Subprime Mortgage Mess: Everyone Jumping In!
According to a prominent story on CNNMoney, the recent mortgage problems have “made it to prime time” with several presidential candidates weighing in on what is the right solution for this situation. Senators Clinton, Dodd and Obama have all unveiled their plan on how to reform the mortgage industry to ensure that this no longer happens. For the record, no one in their right mind would argue that the mortgage industry doesn’t need a thorough reform. But what’s being suggested as the way to go about this reform is oversimplified (to use a kinder term).
As it is often the case with these crisis, a scapegoat is usually found to take the entirety of the blame for the problem. When possible, it is recommended that this culprit abide by certain populist ideas that ensure a maximum ROR (Return on Reform aka votes). In this last episode, the culprits are apparently… (drumroll, please) The Mortgage Brokers! These unscrupulous groups of individuals have been pushing subprime loans to people that should have never gotten them and they have gotten paid in the process. Sound simple enough? According to Mr. Dodd, the current incentive schemes that pay brokers money for charging higher interest rates or “overcharging home buyers” (through Yield Spread Premiums) are “perverse” and should not be allowed.
I happen to agree with the second part of that statement! If there is nothing wrong with the amount of money that a broker charges “in the back”, there shouldn’t be any issue with charging it in the front where the consumer has to bear a stiffer cost initially, but can save thousands in interest costs over the years. But to suggest that the primary beneficiaries of the yield spread premium system are the brokers is simply absurd. Let’s take an example to illustrate: If a broker originates a $200,000 loan at the low (par) rate of 6.5% the consumer ends up paying $255,088.98 in interest over the 30 years of the loan to the lender. If the broker instead originates the loan at 7.0%, the broker is paid an additional $2,000 by the lender for selling the higher rate, while the interest the buyer has to pay to the lender goes up by almost $25,000 over the life of the loan!
I think it is clear which party (no pun intended) the Yield Spread Premium system benefits most. Are there unscrupulous mortgage brokers? Sure! Just like there are unscrupulous bankers, borrowers, lenders, and um, politicians. Instead of “patching” up the system until the story doesn’t make the news anymore, I think the efforts should be focused on truly reforming the system and making sure that unscrupulous individuals in any category cannot put it in a vulnerable position again!
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September 2nd, 2007 at 4:28 pm
I say focus on the problem and providing some viable solutions rather than just pointing the blame finger!
October 4th, 2007 at 2:23 pm
Concerned Mortgage holder
I have an adjustable rate interest only loan that is due to reset next July. It is in my husbands name only. The house is in both our names. We got this house with 100% financing. We are making the payments fine. Our hope was as was most people’s 2 years ago is that the value of the house would go up and we could get better financing in the when the 2 year prepay was up. Because of the 2 year pre-pay and the value of the house stagnating, we can not refi before the prepay penalty is up. Now we are in the position that our house is financed at 100% of value or less and might not be able to get the house refinanced. In the town we live in it is a small town and there is an abundance of houses on the market. My husband and I do not want to loose our house when the loan resets but we may have to walk away. The things we have in our favor is I am not on the loan and I have excellent credit. We could rent a house like ours for about 800 a month less than what we are paying. So with my credit and my income we could get a rental and not be homeless easier than we could re-finance our house. We do not have the money to pay our house down to 80% of value or even 95% of value in order to refinance when the time comes. I believe there are a lot of people who are in my position. We could pay the mortgage payment for our entire house if we could refinance it. The problem is the value of the house has probably dropped since we bought it and one cannot get financing for 100% much less more than 100% of value. I believe the market will eventually turn around and my home will be worth what I paid for it and someday even more. My husband and I just want to stay in our house and eventually pay it off. Because of the problems with the market that my not happen.
What I propose is that the note holders extend the fixed rate term of the note for 5 to 10 years or so until the market is better or they could just change the terms of the loan and make it into a to a fixed rate. They will loose the interest that they may have made on the note when the note adjusted if the people who owe on the note kept paying there payment. However, if the people on the note just rent a home before there credit gets bad and move out and send the keys to the bank who is servicing the loan., effectively defaulting on the note. The note holder will loose a lot of money. They still have to foreclose on the house and then they have to sell the house in a very down market. This is happening all over the United States Today.
This scenario could all be stopped by extending the current payment arrangements until the market picks up enough for the people to refinance their house or the income goes up enough to pay the adjustable rate after it adjusts. The note holder would earn the current interest on their money and not have to foreclose on the house in a market where so many homes are being repossessed and cannot be sold. This would bail out both the buyer and the note holder from a bad situation.
In the event of a foreclosure the second note holders are the ones that will be hurt most but the first holders are not in that great of shape given how the prices are going down in some parts of the country. A piece of something is better than 100% of nothing.
The problem with the FHA bill that congress just passed is that it doesn’t address the needs of the people whose home is worth less than they owe on it. Those are in the position to continue making the current payments as they are, even though they owe more than the house is currently worth. If those people do not have enough in savings to pay the difference between what FHA will loan on their home and what they owe on the house currently they will loose their homes.
I think my proposal is a good proposal however I have no idea how to pitch it, and to whom can I pitch this idea. I would go to the banks but most of the banks that you pay your payment to only service the loans they do not own the loans. Does anybody know where I can go to spread my idea so it will be taken under consideration? I have talked to a few people in the mortgage market industry and they think it is a good idea. Can someone help me? I can be contacted by e-mail at astrial@earthlink.net.
Thank you for any and all help.
Bridget
October 4th, 2007 at 2:41 pm
Bridget
Thank you so much for sharing your story! Thousands of households across America share your same reality. For this reason, I hope that my little blog can serve as a platform for your voice to be heard. What impressed me the most was the fact that instead of simply pointing out the problem (which, the media does a “great” job of that already) you actually came up with a solution that I think is a great idea that could save many homes. I will be in touch soon with what’s being done to spread the word on this idea.
Thank you so much again
Erion Shehaj
In My View Blog