by John M. Curtis
(310) 204-8700

Copyright September 3, 2007
All Rights Reserved.

ive years of unchecked adjustable rate mortgages have suddenly turned into a foreclosure epidemic, where homeowners watched mortgage payments go through the roof. Homeowners now sing the blues, unable to make payments, lapsing into defaults and facing nationwide between 1-million and 3-million foreclosures. Rapidly rising foreclosure rates turned the otherwise lucrative housing markets on its head. Mortgage companies and lenders can no longer sell mortgages into the secondary market, causing a liquidity crunch especially for investors with subprime or B-paper mortgages. Mortgage-backed securities have also watched values drop, rattling the cage of mortgage lenders like Countrywide Funding, generating capital selling mortgages into the secondary market. Under White House prompting, the Congress is poised to take up the issue of helping strapped homeowners

      Homeowners now claim they were duped by unscrupulous mortgage brokers selling adjustable rate loans. When the market boomed, it made sense to take out variable rate loans with “teaser rates,” whose interest rates and payments were a fraction of principle-and-interest payments. Borrowers believed they could bailout of risky mortgages at the propitious time. Now, with defaults and foreclosures on the rise, new lending standards prevent borrowers from refinancing loans to safer fixed interest rates. Without refinancing, homeowners have watched payments jump in some cases seven-fold from the initial “teaser rates.” Borrowers, unable to meet mortgage payments, now say they were duped by crafty lenders, when, in fact, they knew what they were getting into. With defaults and foreclosures spooking the market, Congress and the president look for a quick-fix.

      Past mortgage meltdowns have left lenders with swollen inventories of properties, driving values southward. Like most lenders, mortgage companies would prefer to keep homeowners making payments. “We may have as many as 1 million to 3 million people who could lose their homes, not because the lost their jobs, not because the economy collapsed, but because they got bad deals on mortgages,” said Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking, Housing and Urban Affairs Committee, also a presidential candidate. Dodd knows that by the time Congress comes up with a fix, most homeowners will have lost their homes. Lenders don't look too kindly on homeowners unable to meet mortgage payments. Credit problems have now spread beyond the subprime or poor credit markets to creditworthy borrowers, causing panic on Wall Street.

      President George W. Bush wants Congress to reform the Federal Housing Administration, a depression-era agency that helps low-to-moderate-income borrowers afford homes. That idea will do very little to help struggling homeowners keep themselves out of foreclosure. Sen. Chuck Schumer (D-N.Y.), a member of the Senate Banking Committee, wants lenders to refinance borrowers on the verge of losing homes, regardless of poor credit and inability to meet mortgage obligations. Most lenders sold mortgages into the secondary markets and have no say about refinancing. “Somebody's got to fill in the void,” said Schumer, urging a federal bailout of strapped homeowners. Schumer knows that piling up more bad debt won't helped stressed credit markets or the federal government that guarantees certain mortgages. Whether admitted to or not, there's no quick-fix to the current mortgage meltdown.

      Other brainstorms to save mortgage markets involve changing current limits on conventional loans to more than $417,000, allowing Fannie Mae and Freddie Mac to buy currently jumbo mortgages. Both federal agencies buy and guarantee mortgage-backed securities. Shifting the mortgage crisis to the government would have disastrous consequences to both publicly traded companies, whose share prices are currently under siege from overstating earnings in recent years. Federal bailouts have the unintended consequence of shifting bad debt to the government, already strapped because of the $10-12 billion a month price-tag for the Iraq War. While it's tempting to make promises during an election year, the government is in no position to bailout homeowners unable to make mortgage payments. Democrat and Republican politicians must not make promises they can't keep.

      Federal Reserved Chairman Ben Bernanke urged lenders to work with borrowers to restructure debt before it leads to defaults and foreclosure. Bernanke knows that most lenders sold loans into the secondary market, promising investors with binding contracts specific yields. Once loans are sold, no bank, unless the portfolio is in-house, has the legal basis to change contracts, including lowering rates or extending terms. Apart from an election year gimmick, it's going to be difficult to stop the default and foreclosure snowball leading to the credit crunch and earnings problems at the nations' biggest banks and mortgage lenders. “This won't do anything about what happened in the past, but it will prevent the present crisis from getting worse, because mortgage brokers are still preying on these people,” said Schumer, admitting there's little Congress can do to stop today's defaults and foreclosures.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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