The Sub Prime Mess

The only way you would not know about the sub prime mess is if you have been under a rock for the past year. If we do not learn from the mistakes of the past, then we are destined to repeat the mistake. First let’s talk in basic terms about the problem. Over the past several years, the hunger for homeownership on one side and the desire for high rates of investment return converged. Buyers of limited income, marginal credit histories, (with limited down payments), were able to buy homes. Because of any one of these reasons, they were unable to obtain regular, conventional financing. The ‘sub prime’ mortgages that they were able to obtain generally had very low, below market mortgage payments, initially. Often the first 24 months were at payments and/or at interest rates were ‘affordable.’ Then at the 25th month, the payments increase significantly. Most sub prime borrowers cannot afford the new payments. There are many contributing elements to the problem:
an expectation that the property will be worth more money, an expectation that the borrowers’ income will increase, or an expectation of a myriad of other great things. The challenge is that one of these things ‘had’ to happen for them to stay in the house. It is also true that the mortgage lenders made more money, initially placing these mortgages. Investors were promised high rates of return in “packaged mortgage investments.” Everyone would win if the borrows made more money or property values went up. Neither happened.
Now 450,000 sub prime mortgages are scheduled to ‘reset’ to a higher interest rate and payment, in each of the next 4 quarters. Most will not be able to afford their new payments. Fixed rate conventional (under 417k) mortgage rates are at record lows, 5.25-5.50% 30 year rates. But sub prime borrow generally will not qualify. This is further complicated by the fact that home values have gone down. In short, it is a nasty-perfect storm.
The government’s plan to help buyers really addresses a very small part of the problem. Moreover, a repossessed home often nets the investor only 30% of the original value of the property. Couple that with the fact that these displaced former owners will end up with lousy credit; it will be a very long time before they will be able to repair their credit to be able to borrow again. These people need to live somewhere, but without help; it will be a very long time before they will be able to buy a home again.
Ponder also the impact of the foreclosed property on the value of adjacent neighborhood properties. Ponder the impact on lost revenue for the city or town. Ponder finally the economic impact on the overall economy.
Congress and the White house are attempting to ‘stimulate’ the economy with a package. Among the inclusions is an increase in GSA, Fanny Mae and Freddy Mac, mortgage loan limits to 125% of median price. Some proposals include an increase to $625,000. This will help borrows by making lower ‘conventional’ rates available.
It will be helpful for homes priced into the 700k range. It is most necessary. But this does not address the sub prime borrowers’ plight. If the lender’s can keep the payments and the interest at a low rate, the homeowners will predominantly stay in the house, even if the house is worth less than the mortgage. at this moment. It is a way for lenders to avoid, short sales and foreclosures, and it helps the holders of the investments. Sometimes we make things more complicated than we should. This is one of those cases: It will be better to keep these families in their homes rather than forcing them out. Hopefully, common sense will prevail. Let’s hope so.
Please contact our Senators and Representatives to get their help:
Senator Jack Reed 401 943-3100
Senator Sheldon Whitehouse 401 453 52944014
Representative James Langevin 401 732-9400
Representative Patrick Kennedy 401 729-5600