Bailout Coming to the Mortgage Industry Near You?

With all the resetting of ARM’s and the generally bad market conditions across the country, the mortgage companies that were raking in billions upon billions during the boom are now losing billions. This is a real threat to the whole economy. If it persists or gets worse, it could easily lead the country into a recession. The banks and mortgage companies have no clue how to stop the bleeding. As more ARM’s reset, fewer borrowers can afford the mortgage, and since the real estate market is so competitive, they are having a very difficult time selling as well. The only thing left for these borrowers is a foreclosure or a bank-granted “short sale,” either of which costs the lender tens of thousands. A foreclosure especially eats up money due to attorney’s fees and the condition of the property after a foreclosure has occurred.

To remedy the situation, the Fed has already and will have to keep reducing the Fed rates, which will lower all interest rates across the board. This lowers ARM payments, credit card payments, any type of “floating interest rate.” It basically allows for everything to become much more affordable. If you want to buy or refinance a home right now, the rates are roughly 5.75% for a 30 year fixed mortgage. That is an extremely attractive rate that will move many buyers off the fence to buy a home soon. However, this is only a partial solution to the dilemma.

With all the problems faced by borrowers, banks, investors who invest in the mortgages and the banks, and the declining real estate market (which gets worse as foreclosures and short sales mount, pulling property values down), it is very difficult to determine what else the government should do to help. Should the government even intervene at all? The talk is that the Treasury is trying to develop a plan that will allow all of the ARM’s that are due to reset over the next 12-18 months to be frozen and the rates not to adjust for a while. How long? No one knows. The Treasury has not given any details other than that. While I am not an expert in the amazingly complex world of mortgage and high finance, in my opinion, this problem is just way too complex to solve quickly considering the many different parties involved. More likely, the market will have run its course before the government, banks, investors, and borrowers can put together a plan that makes sense and works — which will be a horrible tragedy. I truly hope that they succeed, but because of the nature of the mortgage business (making one individual loan at a time), it’s going to be an almost impossible feat to create a plan that will be effective and save the real estate market. Now, I have no doubt that the lenders will put pressure on the government to take action because of the amount of money being lost in the stock market. As a result, the government will come up with a half-baked plan that will just be a PR move to help calm people down. That is what the current plan looks like to me.

This entry was posted on Wednesday, December 5th, 2007 at 12:44 pm and is filed under Financing, Miscellaneous. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.