Bankruptcy & Foreclosures

As foreclosures continue to mount in record-setting fashion, our friends on Capital Hill once again gathered to discuss what, if anything can be done to combat this disturbing trend. Lawmakers seek some kind of revolutionary new program to reverse the situation but the Bush Administration holds strong in claiming the existing FHASecure plan is up to the task.

For those unfamiliar (or in need of a refresher) FHASecure was launched back in August and has given subprime borrowers the option to switch to a low fixed-rate mortgage once they’ve fallen behind on payments because their adjustable rate mortgages took a rate hike. The program rewarded the responsible by offered a refinance option to individuals with strong credit histories who display a pattern of paying their mortgages before their loans reset.

Tomorrow the Senate Banking Committee is set to consider a comprehensive bill which if passed would have the government insure some $300 billion in loans. What’s interesting is that while FHA says that the program has helped 200,000 mortgage holders to remain in their homes, they also go on to say that really of those 200,000 only 3,000 of them were those in imminent danger of losing their homes. A majority of the borrowers were current on their payments and simply used the program as a means to refinance out of high-cost or unfavorable term loans.

Interestingly enough, despite individuals using the system as a loop hole, new rules will make FHASecure open to all subprime ARM borrowers- rather than just those whose loans have already reset- no more than 60 days late or 30 days late twice in a 12-month period. In addition these potential borrowers need to have home equity, or cash, equaling 3% of the mortgage principal.

With the changes, the agency says it hopes FHASecure will eventually reach a total of 500,000 borrowers. During the past 12 months, foreclosure filings have more than doubled to 650,000 through the end of March that erquates to over 210,000 Americans having lost their homes this year alone.

We’re only human right? And as humans it is in our nature to celebrate low interest rates. Lower rates make loans cheaper and therefore the material goodness we all seek (cars, houses, boats, and motor homes) more attainable. After last week’s rate slash, the Federal Reserve has been hinting toward the fact that this may mark the end of the rate cuts in an effort to stimulate the economy. So does this mean goodbye to those material goods mentioned above? Perhaps, but there is no need for panic just yet. Believe it or not, low interest rates sometimes make big trouble as they tend to increase demand and with increases in demand without corresponding increases in supply we experience a little phenomenon known as inflation. In other words, yes, there are a few more dollars left in your pocket after you’ve paid all of your bills, but those dollars are worth a lot less than they would be had your interest rate been a bit higher.

It is true that US consumers could actually benefit by a slight rise in interest rates. It sounds blasphemous but it’s true. For starters, some goods and services would immediately get less expensive on account of a stronger dollar. Less inflation means lower prices of goods imported from other countries. Think about it, since the same amount of dollars will purchase more goods from overseas; expect immediate dives in the cost of clothing, appliances, and many other everyday products.

Additionally, higher rates could put an end to the quickly sliding value of the dollar. In case you’ve been living under a rock, let me be the first to tell you that the value of the dollar has been slipping against foreign currencies such as the euro. And why? Because low interest rates here in the US make it less appealing for foreign investors. After all, we all love high interest rates when it comes to money we make, rather than spend.

Along those lines of reasoning, the Fed’s move to slash interest rates has decreased the amount of money individuals make on their CDs, money market, and savings accounts. An increase in interest works both ways (outgoing and incoming).

Finally, and most pertinent to many, an increase in interest rates could potentially stabilize the cost of oil. As of yet, the trading of oil is still based on the exchange of the dollar (despite pleas from investors to transfer to the euro) so a sinking value of the dollar means that other countries can buy more oil for the same amount of currency. The ability to buy more oil around the globe means increases in demand and lower worldwide supply. Hence, the trouble we’re currently experiencing.

The bottom line is that we all cringe at the thought of interest rate hikes but keep in mind that this doesn’t automatically mean more money flying out of our wallets.

When the economy reaches levels where the light at the end of the housing crisis tunnel begins to fade, what choice to mortgage holders have but to turn to their government for help? As it turns out, Congress is ready, willing, and able to help more than a million homeowners staring down the barrel of potential foreclosure. The only problem is that their latest proposal is being met with skepticism in that it could worsen the current situation rather than improve upon it.

The plan calls for up to a whopping $300 billion in loan guarantees from the Federal Housing Administration to refinance loans that homeowners can’t afford under the stipulation that the original lender reduces the principal on the loan to 85% of the home’s current market value.

These measures aim to counteract the recent trend of home-price declines and it does have some redeeming qualities namely in the fact that lenders would get back more of their money than they would by foreclosing. Additionally in preventing 1.5 million foreclosures, this tactic would halt (or at least slow) home-price declines since it would keep these 1.5 million properties from flooding an already saturated market.

So what’s the problem you ask? Some critics claim that this plan would essentially transfer the risk to homeowners (mortgage holders) and lending institutions that were in fact cautious during the housing boom. Even more concrete is the reality that FHA would be left holding a massive portfolio of loans backed by houses and property worth less than the balances on the mortgages. You may say so what to these risks but think about it for a moment: Rather than banks and individuals facing foreclosure risk, the government itself (meaning each of us, the taxpayers) would be responsible for some 300 billion dollars in bad paper; This coming at a time when FHA’s losses are already at record highs.

The bottom line is that there is no easy solution to the crisis Americans currently face and regardless of how the numbers are shuffled; the burden of mortgages worth more than the property behind them isn’t going to simply go away. The Dodd-Frank bill is one of many yet to be approved proposals attempting to lessen the economical impact to the individuals in trouble with their mortgage but the fact remains that displacing the debt doesn’t make it go away.