Dec 11, 2007

For Most Borrowers, Bush Mortgage Bailout Isn't One

A few months ago at a social gathering--well after the mortgage industry's problems were coming to light--I met a woman in her mid-twenties who was a real estate appraiser. "My job is easy," she told me, wide-eyed and innocent. "All I have to do is go in and say that the value of the property is the sales price." Yikes. This professional approach is indicative of an industry-wide problem: and it helps explain why so many homeowners are in such a jam right now, struggling with unaffordable mortgages that banked on equity that either didn't exist or didn't materialize.

And there are no quick fixes. The Bush Administration's newly revealed mortgage rescue plan received a lot of attention last week. The basics of the plan are this: borrowers who took out adjustable rate loans (with initial rate periods of 36 months or less) between January 1, 2005 and July 31, 2007 that are due to reset between January 1, 2008 and July 31, 2010  are eligible for a five year interest rate "freeze." Lender participation is voluntary.

Critics noted that the plan is likely to aid very few borrowers, and since it's intended to prevent foreclosures, doesn't do anything for those borrowers already in it. In a New York Times editorial, Paul Krugman pointed out that its real purpose is to "create the appearance of action", thus undercutting support for alternative plans with actual bite. Looking at how few will likely benefit from the plan, and its voluntary nature, it's hard not to agree.

So who won't benefit? Anyone who has lost a home to foreclosure already (according to one estimate, approximately 800,000 since mid-2007), seen an adjustment they can't afford, took out an ARM before the set period, bought with a conventional loan, has a decent or improved credit score, or (like 55% of subprime borrowers) was given a subprime loan when they could have qualified for a conventional one. In short, a lot of people. And that doesn't even deal with investors who have seen drops in the value of mortgage-backed securities, or the borrowers who can take advantage of the plan--but still have the same mortgage, perhaps one they can't afford to pay, five years later.

Amidst all this, the mortgage industry bemoans its losses. But it's a lot harder to feel very sympathetic toward those who created and sold these products to people who weren't capable of affording them--and astonishingly enough, sold them to people who were capable of affording something better, like a conventional loan without an astronomical future interest rate.

Alayna Schroeder