The real estate market is down, and staying down. Some would say it’s “down for the count”.
Foreclosures are up, way up. There doesn’t appear to an end in sight.
Mortgage companies and now banks are going belly up, and those that aren’t are barely scraping by. Sub-prime funding for homeowners in trouble has dryed up. Even an FHA loan requires a 580 middle credit score.
Homeowners that aren’t in foreclosure are staying put. Higher prices for essentials like food and gas, combined with skyrocketing home insurance rates and plummeting home values have them worried. Many that aren’t in foreclosure are barley getting by. Lack of jobs, wage freezes, lay-offs and cut-backs are effecting nearly everyone.
Reacting to this scenario, the federal government has decided to help by shoring up Fannie Mae and Freedie Mac, and has several “mortgage bailout” plans that it is trying to get passed and funded. But just who do these plans help?
And the answer is; the same banks and other large financial institutions that profited from making these loans in the last few years. These large organizations paid out huge salaries, made huge profits and expanded their business by marketing and servicing these mortgages. Now that they’re seeing their profits shrink, and have failed to cut back on staff, branches and high level executive salaries (and bonuses) quickly enough, the federal government is seeking to bail them out of their woes. Of course, most of the bailout plan is designed by this same group of large lending institutions, so naturally they are designed to help them. And the already strapped homeowners who are barely getting by are going to be paying for this bailout in the form of higher inflation or higher taxes, and most likely both.
The first federal backed plan, to freeze rates on adjustable rate mortgages, which was introduced back in December of 2007, basically could only have been of benefit to the lenders involved. Anyone who would have taken advantage of it would have lost out on the rate decreases that have occurred since January of 2008. Most ARM’s have adjusted down by between 1% and 2% in the last nine months!
The last proposed plan in August, would have allowed banks to re-finance homeowners loans down to 90% of their then current value, and the government would have paid the banks the difference. BUT, those homeowners would have had to pay back anywhere from 50%-100% of any profit they made, when they eventually sold their home.
The most current plan, is simply a staright buy-out of any mortgage debt that the banks feel is “bad debt”. The federal government will assume that debt, and service those mortgages. Again, the big winner is the lending institutions, who get rid of loans that may be going into default. There’s no mention of any part in the plan to forgive the homeowners of any part of that debt, to excuse late or missed payments, or even to lower their interest rate to a more reasonable or affordable level. On top of that, the new plan is supposed to cost anywhere from 700 billion to 1 trillion dollars to complete. With the most recent census estimate of 100 million homes in the USA, the amounts to about $7000 to $10,000 per homeowner! Even with the current huge increase in foreclosures, less than 3% of all homeowners are in foreclosure at any given time, and all quarterly filings project total filings for 2008 to be less than 10%.
That being the case, the federal government could give all homeowners in foreclosure a one time pay out of about $20,000, and cover all foreclosures for the next 2 years (20% of all homeowners). These homeowners could easily bring their mortgages current, and still keep enough reserves to help pay the loan in future months. The total cost would be about 400 billion, or about half of the estimated cost of the bailout. Plus, this plan would actually help keep those people in their homes, and the government wouldn’t have to fund a whole organization to administer the loans!
Now, some people feel that the homeowners who are in trouble shouldn’t get any special treatment, and I can see their point. However, I’d much rather see them get some help, than the big lenders who funded the mortgages. Even so, this plan would help both. The homeowners can afford to stay in their homes, and the lenders get paid. If you really want to give everyone the same “break”, then help everyone out a little bit now. Instead of just giving money to the homeowners in delinquency, give all 100 million homeowners in the USA a one time payout of $10,000. The ones in delinquency could use it to help get current, and everyone else could use it for helping pay off credit card debt, or just to keep up with rising prices. The total cost would be 1 trillion dollars, and let’s face it, if the federal government estimates the cost of their bailout plan to be 700 billion to 1 trillion dollars, you can probably bet that it will actually exceed the 1 trillion dollar mark.
This plan would not only help all homeowners, but the trickle down effect of all homeowners having more money to spend, should actually help out every business and consumer in the country. Or, to be really fair, they could even give every one of the 138 million taxpayers in the country about $7000 each, and still keep the cost under a trillion. Plus, it should give a little bit of help to all of the hundreds of small lenders and mortgage brokerages that have gone out of business or are struggling to stay afloat, and don’t get any assistance from the government’s plan. Also, the thousands of mortgage brokers, processors, appraisors and real estate brokers who have seen their jobs disappear and have had to seek other employment in a tight job market, could certainly use the help.
Basically, if the federal government is going to fuel inflation by increasing the national debt by a few hunderd billion dollars, they should at least use that money to help citizens improve their situation and keep their homes, not just to help their “friends” at the big lending institutions keep their huge salaries and profits. Of course, this is just my idea for a bailout plan, but I think it works. Let me know what you think.