Jeff Kaller

Federal programs that extended unwarranted credit, such as requiring banks to extend loans in high-risk areas, helped distort the housing market. Predictably, Washington is responding by further expanding the role of government, guaranteeing more credit, and rewarding recklessness - as if one could put out a fire by fanning its flames. President Bush's proposed rescue, for example, involves propping up the Federal Housing Administration that dates back to FDR's early days in office. Take Brian Montgomery, HUD's assistant secretary in charge of FHA. The Associated Press quoted him as saying that 'the entire mortgage market needs the stability that FHA brings.'"

"But far from bringing stability to the mortgage market, over the past decade - under both the Clinton and Bush administrations - the FHA's underwriting methods have rivaled the carelessness of many subprime lending practices, and have contributed to current housing woes. The delinquency rate on FHA-backed mortgages has been close to that subprime category and has sometimes even exceeded it. In the last quarter of 2006, for instance, the delinquency rate for subprimes had increased to 13.33% in the industry's National Delinquency Survey. But in the FHA category, the rate had risen to 13.46 percent - 'a new record.' For instance, Senator Johnny Isakson (R-Ga.) tacked on a $7,000 tax credit to buy homes out of foreclosure. As pointed out by William Niskanen, chairman of the Washington, D.C.-based Cato Institute:

One provision of this act is a temporary $7,000 tax credit for buyers of foreclosed properties, the primary benefits of which would accrue to those grieving bankers who made bad loans. Another provision is a temporary tax deduction worth up to $1,000 for families who pay property taxes, the primary beneficiaries of which would be high-income home owners. The most expensive provision is a three-year tax break for homebuilders, which would increase the supply of unsold homes and delay the recovery of housing prices.

 Barney Frank, chairman of the House Financial Services Committee, blew his own horn, bragging that his piece of legislation has "no downside." Frank's proposal actually "will put billions of taxpayer dollars at risk and undermine the already successful Hope Now program," observed the Heritage Foundation. "Hope Now is a voluntary alliance of scores of servicers, investors, counselors, and other mortgage market participants ranging from Catholic Charities to the Bank of America. Partakers in the alliance seek to reach out aggressively to potentially at-risk, credit-worthy homeowners to help them rework their mortgages. With the help of the Hope Now alliance the mortgage industry is helping more than 160,000 families a month to keep their homes either by modifying their loans or by developing more realistic repayment plans."

The chairman's proposal has "two glaring problems: one moral, the other economic," comments Robert Samuelson in Newsweek:

 About 50 million homeowners have mortgages or to have their homes to under stop foreclosures proceedings. Who wouldn't like the government to cut their monthly payments by 20 or 30 percent? But Frank's plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. Government punishes prudence and rewards irresponsibility. Frank is more than willing to use the force of government to twist the arms of lenders who might resist modifying their loan terms. The current crisis, as noted, has been aggravated by past interference in the market such as the Community Reinvestment Act, a law pushed by so-called liberals used to pressure lenders to make loans to people who are poor financial risks, including many minorities. Now Senator Hillary Clinton (D-N.Y.) has the chutzpah to complain that "subprime loans are five times more likely in predominately black neighborhoods." Senator Barack Obama (D-Ill.), her presidential rival, thinks that is foolish, saying, "A blanket freeze like she's proposed will drive rates through the roof on people who are trying to get new mortgages to buy or refinance a home." Ironically, one reason we got into the current mess is that Washington spent the last few decades criticizing and fining mortgage lenders for not lending to low-income households with imperfect credit records - a practice called redlining. Now Obama plans to punish lenders in criminal and bankruptcy courts until they bring redlining back."

It has taken a long, perverse chain of events to bring about the housing bubble and subprime mortgage mess. In the Fed's expansionary period, much of this money went to home loans. Through a combination of federal government inducements to lend to risky borrowers, and the Fed's supply of easy money, the housing bubble took shape. Fannie Mae and Freddie Mac were asked to purchase and securitize mortgages, while investors, buoyed by implicit government backing, rushed to provide funding. Money that could have been invested in more productive, less risky sectors of the economy was thereby malinvested in subprime mortgage loans."

Wall Street made a killing during the housing bubble, reaping record profits. Unfortunately, the rash responses of the federal bailout artists are bound to lead to even more troubles. 

Neil

Mortgage defaults and foreclosures may rise this year, but a strong housing market will limit any increase, according to loan specialists, a regional economist and a title company official. Defaults and foreclosures dropped nationwide and in the Boise area last year as borrowers sidestepped defaults by quickly selling their homes at high prices. Default notices filed in Ada and Canyon counties through July fell by about 12 percent from a year earlier. 

If we arrive to somewhere above 7 or beyond, I would begin to think we might see some problems, he said.7 is probably elevated enough to begin to noticeably reduce demand. If mortgage rates only go up a little bit, and job growth continues to be very strong, I don't believe there's any reason to anticipate a noticeable increase in delinquencies and foreclosures this year, Matthews said. The housing market in Idaho and the Intermountain region has room to cool; the market can sustain 8 to 10 percent annual price gains much more easily than recent 16 and 17 percent increases, he said. Wells Fargo Home Mortgage expects another strong year for mortgage originations in Idaho, said Idaho Area Manager Jeff Grutta, based in Hayden. 

It wasn't long ago that homeowners across the country were gloating over soaring home values in their neighborhoods. Wall Street firms that once enthusiastically packaged mortgages into securities and encouraged lax lending standards and 100% financing are pressing lenders to tighten up. In reaction, lenders now require larger down payments or more equity, higher credit scores and closer scrutiny of appraisals.

Although the vast majority of borrowers still make their payments on time, mortgage bankers report record rates of delinquency and foreclosures. A few high-profile subprime lenders--firms that awarded loans to people with blemished credit or undocumented income--have declared bankruptcy. Even property owners with the best credit feel the squeeze from falling home prices and rising rates. Toward the end of the boom, the amount of adjustable-rate mortgages with cheap initial rates surged as home buyers struggled to get a foot in the door of houses selling for bloated prices.

Kevin Kempskie is not your typical investor. In Boston, investors had already driven up prices and condo conversions were out of control, but Attleboro had escaped the rush and price run-up.

Following his mortgage broker's advice, he traded in his fixed-rate mortgage for an ARM with a rate of 5.97 percent for the initial year. The loan, known as an option ARM, offered four payment choices, including a minimum payment that didn't include all the interest due.

Like many other dangerous mortgages, the loan carried a prepayment penalty that would apply if he refinanced within three years. Often, to boost their commissions, brokers would push for the prepayment penalty because it increased a loan's appeal to investment firms issuing packages of mortgage-backed securities.

The couple bought a single-family residence and began making two credit payments.

The $2,650 that Kevin collects in monthly rents is just enough to cover the loan's minimum payment of $2,370 and the building's operating expenses. For years, swarms of investors descended on his hometown, buying and flipping some of the cheapest housing in the state, driving up the area's median home price from $99,000 in 2001 to $280,000 in 2006. Franey, 63 years old also feared that when the investors left for greener pastures, prices would decline and he and his wife, Mira, 60, might lose the equity in their home just as they approached retirement. And also was under pressure to make their mortgage payments of $3,200 a month and running out of savings, the couple tried to sell the home last fall but had no takers. Mike approached their lender, Countrywide Financial, and offered the deed in lieu of foreclosure, just to stop foreclosures.

The Franeys forgot their first mortgage payment in January, and in February they listed the home for sale at $368,500. Countrywide agreed to accept a "short sale," meaning it would cancel the couple's debt in exchange for the proceeds of the sale. Short sales rescues lenders the legal costs of foreclosure. By then, Mike's loan underwriter tells him, he'll be able to get a mortgage again, as his credit score and his income improve.

Encouraged by the ease of selling questionable loans to investors, lenders relaxed their standards.

As investors and homeowners were overcome with speculators' fever, the mortgage industry fed Wall Street's hunger for high- yield securities by reselling packages of subprime loans. Says Charles Pope, an executive officer of Mortgage Authority, in Florida: "Mortgage companies were having such a good time selling bad paper, they said, Let's get crazier. If you can fog a mirror, we've got a loan for you." Cheered by the effortlessness of selling questionable loans to investors, lenders relaxed their underwriting standards.

Easy credit aided feed the housing boom in Florida and other hot markets. In St. Lucie County, Fla., the average residential property price doubled between 2002 and 2005, peaking at $263,700.

In that frenzy of building and buying, Linda Steele and her husband bought their first home in Port Saint Lucie, the district seat. The couple paid $187,000 for a newly built four-bedroom, three-bath single- family home on a quarter-acre. At $1,500, the mortgage payment was manageable with two incomes--although, as the family's primary breadwinner, Steele worked 14- to 16-hour days as a regional manager for a drugstore chain.

Because of the decline in household income, she had to refinance into a subprime mortgage. In middle of 2006, when the fixed-rate period on her mortgage ended, Steele refinanced into another 2/28 mortgage, this time with an interest rate of 9% because her credit score had fallen. Property taxes imposed by the government rose with home prices to pay for new municipal infrastructure as new- home development mushroomed, and insurance costs soared in the wake of multiple hurricanes. Steele's mortgage payment rose to $2,800 a month.

Steele draw near her mortgage lender hoping for a forbearance-- meaning she would be able to skip a few months' payments, which would be tacked on to the end of her loan. Instead, the lender told her that if she could pay her mortgage fees on time for three months it would consider adjusting the interest rate downward.

Steele still has equity in her home, but she isn't confident that she can sell it fast enough to avoid foreclosure. Since the county's market peak, the number of homes for sale has more than doubled, time on the market has increased, and the median home price has fallen.

Even if you're a fiscally conservative homeowner, you may be feeling the pressure of high housing costs, particularly if you have an adjustable-rate mortgage with a rate that's headed up or if your income has taken a hit.

Rates on 30-year fixed-rate mortgages are still good-looking and are generally lower than fully indexed rates on adjustable-rate loans. If you can't refinance because your financial prospects are poor, you have no equity in the home or you're looking at a large prepayment penalty, you may want to try selling your home yourself.

Take advantage of mortgage relief, if it's available. In California, legislators have recommended creating a mortgage pool to assist first-time homeowners in trouble. Head off foreclosure. As quick as you think you will miss a mortgage payment, call your lender to discuss your options. Close to refinancing, those may include a forbearance (you temporarily pay nothing or only a minimum amount, making up the payments either over time or at the end of the loan), or a loan modification (the lender temporarily adjusts the interest rate). If all else fails, you could try to discuss a short sale. In that case, the lender agrees to cancel your debt in switch for the proceeds from the sale of your home. When you cant stop foreclosure make you sell your home at a good price.

The method moves after that.

neil