Thursday, June 21, 2007

Rising Rates Not Helping SubPrime Mortgage Effects on the Economy

It looks like life will get much more difficult for people struggling with their sub-prime mortgages before it gets easier. To re-cap what I've written about here before, many companies who can refinance these types of loans are now bankrupt, making the options fewer and farther between. And now rising interest rates are complicating the issue even more.

"Economists said homeowners trying to refinance their adjustable rate mortgages before they reset to higher levels are already feeling pinched. The national average for the 30-year fixed-rate mortgage jumped to 6.74 percent yesterday. At the beginning of the year, the average was 6.18 percent, according to Freddie Mac, a big buyer of mortgages."

"Some bond strategists said the recent rate spike is only the beginning. sThe sharp increase, they said, is just starting to bring interest rates back to their normal or long-term trend levels."

"Particularly hard hit will be consumers with weak credit — known as subprime borrowers — who are faced with mortgage rates that will soon reset to higher, in some cases double-digit, levels. Some $100 billion in subprime loans are scheduled to reset between now and October."

The government would like to do something to protect more people from ending up in these situations, but time will tell how helpful new regulations will be. It's important to protect the consumer, of course, but in their efforts to do so, they may inadvertently make it impossible for lenders to help people out of these unfortunate situations. It's a fine line, and hopefully some common sense will be used in the decision-making process.

“Rising foreclosures in the subprime market over the past year have led the board to consider whether and how it should use its rulemaking authority to address these concerns,” Mr. Kroszner said. “In doing so, however, we must walk a fine line. We must determine how we can help to weed out abuses while also preserving incentives for responsible lenders.”

"Lenders generally argued against new regulations, saying that most of the practices being criticized may have been abused but can be very effective in helping lower-income borrowers if used prudently."

The Oregon State Legislature just tried to pass a law making nearly every loan program under the sun a "non-traditional" loan. And for "non-traditional" loans, a lender would be required to look at a client's tax returns for three years and somehow (crystal ball method?) determine that the customer would still be in a position to make his mortgage payment five years into the future. Fortunately, just today the bill was killed in committee, or we'd not just force lenders to stop lending irresponsibly, we'd go back to the old days when the saying went, "Banks only loan money to people who don't need it."

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