The Mortgage Crisis - Part 3: Fixes and Fallout

If you haven't already, see part 1 and part 2.

Well, this is a fine mess we are all in now, and for most of us, we didn't do much to bring it on us. Housing prices are known to be inflated, credit is much harder to get (is this a bad thing?), and the markets are in a panic (I know, when are they not?). It seems there are two options being talked about a lot - bailout or let them sink. No good options seem to exists (that seems to be a common phrase these past 4-6ish years...). Here is my (probably not very) modest proposal for a good way out, or at least forward.

First, stop this fake rate freeze talk that is actually only going to help a couple thousand people. The people that this would actually help (between the never late for a payment and can't afford next hike restrictions) would be far better served by a true, honest and open, renegotiation with the banks, similar to what FHA is being brought in to do for some.

I believe that each borrower needs to be given a transparent way to ask for a renegotiation. Many of these borrowers were presented with the very false idea that they could afford more house than they really could. These borrowers should be allowed to present this and if fraud (or I expect the lenders might prefer "creative lending strategies") was involved the borrowers should be helped. But I don't think the government should be footing the bill, the lenders or brokers who did the misleading should be forced to face their mistakes.

In all fairness to the lenders, the borrowers should have been more careful in many cases or should have read more of the fine print. My wife and I were very careful with our finances (for those of you running Linux out there, a great finance tool called GNUCash is out there that really helps me keep everything in order - 100% free and open source and it does everything I would use Quicken for). We knew exactly how much house we could afford, and how much renting would cost us, both at the time and a couple of years down the line. We settled for a smaller house that we might have liked, but boy do we understand how tempting that larger kitchen with the brand new appliances can be, especially when the bank is telling you that you can afford it easily... I do think though that the borrowers shouldn't be completely let off the hook. This is why a neutral third party mediator should be brought in. Maybe not a judge, but someone along those lines.

ARMs, and really even fixed mortgage rates need to be more closely examined. Right now, and I didn't realize this until I asked a lender, mortgage rates can be whatever the bank thinks you should pay. It isn't tied to anything at all. Banks pay a discount rate to borrow, then there is the key interest rate, and also the prime lending rate. Mortgages, as I was told, vary day to day and are what the bank is choosing to charge. This means that I can't go bank to bank and compare rates, a rate given on one day could be completely different from what I am told the next. This needs to be changed. Banks can compete on how they treat credit ratings and other features of the loan (closing costs, etc.), but the base rate should be tied to something I can look at, not personal whim.

Finally, we do need to face some fall out. There will still be an increased number of foreclosures. Some banks will lose solvency. Many mortgage brokers will go out of business. The stock market will take a hit. Houses will still drop in price. However, the markets will stabilize quickly if this is handled responsibly. Funds, institutions and banks that are built on the mortgage industry's fraudulent practices will be removed from trading, and while there will be an overall drop in the market, those people who knew better than to listen to the pipe dreams these funds offered won't be as badly hurt (full disclosure, I kept most of my 401k out of mortgage and bond centric plans since I started with my current employer, so while I don't have anything to gain, I have less to lose). These fall outs will happen. I believe it is better to take care of it now and get it over with than to perpetuate the lies and let there be a bigger fall later.

Housing will be cheaper for a while, this will allow some people who may not be able to afford the house they are in to afford a smaller house, that's worth a little bit less than the one they currently can't afford. Not everyone will be able to get a house, but I'm sorry to say, not everyone can afford a house. I know a lot of this is a bit harsh, but there is no good way out other than to have not gotten into this mess in the first place.

Good luck to everyone out there, and if anyone can see a better way of getting through this, feel free to share.