The Subprime Bailout
Banking industry leaders and government agencies are working on a plan to bailout homeowners and investors who have fallen victim to the bursting bubble in the real estate market. The premise of the discussion is that banks would basically freeze mortgages at the low teaser rates that were originally offered as an incentive, for an additional 2-5 years.
The thinking is that it would allow homeowners to keep making payments while the housing industry regains its footing. It also assumes that once home prices are no longer falling, it will be easier for homeowners to refinance their adjustable rate mortgages.
This “band-aid“ bailout is actually aimed at troubled homeowners who bought homes they couldn’t afford, or worse, those who were speculating in real estate. That’s good for those being bailed out but its bad for the banking industry and the rest of us poor suckers who will have to pay the prevailing rate for mortgages should we decide to buy a home or refinance. That is if banks will let loose of any of the money they have been hording at all.
The damage to the system thus far is so acute, that the amount of money they have available for making new loans has been greatly reduced, due to the fact that their reserve requirements have been raised to compensate for the upcoming billions in losses they are about experience.
Another band-aid would lower interest rates which is good for Wall Street but bad for the overall economy in the long run. Not only is it inflationary but the enormous amount of liquidity that has been pumped into the economy since 2001 has wrecked the value of the dollar at home and abroad.
We just happen to believe that surgery from the inside out needs to be perfomed. In other words, repairing the problem without repairing the cause, is ridiculous.
Why It Won’t Work
Homeowners who financed with adjustable rate mortgages fall into one of three categories according to the financiers attending these talks.
Those who are financially able to pay the higher interest rate when their reset is due, and therefore won’t qualify under the new plan. If there is a downturn in the economy and their situation changes later, tough.
Those who have already proven their inability to keep up with their current payment, even with the low teaser rate, by missing payments or defaulting on the loan. These homeowners most likely will end up in foreclosure since the price of homes have decreased in value at least 13% this year alone. The only possible way that these homeowners could possibly qualify for refinance would be to come with the difference in cash, between what is owed and the lower value of the home, any penalties due, plus a 20% down payment on the new loan.
Here’s an example: A homeowner got a mortgage for $200,000 two years ago, but the home is now valued at only $180,000 even though he still owes $198,750. In order to refinance he would need to pay off the original mortgage, which means that he would need $18,750 plus late fees and penalties. He would also need $36,000 for the down payment.
And those who honestly can’t afford the new higher rates but are current on their monthly mortgage payments.
Most of the sub prime loans were sold to investors, who will be forced to accept a lower return on their investment than was agreed to. Those obligations must be upheld or future sales of these mortgage backed securities will suffer even worse than they are now.
A total of 224,451 foreclosure filings were reported in October, an increase of 94% from October 2006. Experts estimate about 2 million of the loans (about $400 billion) are due to reset at higher rates through 2008. Many of those will increase payments an average $350 per month. The average price of a home is expected to fall between 15 to 25% before crisis settles.
Currently, banks are not even willing to lend to one another, due to the heavy write downs expected from the sub prime spillover. They must keep a certain level of reserves in order to stay solvent. The effect it is having on the economy is similar in many ways to what Japan experienced in the 90‘s, except that in the case of Japan, banks wouldn’t loan to one another because the interest rates were at 0%.
By Michael Scoglietti
Copyright DynamicTrends.com
DynamicTrends.com
8380 Pearl Rd. Suite 303 Strongsville, Ohio 44136
Home |
About Us |
Privacy Policy
Copyright DynamicTrends.com 1999-2008
|
Help Improve the Economy!
Join the Fair Tax Revolution
View The Video: Fair Taxes
|
