I just read an interesting letter to the editor on The Seattle Times which although rather simplistic, makes a very powerful point. The letter to The Seattle Times editor reads:
“Editor, The Times:
Here is a quick solution for the housing and economic crisis:
In the next 30 days, require all banks that are receiving federal aid to adjust all mortgages on primary residences to 3.5 percent, 30-year fixed rates.
Issues solved: Homeowners would see an instant relief on their monthly payments, freeing up cash. This lack of delay would bypass mortgage brokers, red tape and other time-consuming issues that would delay relief.
The current Fed plan of lowering key rates ["Fed's big rate cut just for starters," Times, page one, Dec. 17] and expecting banks to pass this along will not solve the problem. Housing prices have deflated and jobs have been lost, so many people will not be able to refinance if given the opportunity.
This plan would instill confidence in the public for the $350 billion that has already been partially given to the banking system, with little oversight and with no noticeable results.
People who can’t survive after this drastic cut are over-leveraged and would not be able to survive this crisis with any realistic fix.
– Patrick Wylie, Seattle”
The interesting thing to note here is that one of the key elements in the economic crisis is the mortgage crisis. And the mortgage crisis is not only fuelled by homeowners who received mortgages without being able to pay for them, but also homeowners who have seen their mortgage rates nearly double.
With banks making huge profits and receiving huge bailouts from the government, Patrick Wylie’s suggestion is not a bad one, and definitely one that should be noted by politicians.
Image by respres under Creative Commons.
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Note only is that suggestion simplistic, it is wrong.
FIRST, the Banks that are receiving funds may not “hold” very many RE loans, and therefore can NOT change anything more than what they DO hold.
If they sold or “securitized” prior RE loans, they do NOT still hold them, and may not have the legal ability to change all of the loans that they did originate.
SECOND, “securitizations” of RE loans began, after W was elected, in 2003. By 2007 they were more than 50% of the RE loans issues in Cal, Fla, Nev and AZ.
NONE of those loans were originate by “The Banks” you refer to, and NONE of them are currently HELD by them – which means that about 50% of all RE loans made in the last 7 years are NOT covered by your suggestion.
The even worse news, is that they are not covered by Obama’s plan either, for two reasons:
FIRST, in those 4 states ALL loans, even those of Those Banks, made in the last 5 years do not fall under they 105% limit, they have fallen a lot farther than than.
SECOND, by not covering “securitized” RE loans, eliminating “investor homes” and people who have lost their jobs…, there are hardly ANY current RE loans in those states that are affected – by Obama’s Plan or yours.
Thanks for clarifying the banking-mortgage relationship, JGBell. And thanks for taking the time to comment.
The point that we liked most about Mr. Wylie’s letter was “limiting interest rates on the mortgages”. That’s an approach which goes directly to the people “in trouble”.