Housing finance bust?

Question

Why instead of a bailout doesn't the government force the lenders to work with their customers to refinance their mortgages into a more affordable option than the options that mortgage brokers put them into? Wouldn't that be a better solution?

Answer 1

Matt, that is a GREAT question. However, many of the lenders that caused this ripple in the industry CLOSED their doors.
Lenders make loans, then 'sell' the loans (paper) as a security (mortgage backed securities) on the secondary market (stock market) These lenders bundle 10,000 loans and sell the group (I am just using 10,000 as a number, it varies) to investors on the stock market.
The lenders then have more money to make loans again. This cycle repeats itself indefinitely.
So, today we have investors holding the bag so to speak on bad 'paper'. Loans that were too risky given the criteria. Some loans were fraudulent, some were adjustable loans with marginal borrowers that when the rates adjusted UP, they could no longer afford the house payment and defaulted.
This is not a single lender problem, but now that the lenders are out of business the investor can not FORCE them to 'buy back the loan' based on fraud etc. So the investor is stuck with the mortgage that is not being paid; for various reasons.

I do not sanction a government bail out, but i do sanction mortgage industry reform and standards.

The government has bailed out other industries in the past, airlines, utilities, and savings and loans. All for different reasons but ultimately to protect the public (John Smith)

Hope this helps, again I am not saying the government SHOULD bail out this industry. I am 100% behind reform.

Answer 2

Many of the lenders are voluntarily doing this anyway. Government involvement in business usually seems great at first, but ends up messy in the end.

Also, bad brokers are only partially to blame. Most of the brokers that I know genuinely look out for the interests of their clients. There are a few bad ones out there for sure.

The lenders themselves are more to blame in my opinion. The programs that were created were in response to the fast money they could make on selling the riskier loans. The investors behind those loans were gobbling up more and more of the subprime loans in hope of making a high return on their investment due to a rapidly appreciating real estate market.

What went wrong is that the market stopped rising at a feverous pace. Unfortunately, the lenders continuted the risky programs. Adjustable mortgages started to adjust and people could no longer just sell to get out of a tight spot.

This created a chain reaction that put us where we are.

The media is quick to point the fingers at people like me, when the bad brokers are only a part of the story.

Do I know people that abused the system - yes. I also know of clients that I advised NOT to buy because of what they would end up with after 2-3 years but did so anyway without me. So, many of the consumers are responsible as well.

Consumers should be protected from those who would take advantage of them. However, people need to understand the reality of their financial situation and work from there - not act in a foolish manner just because someone says they can. It's kind of like alcohol, know your limits and be responsible.

Part of the problem is that many of the lenders don't actually hold the notes themselves, they only service them (collect the payments etc) for the investors. The investors are often hedge funds (as you've all heard in the news lately) that have a management team that is not prepared to renegotiate the terms of it's assets.

We'll all ride this out like we did with the S&L collapse in the 1980s and be OK in a couple of years - we'll have some new regulations that will improve the industry, but the basic business will remain the same.

Answer 3

there is no "Bailout" happening...the federal reserve simply loaned $70 Billion to the banking system to do exactly what you stated --- "to force them to work with the homebuyers so they can refianance"

This is not considred a bailout. and the homebuyers have to meet certain criteria...like they cannot be upside down on their loan.

mortgage brokers and mortgage companies....ya the feds have already said they are going after them...as you notice there are many closing their doors or going bankrupt to avoid the feds...

so is any of this considered a "bailout"? Hardly......and the housing market hasn't gone Bust either.

ther terms you use are inappropriate.

good luck :)

Answer 4

A bailout isn't needed.
Unless you're a Democrat running for President, of course.

:-)

mistakes were made. the best economic solution is to take the loss as soon as possible, fix your systems, and move on.

what needs fixing?

housing prices, for one. and they won't go down until the number of houses being offered is much larger than the number of buyers out there.

lending methods. loan buyers might want to refuse to lend large percentages on houses with unrealistic prices, on 2nd homes, on rental homes, and to people who can't afford the full future interest rates with their present incomes. [It was pretty silly to think that mortgage interest rates would still be 5% a couple of years out back when these loans were made, so why were people allowed to borrow at 5% when anyone with half a brain knew they couldn't afford the house at the likely future mortgage rate of 7%??]

as to 'more affordable' ... when a loan is upside down [more is owed than the house is worth] and getting worse because the buyers can't afford the payments, it is time to sell the turkey and get prices back down to reasonable levels for those buyers who didn't get house greedy.

imho, of course