Mortgage meltdown mess

by | Aug 6, 2008 | Musings | 0 comments

I drive to and from work in the California town I call home, and on just about every block at least one home is for sale: RE/MAX, Century 21, Coldwell Banker, all the big real estate names are represented on For Sale signs swinging in the breeze, along with a smattering of local outfits, each one with a number plastered across in red, black or white. Call, call, call they request, but their phones aren’t ringing much.

One corner where a stop sign halts my forward motion for a few seconds each morning has two homes for sale side by side. Unlike some farther down the block, these are still occupied by two neighbors about to say farewell. How many Saturday morning conversations have they had while washing their cars or trimming their rose bushes? Do they have children playing in the schoolyard across the street? Are they retirees seeking to live, in part, from the proceeds of the sale of their beloved, long-time home? Are they first-time buyers who took a leap of faith, buoyed by the infectious, frenzied optimism of the market a few years back? Did they lose a job, experience a debilitating illness or simply miscalculate their ability to make their payments after an initial low teaser rate expired?

Each home with a sign out front has a story all its own. How many children are being displaced? How many individuals are blaming themselves, how many spouses are blaming each other as they cram their families back into rentals, move in with relatives or hit the road in vans or trucks, parking on a different street each night, hoping no one taps their window and tells them to move on?

I think often of these people interrupted, disrupted. How can I not when the signs of distress are literally all around me? But they’ve been even more on my mind in the past couple of days because bankers are predicting an even larger number of foreclosures to come as interest rates adjust upward for alternative-A mortages taken out by the tier of borrowers just above subprime. These are borrowers who, unlike subprime borrowers, have good credit ratings but who didn’t meet all the criteria for a conventional mortgage. The initial low-interest period tends to be longer for these loans is longer, so higher payments are starting to hit this group.

It’s hard to predict what will happen, of course. A good credit rating might indicate an ability to plan ahead for such things as mortgage rate adjustments. However, if bankers really expect an even greater number of borrowers to default in the coming months and years, why don’t they do something to prevent it rather than let it take its course the way they did with the subprime borrowers? Haven’t they learned anything?

My idea is for the financial institutions holding the mortgages to restructure them proactively. Review each mortgage case by case and find a fixed rate that is higher than the teaser rate but that is one the borrower can afford to pay. This would mean the return on investment would be reduced for entities that invested in mortgage-backed securities. I don’t know how these things work, but I imagine there might be a need for lawmakers to get involved if investors won’t willingly take a lesser return. But, really, wouldn’t it be better all around if investors earned a little less money instead of having a tsunami of people defaulting on loans, real estate prices plummeting further, banks failing—and then we, the tax payers, bailing out the financial institutions?

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