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Friday, February 20, 2009

Word To The Wise: The Foreclosure Nightmare Part 2

Wake Up and Smell the Coffee!--PART 2

By E.A. Roberts

Part 1 was published Thursday February 19, 2009

Where Do We Go From Here?

1. Stop encouraging the policy of lending money to folks who do not have the wherewithal to repay.
• Disallow subprime loans, in which borrowers clearly do not have the resources to make payments.

• Use government subsidized “affordable housing” strategies to place low income consumers in homes, rather than pawning off the responsibility to the private sector, which is largely unregulated.

• Encourage people to live within their means.

• Disallow gimmicks by private enterprise that addict consumers to spending.

• Government should set a good example to consumers by balancing its own budget.

• Government cannot keep bailing out private enterprise, which is becoming all too common an occurrence.
2. There must be more government oversight and regulation from the beginning, rather than after the fact, of the following:
• Lending standards

o Proof of employment should be obligatory;
o Sufficient income required;
o Adequate down payment necessary
• Bank/lending institution practices

o Exorbitant executive compensations/perks should be disallowed;
o Compensation should be tied to economic health of company;
o Expensive retreats for non-business purposes should be disallowed.
• Sale of securities

o What type of things can be sold as securities and how can they be sold?
- Ban subprime loans for sale as securities;
- Ban bundling of different types of securities.
o Insist on and enforce an objective credit rating of securities.
3. Make originator of loan accountable for any default - institute tracing system if mortgage is sold as security.

4. Crack down on predatory lending practices.
• Ban Adjustable Rate Mortgages altogether;

• Make sure customer is fully informed as to each and every term of a loan;

• Have strict guidelines for loan refinancing;

• Limit what lending institutions can charge in fees and interest;

• Punish lending institutions that do no conform their behavior to the law
5. End the political and ideological rigidity and polarization that has taken hold in this country. We need to get back to pragmatic policies instituted for the good of the country. Blaming one party or the other is fruitless. There is plenty of blame to go around on both sides of the aisle, in private enterprise, and in regard to consumers.
• Push to obtain minority votes is polarizing this nation;

• Protecting business at all costs is destroying this country;

• Campaign contribution methods are corrupting our political process.
6. Encourage lending institutions to do the right thing, by not giving them any bailout money unless they agree to all of the following:

• Recapitalization of the banking system;

• Restructure mortgages by -
o Eliminating Adjustable Rate Mortgages;
o To avoid foreclosures, restructure existing mortgages -
- From ARMs to fixed rate mortgages;
- Extending time due;
- Decreasing interest rates.

• Limit executive compensation/perks.

• No lavish parties at the company’s expense.

It is predicted that this nation should be done with subprime loan foreclosures in the first quarter of 2009. I am not sure I agree with that statement. There is no doubt the housing market will be flooded with bank owned homes - from one quarter to one third of all homes for sale will be bank owned. This occurrence could push down housing prices even more, perpetuating a vicious cycle, but it could also attract bargain hunters (and speculators).

Borrowers can escape negative equity by dropping their house keys in the bank mailbox and walking away - except they still may be held responsible for any loss the bank takes on the eventual sale of the house at auction. But abandoned homes are a plague on the neighborhood. They often fall into disrepair, and offer an attraction to looters and squatters, dragging down property values of the entire street. Housing market deflation can produce overshooting on the economy’s downside.

Lenders could forgive part of the mortgage or renegotiate the terms of the loan a) from an adjustable rate mortgage to a fixed rate one, b) keep the teaser rate for an extended period, c) increase the length of the loan and/or decrease the interest rate. But because subprime loans have been bundled in a pool with other mortgages sold to a diversified group of investors, the packaging process puts the borrower and lender a labyrinth of a distance away from each other. So the ability to renegotiate has become nearly impossible. Subprime loans packaged into securities skyrocketed from 32% in 1994 to 81% in 2006.

The solution to the “distance” dilemma might be to give the legal right to change the terms of mortgage loans, or forgive part of them, to servicers who collect payments on behalf of creditors. Another idea floating out there is for Fannie Mae and Freddie Mac, the government sponsored enterprises whose loose lending policies (prompted by Congress) helped get us into this mess, could buy/guarantee any existing home mortgage at a fixed discount from current principal, e.g. 15%, with the understanding the new mortgage would be supported by federal credit guarantees, with interest rates reduced to perhaps 5% with the payment schedule lengthened. Once these mortgages become liquid/tradable, it would improve the liquidity of the entire financial system, or so the hope goes.

Lesson to be learned: Don’t borrow more than you can afford. Save, save, save. Diversify your investments. Don’t trust everything you read or hear. Bring a good healthy bit of skepticism to the table. Know that not a single person is immune from financial ruin no matter how careful one is. Make sure to keep up with the news, and keep involved in the political system, especially the local scene. Locally is where you can exert the most control on what goes on with your tax dollars.

Part 1 was published Thursday February 19, 2009

Elaine Roberts Musser is an attorney who concentrates her efforts on elder law and aging issues, especially in regard to consumer affairs. If you have a comment or particular question or topic you would like to see addressed in this column, please make your observations at the end of this article in the comment section.