Thursday, April 26, 2007

Help Is On The Way

Living here in California, I watched the housing boom with quite a bit of interest, fascinated by how desperate people were to "own" (miss a payment and you find out the truth) their own home. The prices were out of control, the properties weren't worth what people were paying for them, the job situation was precarious in the region and the financing was fishy. How can you pay less than the interest accruing every month and still expect to pay off the loan? Just because I don't have the money, doesn't mean that I can't do simple arithmetic.

When I was 22, I owned a house in Santa Maria, CA. It was a cute little thing, with a vegetable garden that I didn't appreciate. Even though the loan was financed using my G.I.Bill, my income wasn't considered because I was a woman. The loan was for 33K and the interest rate was around 6%, the payment was a little more than $300 (it's been a long time). It was a little more than a quarter of our income. Property tax, insurance, car repairs, etc., all added up. If the loan payment had been any larger, chances are we would have been in trouble eventually, which is why I was so fascinated by these new loans.

Everybody was so focused on the brass ring, both lenders and borrowers, that they failed to consider the old bromides of what goes up, must come down and that for every action there is an equal and opposite reaction. Which is becoming painfully clear to lenders and borrowers. So, unlike the crew without a clue, lenders have decided to be proactive and forestall the foreclosures.
• Fannie Mae, America's leading mortgage lender, says it plans to help as many as 1.5 million "subprime" borrowers – people with low credit ratings – refinance out of high-interest loans.

• Freddie Mac, which like Fannie Mae is a government-backed corporation, is creating new products to make homes more affordable to buyers with poor credit. Freddie Mac doesn't make loans directly but pledges to buy as much as $20 billion worth of these mortgages from participating lenders.

• Washington Mutual, another giant lender, says it will refinance $2 billion in subprime loans, helping borrowers avoid foreclosure. The new loans will come with below-market interest rates.
Remember those commercials from a few years ago, the tearjerkers that convinced people to clean up their credit and they could move into the home of their dreams? They pulled out all the stops in their effort to sell as many homes as they could and make those that couldn't afford to buy, feel guilty. Now reality is setting in, sticker shock has given way to payment shock and the only way to save the situation is for the lenders to give up some of their profit or they will have none.

Hindsight is always 20/20.

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