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Wednesday, February 20, 2008

Hillary Clinton's "fix" for the mortgage meltdown

My career is in the mortgage industry, or it was until my position was eliminated at the end of the year, along with thousands of other's impacted by the mortgage meltdown. Given my ultimate concern for the future of my career (and lesser concern for those that may want to buy a house or refinance a mortgage someday), I've looked closely at what the candidates have to say about addressing the mortgage market, which in turn directly impacts the housing market.

Hillary's "plan" (click the subject to go to her site) makes me shudder, as I see it not promoting a rebound in the industry at all. In addition, I see her call to action as prompting results that I would not think the democratic party would value- bank consolidation and lower rates of homeownership.

Hillary's plan includes 2 main points...


1. A foreclosure moratorium for 90 days, so "At-risk homeowners can get financial counseling to help them transition to affordable loans".

The issue? A bank cannot begin foreclosure proceedings until the borrower is already several months (normally 120 days) behind in their payment. Also, foreclosure is generally the "nuclear option" for lenders in the first place, as it is hugely expensive and in most cases garauntees a loss.

The reality here is that a borrower that is 90+ days late on their mortgage no longer has the credit profile to obtain an "affordable" loan. These borrowers fall into the realm of "subprime", with high rates and fees- the same loans that got then into trouble in the first place! While there are some govt-back programs that have been put into place to help, they are limited in applicability.

By blocking foreclosure, the we are not helping people transition into new loans- there is no workable refinance option in most cases (which is why the homes are in foreclosure rather than the borrower refinancing into a more affordable loan BEFORE this point).

What we are doing is extending the point where the borrower can live in the house without making the payments. This additional cost on the lenders increases the cost of making FUTURE mortgage loans, increasing rates and tightening guidelines. This mushrooms- because of higher rates, people who COULD have refinanced no longer qualify, and thus fall into foreclosure as well, creating more costs which then force guidelines and rates ever higher.

The net result? Less borrowers can get homes, less banks can profitably operate, which leads to industry consolidation as they are bought at fire sale prices by the larger banks. Is making it tougher to get a house and decreasing competition (fewer firms) Democratic principles?

2. Freeze Adjustable Rate Loans for "at least" 5 years- "or until subprime mortgages have been converted into affordable loans." First, many lenders are choosing do this in order to keep people making payments (and preventing them taking the foreclosure loss). But making this compulsory takes away the incentive to migrate out of a loan. Why?

Many of the adjustable rate loans that are in question here have a very attractive start rate that is significantly lower than what a traditional fixed mortgage rate would be. By extending this rate period, the incentive to migrate to a more stable loan goes away- for 5 years. Even assuming you could, why move from a 5% rate that is guaranteed for 5 more years when you would have to pay 8% on a refinance rate?

And again, who bears the cost of this rate freeze? The bank holding the loan. By inducing a 5 year freeze, we are slowing the correction process down by prolonging the malaise in the banking sector. Do we want the housing crisis to be longer in time, or shorter?

Banks should be accountable for their poor decisions, and their punishment has been taken in the extreme losses seen in the banking sector in 2007 and continuing into this year. However, banks also form a cornerstone of our economic performance. Without easy access to credit, the economy simply does not move forward- fewer banks operating under tighter lending guidelines at higher rates drive up the cost of financing, driving down economic expansion.

The mortgage meltdown is not an easy situation, but in recommending that the banking sector shoulder all the costs of fixing the problem will only serve to throw more wrenches into the economic engine.

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