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Manhattan

Government Involvement and The Mortgage Crisis

Last Modified: 09/15/10
First Published: 08/28/07
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Views: 1094
Now that Washington has decided to act (debate) on the mortgage and foreclosure issue we can see what possible problems (intervention) this might bring.

With declining home values and incremental rate readjustments affecting homeowners across the United States, another option is drying up for these weary borrowers. The option to refinance tends to fall prey to declining property prices.

If I borrowed $200,000 with a variable rate 2 or 3 years ago, and now my home is assessed at $150,000, I have a big problem. If I decide to try to refinance at a lower rate the bank will wonder who covers the missing $50,000, not to mention the problem of my home's value next year. If this option is not possible for homeowners then rate reductions in general cannot have much impact on helping the housing market and the ability of these borrowers to pay their mortgage.

But if certain congressional proposals about allowing Freddie or Fannie to assume these mortgages are enacted, forcing the refinancing option, the Federal Government has only shifted the burden to the taxpayer. Now it is likely that some measures will be adopted to cope with this issue. This fall it is estimated millions will be affected as rates increase, and now the presidential candidates are stepping over each other to propose meaningless reforms or stop-gaps.

Ultimately what comes out of this situation is not good for anyone. Tampering with bankruptcy judges power, contract reevaluation, billion dollar funds proposed by presidential candidates, mortgage counseling and the like are not substantial solutions.

If the government raises the mortgage limit that Freddie and Fannie are allowed to hold in their portfolio, and the statutory ceiling imposed, these homeowners might temporarily benefit, but the market suffers from government imposed property values. Although what is going to happen when they have problems again and their mortgage is now backed by the taxpayer? Higher taxes, and a more managed market that will hurt the next generation of borrowers.