As an attorney I practiced foreclosure defense during the last recession 1986 to 1994. Unfortunately some of the ideas listed are close to locking the barn door after the horse is in the next state.
Its a little late to impose an "ability to repay standard" if the place is in foreclosure and Mortgage brokers end up with the loan back if the borrower doesn't make payments or there is the least fraud or incorrect info on the application. Thats why they go bankrupt.
One of the solutions that used to help prevent foreclosure was Chapter 13 BK. the borrower could repay arrearages over up to 5 years. Clinton fought off the banks push to change Bankruptcy. But Bush signed the "Reform Act" changing Bankruptcy in some awful ways which almost eliminated the ability of the borrower to save their home and repay over time. You will see that the Bankruptcy law change will lead to people just walking away from their homes instead of trying to work something out, because its a nightmare dealing with banks who sold the loan and you don't even know who to deal with. At least with the old Bankruptcy law the banks had to cooperate and give a correct repayment amount and file with the court.
Credit card companies also seem to have managed to change the law regulating their interest rates.
Last time they had the Resolution Trust Company that had a goal of helping foreclosures but I never could figure out what they did that was a benefit and they had a huge budget.
I have lived in the UP during tough times and I wish you luck. The laws to consider sound good--but the banks will fight you and they have friends in Washington.

There should never be prepayment penalties. It should be illegal. Penalizing the borrower for repaying the loan? Hello?? So you didn't make as much money as you'd expected. Boo hoo. Better luck next time. You got your money back, and then some.

I applaud Nancy and her fellow community members for trying to do something. I agree with margenorman that there has been far too much yielding to corporate pressure in Washington, but when citizens meet for discussions as Nancy described, it should increase awareness that we are all affected by legislation that we too frequently ignore.

Ohio, Maryland, Rhode Island, Massachusetts, and Virginia have all begun to underwrite subprime bailout loans. Colorado, California, Washington, and Wisconsin are considering similar programs, according to Garth Rieman, director of housing advocacy at the National Council of State Housing Agencies. This was according to USA Today on March 28th. The plan is to assist in refinancing to a fixed rate. Ohio is going with a 6.75% fixed rate. May be Michigan will begin to look at this. It is horrible what is going on.

Foreclosure is a terrible thing, without question.However, a homeowner must bear some responsibility for the loan..For every case where the buyer with a subprime loan was mislead, theree is another case where the buyer knew full well what they got themselves into..I am not sure i support a government bailout of those unfortunate to lose their homes.Those who are responsible and pay their mortgage on time, and may do without some "luxuries" in life to pay their mortgage, are getting the shaft.Where do bailouts end? I have scrimped and saved to plan for retirement, i know many people who have the latest and greatest cars/do-dats/whatchamacallits,etc and svaed ZILCH for retirement..Will the government bail those people out also? It may sound callous, but if you signed the loan, you need to pay the price..sorry

"It may sound callous, but if you signed the loan, you need to pay the price..sorry"

You make it sound as if this "bailout" gives the people who are facing foreclosure a free house.

This is not true.

Those "bailouts" just make it possible for people to re-finance to a fixed rate (around 6.75% so nothing outrageously cheap) that they can afford. What is so wrong with this?

I agree generally with qdog.
When moving to Omaha 3 years ago I was agast at the housing development going on. It was so obvious that it was out of control and there would be a bust. My realtor kept saying no no it will be fine.
Well now the builders have had in an outside consultant because the market is past saturated, small builders have gone under and of course the consultant said "oh yea, you guys are way overbuilt and in huge huge trouble".
My view on this 3 years ago and still today is - what is city and state govt for if not to regulate this sort of thing? They do provide permits and oversight etc. Someone has to have the big picture and in some essence save the city people/business/farming with growth regulation (something Omaha doesn't seem to have heard of).
So now who pays when all the builders go bankrupt, there's a zillion new homes on the market, half built ones, the rest of us slobs selling "used homes" (good luck, half the town was working for developers or builders - it was like a big pyramaid scheme, the more homes going up the better the economy looked, the more homes they built - that the population itself wasn't growing or the non-building job market was growing to meet the market didn't seem to dawn on anyone - hello? Govt asleep at the wheel. Now developers and builders are laying off and those people can't afford their homes and they are going on the market as well. Its not as bad here as Michigan and Ohio but it all could have been avoided with a little city oversight.
Meanwhile, if you can sell a house, you sure aren't making 5%. Your lucky if you get 3.
And now what - are we supposed to underwrite and bail out all these huge developers and builder companies? I think not.

jrldh, what makes you think they can afford 6.75%? they could have refinanced into this rate or lower over the past 12 months easily..Problem is their equity is zero,otr worse ,negative..And why is it zero or negative equity? Because they had NO downpayment!!! They took the risky road, and got caught..sorry, you don't need to be a MBA to figure out this was a very bad idea...

The point is that mass foreclosures threaten the entire housing market because they both force down prices and increase the already existing oversupply of unsold houses. And if the foreslosures are numerous enough in a single area, they bring blight to previously unblighted neighborhoodss, causing property values to drop even further and threaten the equity of all homeowners in the affected area.

The states have begun programs to underwrite subprime bailout loans because they're trying to stabilize their own housing markets and preserve property values and property tax revenues. They are taking a pragamatic approach to a problem that has much broader impact than just the individual tragedies of families losing their homes.

Trying to figure out who's to blame for the subprime meltdown is something that should be looked at to see what could be done to prevent it happening in the future, but these states are doing something NOW to try to stabilize the foreclosure situation before it gets even worse.

"what makes you think they can afford 6.75%? they could have refinanced into this rate or lower over the past 12 months easily.."

That haven't been able to refinance because they have poor credit. That's why they they had to settle for a subprime mortgage in the first place. And their credit now, if anything, is likely to be even worse because they can't make their increasingly large morgage payments. Also add in the fact that mortgage lenders have tightened their mortgage standards.

Many of them could handle a fixed rate payment a 6.75% if they could obtain such a loan.

Isn't is ironic that you have to take a test to get a driver's license, and some states even require people to have some form of marriage counseling before they get a marriage license, but no one has to understand how to manage their own money or understand basic lending practices to take out a mortgage?

I think there's alot of unscrupulous lenders out there who are taking advantage of people and signing them up for loans they can't handle. See Steven Pearlstein's article in the Washington Post (March 14th) and you'll see a whole laundry list of these crazy loan schemes. People are getting loans without showing documentation of income, putting nothing down, and in many cases not using common sense to see that they're in over their heads!

I'm totally with Nancy. This kind of lending hurts everybody.

Denise (also in Michigan)

FF Said:

Many of them could handle a fixed rate payment a 6.75% if they could obtain such a loan.

But FF also said
That haven't been able to refinance because they have poor credit. That's why they they had to settle for a subprime mortgage in the first place

Ok, so if they didn't qualify for a fixed rate loan when they took out the subprime, why would they qualify now? The fixed rate was likley much cheaper when they took the subprime. So are you saying they should NOW be given a fixed rate, when they couldn't get one before? This is a recipe for another financial disaster

"So are you saying they should NOW be given a fixed rate, when they couldn't get one before? This is a recipe for another financial disaster"

So, what is your solution, then? Throw them on the street and say tough luck? Next time, please do yourself a favor and don't yap around how foreclosure is a terrible thing, if your compassion isn't even big enough to give people a state backed 6.75% fixed rate that they probably can pay vs. a rate that reset to a much higher rate.

Just admit that you think foreclosure is just punishment and don't sugarcoat it with how "terrible" your bleeding heart thinks foreclosure is.

Maybe the greed angle could help you like something like this better: Fewer foreclosures == less devaluation of your own property.

"Ok, so if they didn't qualify for a fixed rate loan when they took out the subprime, why would they qualify now? "

That is the whole idea of a "bailout" (which is a stupid term in this context). Make it possible for people with poor credit to obtain a loan they actually can afford.

OK, I'll go through it slowly.

Many, if not most, of the borrowers who took out subprime mortgages couldn't get a conforming mortgage at standard rates because their credit was poor or their income too low to qualify for a conforming or other conventional loan. The subprime mortgages they were able to get typically had a relatively low, but adjustable, rate for the first few years. After that, the rates were adjustable upward, usually quite drastically. I understand it isn't unusaul to have the payment double after several of these interest adjustments. That's what has caused these folks to default -- their incomes simply can't cover the greatly increased payment.

However, they were able to handle the lower rate that applied for the first few years. Many of these borrowers DO have enough income to pay back the mortgage at a fixed 6.75 rate. But they haven't been able to refinance and get such a rate, thereby avoiding the big rate adjustments upward, because housing prices have stagnated or declined and they don't have enough equity in the house to get a normal refinance.

The real "financial disaster" is a flood of foreclosures. This is certainly true for the mortgage lenders, who have to write off the diference between what they lent and what they can get when the foreclosed house is sold. It's certainly true for the shareholders of these lending institutions who are going to see their stock prices drop. It's certainly true for the people who lose their houses. It's certainly true for the communities in which they live, for the reasons I explained in an earlier post. And it's also true for the US economy as a whole and everyone involved in it, including you and I, brother. And the more foreclosures that occur, the truer this becomes.

In view of all that, it's not unreasonable, IMHO, for the states most endangered by this crisis to assume some risk in underwriting these mortgages. They risk far worse consequences if they just stand back and let things take their course.

oh brother..If you can't afford the house, you shouldn't be given it... These are owners that COULDN'T qualify for a loan, took out a highly speculative loan, and lo and behold defaulted..surprised?? So now they should be given a fixed loan that they couldn't qualify for earlier? Ok,what about the people that make do by living at their means or below it, to make their mortgage payment? Is it fair to them?...I'll concede that if the FED lowers rates, and those who are in foreclosure and those who can refinance can take advantage of rate reductions,then so be it...

ff, repeat after me,they KNEW the rates would adjust,so how did they expect to make the new payments once they adjusted? oh, i see, they default ,and wait until uncle Sam bails them out

Your question was how these borrowers could afford the 6.75% mortgages and I think I explained it well enough.

If you want to rant and rave about blame, be my guest because that's not what this thread is about.

BTW, the FED doesn't lower mortgage rates. It's a bit more complicated than that.

correct the fed doesn't lower mortgage rates, however, they INFLUENCE them..and i still maintain my point they can't afford 6 3/4%...

OK, maintain it.

So, qdognj, do you have a constructive solution or do you just want to rant how irresponsible people should face foreclosure?

Constructive solution... to what?

The fact that home prices FINALLY have a realistic pressure to come back to fundamentally supported values... this is a "problem" in the big picture?

People who cannot afford to own... they'll rent (just like they did before.)

Will some people who bought too high lose money? Yes.
Will some people who couldn't afford at the highs benefit when they can afford to buy at reasonable prices? Yes!
Is either one of them "wrong"? Not in my opinion.
Is either one "predatory" or "victim"? Not in my opinion.

Do we wail when eagles eat rabbits? When orca whales eat seals? When sparrows eat worms?

Do we frantically try to change the tides when they come in & sweep away our sand castles?

This "media drama" is all clear evidence of the "slow hangover" period currently happening to the markets. People are wailing & gnashing their teeth simply because they have no "exciting buzz" pumping through their veins... the markets are sluggish & quiet... (certainly not "crashing,)... so those who have no sense of internal peace are freaking out & running in circles declaring that the sky is falling...

So much ado about so little importance, in the big picture...

Cheers,
Dave

Hey Dave, nice to have you back where you belong!!!
Jrldh, The solution is let the free market reign!! It'll weed out the people who shouldn't have had a mortgage to begin with..And the lenders who were unethical, well they go back to selling Big Macs

One point that my office mate and I were discussing today is that 20 years ago, you COULDN'T buy a house you couldn't afford. A lot of people still rely on the Big Brother tradition of banks only loaning you what they really believe you can pay back. When new-fangled financing is combined with the boundless optimism of rising home prices, simple people can begin to doubt the cautions that they believed in more conservative times.

There are a huge number of people who do not know enough about finances to make good decisions about mortgages they do not understand. When I work with everyday working people at my jobs, it is amazing how many cannot use basic math skills. People on these forums do not at all reflect the general public.

While I know it's far from the norm, I'm in Macomb Co, MI and the neighbourhood is quite stable, but now has 3 (known) foreclosures in a couple street area.

Two of those weren't due entirely to subprime loans or overspending. Both houses were older - one around 1950, the other is in a similar style to ours, so ~1925-1929.

In the case of the house built in 1950, the owners were out of town when a roof leak decided to open up the roof in a valley that wasn't visible to any of the neighbours. They got home to a destroyed house - it had been basically open for two weeks of heavy rain, combined with lots of broken pipes since many ran through the attic. Insurance gave them so little that they felt the only thing they could do was leave it. It's been empty for awhile now. No attempts to sell it even for the land, that we know of.

The other house, they noticed some major cracks forming in the walls and a door started to not close right. Several structural engineers later and they realized that it wasn't worth it for them to pay more than 1/2 of the value to fix the foundation.

Perhaps they could have done more, but at least from the outside, neither instance was the typical "expected" foreclosure case of multiple brand new SUV's, boats, or excess.

UV, I am in Macomb Co, too. So was the Forum. The assistant treasurer gave the example of a widow left alone in her home with $500 in SS income after her husband died. She tried to get by, but failed. When the taxes remained unpaid, the Treasurer's office put her on a list of people to contact any way possible. She never answered any mail or any knocks on the door. From the front of the property, it looked fine. The treasurer's people went around the back and saw it had caved in, completely hidden from the street. The water, electricity and gas were turned off, but the woman still lived there. They finally met her when they came by and intercepted her on her way home from filling her water bucket at a nearby store. Inside, they found she was living in the front room with a kerosene heater for warmth and cooking. They got grants and donations and repaired her house. That allowed her to get a reverse mortgage. A furniture company or two provided furniture and she now has a warm, safe, and comfortable house. Her bills are paid and she feels like she is living in a different world. That is true. She is living in a world of community and the power of civilization. She had been isolated and powerless in her shame and poverty in the world she knew before.

Being here in Canada about a stones throw from Nancy in Mich's house almost literally I was trying to read up on what/why this is happening in the US and not in Canada. It is a good comparison because both the US & Canada have about the same percentage of home ownership by population along with being the highest world percentages. From what I've read so far the stark difference is that in Canada mortage payments are not tax deductible but capital gains on the sale of your principle residence are not taxed. Whereas in the US, mortgage payments are tax deductible but you pay capital gains tax unless you buy another house of equal or greater value? So how does this make a difference, well in Canada since you are not gaining a yearly tax deduction on your mortage payments there is more of an incentive to pay your mortage off as quickly as possible while in the US a lender may prod a purchaser into taking out a larger mortage, buy a bigger house or de-incentive people to pay of their mortage quickly because they'll lose the deductions. Does that make sense? Banks here are still very careful about not over extending mortgages beyond the purchasers ability to pay and if you have less than a 10 percent downpayment (I think it's 10% maybe more) then you must get mortgage insurance thru the CMHC (Canada Mortage and Housing Corp)or they won't give you a mortgage.The premiums are added into your monthly mortgage payment.
Do you think if people living in the high value areas of the US were able to sell their overpriced $800k 3 bedroom ranch they paid $50k for 25 years ago could walk away with $750k tax free and move to a much nicer $300k house in Michigan and stand to pocket $400k or so of cash they'd move? Obviously not if they were still had to work but say if they were retired or near retirement, self employed etc.
Of course I could be wrong about the whole capital gains in the US on the sale of your house.

PKguy, you are out of date on the capital gains taxes. We no longer use the trade-up rule. Instead there is an fairly generous exclusion for sale of primary residences with restrictions. If the home in your example were owned by a couple, I think it would be $750K minus $50K cost minus $500K exclusion minus all the improvements over the last 25 years minus the selling costs= taxable gain. So they might have little or no capital gain if they saved receipts for many improvements over the years.

We have private mortgage insurance in the US, too. I believe the cut-off is 20% down for PMI. So, I don't think that is the difference.

But I think you have a point about the tax deduction, which encourages people to refinance homes to pay off consumer debt. I remember when taking out a "second mortgage" was a sad, scary idea. Now "home equity loans" are promoted as a saavy money management strategy. Maybe for some people, but they are a deep pit for others.

I hope your lenders have been better than ours about allowing people to over-extend. Foolish underwriting plus foolish buyers is a dangerous combo.

Hi pkguy,

Being here in Canada about a stones throw from Nancy in Mich's house almost literally I was trying to read up on what/why this is happening in the US and not in Canada. It is a good comparison because both the US & Canada have about the same percentage of home ownership by population along with being the highest world percentages. From what I've read so far the stark difference is that in Canada mortage payments are not tax deductible but capital gains on the sale of your principle residence are not taxed. Whereas in the US, mortgage payments are tax deductible but you pay capital gains tax unless you buy another house of equal or greater value? So how does this make a difference, well in Canada since you are not gaining a yearly tax deduction on your mortage payments there is more of an incentive to pay your mortage off as quickly as possible while in the US a lender may prod a purchaser into taking out a larger mortage, buy a bigger house or de-incentive people to pay of their mortage quickly because they'll lose the deductions. Does that make sense?

As quip pointed out, your assumptions are a bit out of date (OK, quite a bit... but big credit to you for strategic thinking!!!!)

Today, in the U.S., you get a cap gains tax exemption for $250,000 single, $500,000 married... as often as every two years (which means if you are a magician and can buy a primary or second home and re-sell it every two years you can take up to a halg Mill tax free each round... can't beat that with a stick!)

The U.S. government's subsidy of mortgage leverage certainly DOES muddy the water from financial simplicity. It can be a very powerful advantage to those who understand it (and how to marry it with tax-subsidized investment strategies,) but when misunderstood people can, and do, hang themselves by it.

Do you think if people living in the high value areas of the US were able to sell their overpriced $800k 3 bedroom ranch they paid $50k for 25 years ago could walk away with $750k tax free and move to a much nicer $300k house in Michigan and stand to pocket $400k or so of cash they'd move?

Yup... In fact, you have just described an often-maligned migration tendency of Californians to Washington, Oregon, Arizona & Nevada.

Believe it or not, oldtimer native Washingtonians birtch & gripe about how "unaffordable" and "tax inflated" their neighborhoods have become because of "the damn Californians" who sell their 3 bed, 2 bath starter in Sacramento for a cool Mill, and bought (at full retail) a 4,000 square foot mini-mansion in Bellevue for half their proceeds.

As always... the knife cuts both ways.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Dave, do you know can you sell a second home and get the tax exemption. I thought it was only your primary residence? I know you can deduct interest for your second residence. I want to sell my second home, but am planning to pay capital gains.
Funny my SIL is selling in CA to build in WA with her proceeds.
I live near aerospace jobs, I remember a few years ago when the jobs went to WA, the first thing Californians did upon arrival up there was order new license plates.
Me I'm staying put in "overpriced" CA, I love it. I don't do rain or too much heat.
Now, I want to know if someone is willing to pay the price, how can you maintain that the 3 bedroom ranch is overpriced at any price?

Hi Cmarlin,
CPA-check time... IANACPA, so take my tax blather at arm's length.

Also, never said any 3br is overpriced in Cali... heaven is where you find it! At ANY price!

Have a great weekend!
Dave Donhoff
Strategic Equity & Mortgage Planner

"Also, never said any 3br is overpriced in Cali... heaven is where you find it! At ANY price!"
Dave, I didn't mean to address just YOU, it was meant as a general question, I keep seeing the term, and wonder how one determines that, if so many people are willing, in a free market to pay the price, how does another person come along stating it is overpriced.