Bush's Creative Financing Plan
I bought my retirement home on the coast of Florida in the summer of 2005. This spacious three bedroom home, just minutes from the beach, has become an albatross. In retrospect, obviously, I paid too much money for the property. Historically, housing had always been a safe investment, similar to a money market fund. I invested the profit from the sale of my previous homes, $100,000 into a down payment on my new one. This seemed like sound logical thinking as I wasn't a subprime borrower, I had an excellent FICO score and my interest rate was fixed at five and a half per cent for thirty years. Now, three years later, I'm invested in a piece of property that is worth, at best, $25,000 less than when I purchased it.
The big question for everyone who bought during the bubble is-- what to do now? I recently called my bank to check on my home equity line of credit. Much to my dismay, I can't even borrow all of my own money back, the $100,000 that I used as a down payment. Currently, the bank will only loan on 90% of the home's value. The loan officer, who initially wanted to enroll me in a higher home equity line of credit, admitted that I would be better off to keep my original terms since the current rate is now one and a half per cent higher.
The Bush administration wants to create a plan to rescue folks who bought property with subprime loans; they want to freeze adjustable rate mortgages. The current thinking is that this freeze will assist all homeowners. "After all," they say," you don't want empty houses in your neighborhood." OK, then what are our options? We could stay in our homes, wait for the meltdown to pass and hope that the market will get better in the years to come or sell our homes and incur a substantial loss.
Those of us who are retired and living on a fixed income may be able to ride out the downturn but this certainly will not be the case for the working class. Where I live, public schools enrollments are substantially lower, construction work has ceased to exist; real estate agents are no longer writing contracts. The "trickle down" effect has emerged throughout the entire community.
Bernanke's Creative Financing Plan
Fed Chairman Bernanke in a meeting with bankers in Orlando suggested that lending institutions reduce the principals owed on home loans for people who are facing foreclosure as an incentive for borrowers to stay in their houses. The idea is to give the borrower, who is upside down on his mortgage, a chance to recoup his losses in the future thus keeping him from just walking away from his debt. The logic is: banks lose 50% on foreclosed mortgages and would lose much less if they just reduced the principal on the mortgage. Homeowners would have less to pay off and thus eventually would establish some equity in their homes. Mortgage payments would be reduced slightly because less money would be owed on the principal as the variable interest rate increased and banks would have some recourse, as yet undisclosed, to reset the principal if the value of the home increased in the future.
For the vast number of subprime borrowers who are facing those rate resets that that will increase their monthly mortgage payments, this solution might be workable. However, in the long term, the banks would be the ultimate winners because they could set the principal back to its original amount if and when the housing market rebounded into positive territory.
Clearly, this housing crisis is affecting everyone. While I'd be jubilant for an equitable solution, I just can't see how more creative financing can be the answer. After all, wasn't it creative financing that originally produced this mortgage melt down. If the Fed stages a bailout for unqualified borrowers and careless lenders, aren't they just basically extending this housing down turn ad infinitum?
How will this affect those home owners who have been responsible borrowers? If we reduced the estimated value on all home mortgage loans created since the 2004 bubble, then I would say hooray but why should we reward the folks who "bit off more than they could chew."
Obviously, no compassionate human being wants to see so many families lose their homes but economics and fairness do not necessarily go hand in hand. If we want this housing debacle to be over in the near future, we have to play out the hand we have been dealt.
Americans are deeply in debt. Come on people, it's time to face the music; bite the bullet; confront reality. We're out of options. Our homes do not qualify for home equity loans and our credit cards are maxed out. It's time to say no to bailouts and creative financing.
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