Word To The Wise: The Foreclosure Nightmare Part 2

imageCity of Davis

Wake Up and Smell the Coffee!–PART 2

By E.A. Roberts

Part 1 was published Thursday February 19, 2009

Where Do We Go From Here?

1. Stop encouraging the policy of lending money to folks who do not have the wherewithal to repay.

• Disallow subprime loans, in which borrowers clearly do not have the resources to make payments.

• Use government subsidized “affordable housing” strategies to place low income consumers in homes, rather than pawning off the responsibility to the private sector, which is largely unregulated.

• Encourage people to live within their means.

• Disallow gimmicks by private enterprise that addict consumers to spending.

• Government should set a good example to consumers by balancing its own budget.

• Government cannot keep bailing out private enterprise, which is becoming all too common an occurrence.

2. There must be more government oversight and regulation from the beginning, rather than after the fact, of the following:

• Lending standards

o Proof of employment should be obligatory;
o Sufficient income required;
o Adequate down payment necessary

• Bank/lending institution practices

o Exorbitant executive compensations/perks should be disallowed;
o Compensation should be tied to economic health of company;
o Expensive retreats for non-business purposes should be disallowed.

• Sale of securities

o What type of things can be sold as securities and how can they be sold?
– Ban subprime loans for sale as securities;
– Ban bundling of different types of securities.
o Insist on and enforce an objective credit rating of securities.

3. Make originator of loan accountable for any default – institute tracing system if mortgage is sold as security.

4. Crack down on predatory lending practices.

• Ban Adjustable Rate Mortgages altogether;

• Make sure customer is fully informed as to each and every term of a loan;

• Have strict guidelines for loan refinancing;

• Limit what lending institutions can charge in fees and interest;

• Punish lending institutions that do no conform their behavior to the law

5. End the political and ideological rigidity and polarization that has taken hold in this country. We need to get back to pragmatic policies instituted for the good of the country. Blaming one party or the other is fruitless. There is plenty of blame to go around on both sides of the aisle, in private enterprise, and in regard to consumers.

• Push to obtain minority votes is polarizing this nation;

• Protecting business at all costs is destroying this country;

• Campaign contribution methods are corrupting our political process.

6. Encourage lending institutions to do the right thing, by not giving them any bailout money unless they agree to all of the following:

• Recapitalization of the banking system;

• Restructure mortgages by –

o Eliminating Adjustable Rate Mortgages;

o To avoid foreclosures, restructure existing mortgages –
– From ARMs to fixed rate mortgages;
– Extending time due;
– Decreasing interest rates.

• Limit executive compensation/perks.

• No lavish parties at the company’s expense.

WHAT DOES THE FUTURE HOLD?

It is predicted that this nation should be done with subprime loan foreclosures in the first quarter of 2009. I am not sure I agree with that statement. There is no doubt the housing market will be flooded with bank owned homes – from one quarter to one third of all homes for sale will be bank owned. This occurrence could push down housing prices even more, perpetuating a vicious cycle, but it could also attract bargain hunters (and speculators).

Borrowers can escape negative equity by dropping their house keys in the bank mailbox and walking away – except they still may be held responsible for any loss the bank takes on the eventual sale of the house at auction. But abandoned homes are a plague on the neighborhood. They often fall into disrepair, and offer an attraction to looters and squatters, dragging down property values of the entire street. Housing market deflation can produce overshooting on the economy’s downside.

Lenders could forgive part of the mortgage or renegotiate the terms of the loan a) from an adjustable rate mortgage to a fixed rate one, b) keep the teaser rate for an extended period, c) increase the length of the loan and/or decrease the interest rate. But because subprime loans have been bundled in a pool with other mortgages sold to a diversified group of investors, the packaging process puts the borrower and lender a labyrinth of a distance away from each other. So the ability to renegotiate has become nearly impossible. Subprime loans packaged into securities skyrocketed from 32% in 1994 to 81% in 2006.

The solution to the “distance” dilemma might be to give the legal right to change the terms of mortgage loans, or forgive part of them, to servicers who collect payments on behalf of creditors. Another idea floating out there is for Fannie Mae and Freddie Mac, the government sponsored enterprises whose loose lending policies (prompted by Congress) helped get us into this mess, could buy/guarantee any existing home mortgage at a fixed discount from current principal, e.g. 15%, with the understanding the new mortgage would be supported by federal credit guarantees, with interest rates reduced to perhaps 5% with the payment schedule lengthened. Once these mortgages become liquid/tradable, it would improve the liquidity of the entire financial system, or so the hope goes.

Lesson to be learned: Don’t borrow more than you can afford. Save, save, save. Diversify your investments. Don’t trust everything you read or hear. Bring a good healthy bit of skepticism to the table. Know that not a single person is immune from financial ruin no matter how careful one is. Make sure to keep up with the news, and keep involved in the political system, especially the local scene. Locally is where you can exert the most control on what goes on with your tax dollars.

Part 1 was published Thursday February 19, 2009

Elaine Roberts Musser is an attorney who concentrates her efforts on elder law and aging issues, especially in regard to consumer affairs. If you have a comment or particular question or topic you would like to see addressed in this column, please make your observations at the end of this article in the comment section.

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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15 thoughts on “Word To The Wise: The Foreclosure Nightmare Part 2”

  1. Cheezburgers

    End the political and ideological rigidity and polarization that has taken hold in this country. We need to get back to pragmatic policies instituted for the good of the country. Blaming one party or the other is fruitless. There is plenty of blame to go around on both sides of the aisle, in private enterprise, and in regard to consumers.Well, I blame Democrats, in particular Barney Frank and the Dem House leadership. That …evil… Bush guy and John McCain and a few others were the ones who wanted to fix the system a few years back and were met with resistance by Democrats.

  2. Elaine Roberts Musse

    …I was going to read this, then I saw that a …lavish parties… are one of the major fixes for banking industry…. You have no idea what your talking about……I'm not quite sure I understand this comment. I indicated the banks should not be allowed to give lavish parties if they are taking gov't bailout funding. Nor should they be able to give lavish parties period….What about something simpler and easier to implement? For example, not allowing bankers to lend more than they have in solid assets? And don't lend to anyone who can't repay a loan considering their present job and income?…Good, solid suggestions, and very simple. However, much predatory lending was going on, where people were being lied to about the terms of the loan (such as balloon payments and teaser rates in an adjustable rate mortgage). That has got to stop….Well, I blame Democrats, in particular Barney Frank and the Dem House leadership….I actually heartily agree with you there. However, the Bush people were hesitant to get rid of Greenspan when they should have; and Bernanke seemed clueless that there was a crisis looming until it was too late. However, Greenspan had a lot to do with that, by not advising Bernanke properly.I also am critical of Republicans for not wanting enough regulation of business. The SEC is virtually worthless IMHO. I have had dealings with them, and was not impressed. Other state regulators have had the same abysmal experience as I did….

  3. grim reaper

    So far behind the curve out here in podunk. Option Arms aren't even mentioned, even 60 Minutes has covered them. What about commercial real estate, consumer loans, student loans, credit default swaps, prime mortgages, seconds and so it goes. The notion that this is fixable by anything the gov does in the housing market is fading into the realities of the Obama administration being unable to break with the policies of Bush and Wall Street and do the one thing that will be the least painful in the end, close the banks that are insolvent. The one smart thing in Musser's diatribe is to keep yourself out of more debt then you can afford. Of course when was that ever not good advise. Sadly for most people that horse left the barn during the last administration.

  4. grim

    …not allowing bankers to lend more then they have in solid assets…Do you know anything about the banking system? Banks loan out more then they have in deposits. The problem is that under Bush the SEC let the investment banks lever up to 30:1 instead of the traditional 12:1As for closing the banks that are insolvent it will be ugly as Nouriel Roubini has pointed out it is the best of several bad options. The International banking system has collapsed as George Soros recently pointed out. Many banks are insolvent. Wall street knows it that is why the financials are discounted to penny stock speculation status and gold is $1000 a troy ounce. Figuring out which banks can't be saved and taking them over will be expensive but it will cleanse the stables of dung, restore confidence in the one's that are left, cost the least amount of public funds and result in the least amount of monetizing dilution and national debt increase.

  5. Fiscally prudent

    …Do you know anything about the banking system? Banks loan out more then they have in deposits. The problem is that under Bush the SEC let the investment banks lever up to 30:1 instead of the traditional 12:1…Point well taken. So let's put a limit on how much credit the banks can extend, and to whom. We need real reform, that may not be politically correct, but is fiscally sound.

  6. Anonymous

    Has anyone drafted legislation that would implement these recommendations? I don’t think that it is possible to have the legislature change existing laws to do this.What about something simpler and easier to implement? For example, not allowing bankers to lend more than they have in solid assets? And don’t lend to anyone who can’t repay a loan considering their present job and income?

  7. Anonymous

    Has anyone drafted legislation that would implement these recommendations? I don’t think that it is possible to have the legislature change existing laws to do this.What about something simpler and easier to implement? For example, not allowing bankers to lend more than they have in solid assets? And don’t lend to anyone who can’t repay a loan considering their present job and income?

  8. grim reaper

    So far behind the curve out here in podunk. Option Arms aren’t even mentioned, even 60 Minutes has covered them. What about commercial real estate, consumer loans, student loans, credit default swaps, prime mortgages, seconds and so it goes. The notion that this is fixable by anything the gov does in the housing market is fading into the realities of the Obama administration being unable to break with the policies of Bush and Wall Street and do the one thing that will be the least painful in the end, close the banks that are insolvent. The one smart thing in Musser’s diatribe is to keep yourself out of more debt then you can afford. Of course when was that ever not good advise. Sadly for most people that horse left the barn during the last administration.

  9. Cheezburgers

    End the political and ideological rigidity and polarization that has taken hold in this country. We need to get back to pragmatic policies instituted for the good of the country. Blaming one party or the other is fruitless. There is plenty of blame to go around on both sides of the aisle, in private enterprise, and in regard to consumers.Well, I blame Democrats, in particular Barney Frank and the Dem House leadership. That …evil… Bush guy and John McCain and a few others were the ones who wanted to fix the system a few years back and were met with resistance by Democrats.

  10. Elaine Roberts Musser

    …I was going to read this, then I saw that a …lavish parties… are one of the major fixes for banking industry…. You have no idea what your talking about……I’m not quite sure I understand this comment. I indicated the banks should not be allowed to give lavish parties if they are taking gov’t bailout funding. Nor should they be able to give lavish parties period….What about something simpler and easier to implement? For example, not allowing bankers to lend more than they have in solid assets? And don’t lend to anyone who can’t repay a loan considering their present job and income?…Good, solid suggestions, and very simple. However, much predatory lending was going on, where people were being lied to about the terms of the loan (such as balloon payments and teaser rates in an adjustable rate mortgage). That has got to stop….Well, I blame Democrats, in particular Barney Frank and the Dem House leadership….I actually heartily agree with you there. However, the Bush people were hesitant to get rid of Greenspan when they should have; and Bernanke seemed clueless that there was a crisis looming until it was too late. However, Greenspan had a lot to do with that, by not advising Bernanke properly.I also am critical of Republicans for not wanting enough regulation of business. The SEC is virtually worthless IMHO. I have had dealings with them, and was not impressed. Other state regulators have had the same abysmal experience as I did….

  11. grim

    …not allowing bankers to lend more then they have in solid assets…Do you know anything about the banking system? Banks loan out more then they have in deposits. The problem is that under Bush the SEC let the investment banks lever up to 30:1 instead of the traditional 12:1As for closing the banks that are insolvent it will be ugly as Nouriel Roubini has pointed out it is the best of several bad options. The International banking system has collapsed as George Soros recently pointed out. Many banks are insolvent. Wall street knows it that is why the financials are discounted to penny stock speculation status and gold is $1000 a troy ounce. Figuring out which banks can’t be saved and taking them over will be expensive but it will cleanse the stables of dung, restore confidence in the one’s that are left, cost the least amount of public funds and result in the least amount of monetizing dilution and national debt increase.

  12. My View

    …As for closing the banks that are insolvent it will be ugly as Nouriel Roubini has pointed out it is the best of several bad options. The International banking system has collapsed as George Soros recently pointed out….Yes, but how much credibility does George Souros have? He wants America turned into a socialist state, much like many European nations. He has floated a lot of his money out there to the Dems, but didn’t get much traction on a lot of his Socialistic nonsense. On the one hand you say the gov’t can’t solve things, then on the other want gov’t to take over the banks. Which is it?

  13. Reform-minded

    …Figuring out which banks can’t be saved and taking them over will be expensive but it will cleanse the stables of dung, restore confidence in the one’s that are left, cost the least amount of public funds and result in the least amount of monetizing dilution and national debt increase….None of that will be of any value if we still loan people money they cannot afford to pay back. It doesn’t matter whether the bank is privately owned or publicly owned. If any bank loans to folks that cannot afford to make payments, this country is doomed to slide into another recession…

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