Fifteen years ago, the last time the housing market ran into stiff trouble, government-sponsored enterprises like Fannie Mae did most of the work pooling and selling mortgage securities. These enterprises readily agree to loan modifications.
But not so in the private issues pooled and sold by Wall Street, which has fueled the extraordinary growth in the market....
The agreements require that any modifications to loans in or near default should be “in the best interests” of those who hold the securities. [emphasis added]
But there is wide variation in how many loans can be modified. Some trusts have few curbs; others allow no more than 5 percent of mortgages to be changed.
Mortgage Maze May Increase Foreclosures
By GRETCHEN MORGENSON
In 2003, Dianne Brimmage refinanced the mortgage on her home in Alton, Ill., to consolidate her car and medical bills. Now, struggling with a much higher interest rate and in foreclosure, she wants to modify the terms of the loan.
Lenders have often agreed to such steps in the past because it was in everyone’s interest to avoid foreclosure costs and possibly greater losses. But that was back when local banks held the loans and the bankers knew the homeowners, as well as the value of the properties.
Ms. Brimmage got her loan through a mortgage broker, just the first link in a financial merry-go-round. The mortgage itself was pooled with others and sold to investors — insurance companies, mutual funds and pension funds. A different company processes her loan payments. Yet another company represents the investors as the trustee.
She has gotten nowhere with any of the parties, despite her lawyer’s belief that fraud was involved in the mortgage. Like many other Americans, Ms. Brimmage is a homeowner stuck in foreclosure limbo, at risk of losing the home she has lived in since 1998.
As the housing market weakens and interest rates on adjustable mortgages rise, more and more borrowers are falling behind. Almost 14 percent of subprime borrowers were delinquent in the first quarter of 2007. Investors, fearful that these problems will hurt the overall economy, have retreated from the stock and bond markets, creating major sell-offs.
And the very innovation that made mortgages so easily available — an assembly line process known on Wall Street as securitization — is creating an obstacle for troubled borrowers. As they try to restructure their loans, they are often thwarted, lawyers say, by strict protections put in place for investors who bought the mortgage pools.
This impasse could exacerbate the housing slump, pushing more homeowners into foreclosure. That would lead to a bigger glut of properties for sale, depressing home prices further.
“Securitization led to this explosion of bad loans, and now it is harder to unwind and modify them even where it is in the best interests of both the borrower and the investors,” Kurt Eggert, an associate professor at the Chapman University School of Law in Orange, Calif., said in an interview. “The thing that caused the problem is making it harder to solve the problem.”
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I don't like the fact that
I don't like the fact that blacks and other minorities are being made the face of this crisis.
The Face of the Mortgage Crisis
In some ways the current crisis in the mortgage industry is the cumulative result of African Americans being denied equal access to this market for three or four generations since the end of World War II. If returning black veterans, for example, had been allowed to use their government benefit packages to purchase homes anywhere they desired these black homeowners and their descendants would be found living across a wide swath of American suburbia instead of being concentrated in older neighborhoods in the inner-cities.
Consequently, many prospective black homebuyers have little choice but to buy homes either in the neighborhoods where they were raised or ones that have been abandoned by whites. Many of the homes in these neighborhoods have not appreciated in value as compared to similar homes purchased for similar prices in all white or majority white communities. In short, black homeowners derive less appreciated equity from these purchases than whites and receive less than whites when they attempt to sell.
Blacks becoming the face of the current mortage crisis was an almost predictible event once the home mortgage industry, in its ceaseless search for a new pool of borrowers, latched onto the so-called disparity of homeownership rates between African Americans, Hispanics and Whites. Black policy makers for the most part simply bought into the argument that these differing rates were the result of racial discrimination in the market place and pushed, for example, Fannie Mae and government regulators, to promote programs supporting higher rates of homeownership among African Americans. The result is that many people who probably should not have purchased a single-family home were encouraged to do at their eventual peril.
Part of the problem the Black community is facing is that those in the community who see themselves as providers of affordable housing or who have some influence in this matter are not capable of thinking and looking outside the box for housing solutions that benefit the Black community. They have accepted all of the prevailing paradigms and the prospect of considering different or new ones seems too daunting. The community's political leadership is too closely wedded to the traditional real estate and property development interests who have helped to create this problem in the first place.
But PTC, this phenomena is
But PTC, this phenomena is not restricted to black people. I think the media is trying to morph this into a "black" issue, with all negative implications about the lending and spending habits of black folk.
However, if we are going to focus on blacks and this crisis, I think there are some ways in which racial discrimination plays a part. I think many blacks have been placed in the sub-prime category, when they would otherwise qualify for higher rated loans, and most importantly, the better terms and rates.
When black people are discriminated in this way, their risk of default goes up. IMO, all things being equal, there is a higher risk of default when given a loan at worse rates and terms.
Homeownership
There are many other modes of homeownership rather than purchasing a single family home. If you look across the board at the rates of homeownership for blacks and whites, for example, you will see that blacks regardless of income, education and age have lower rates of homeownership than whites. I tend to interpret this data not as evidence of pervasive racial discrimination in the housing market but as a sign of different degrees of homeownership preferences between blacks and whites.
What nobody seems wiling to do is to find out what homeownership preferences do blacks have versus what whites may prefer and consider acceptable. For black single mothers earning less than $50,000 per year cooperative housing in neighborhoods that allow them to remain close to family and friends may be a more financially and socially viable alternative than a single family house and its consequent demands.
That's a great point PT. I
That's a great point PT. I wish we had some numbers to represent it.
Cramer's losing his mind.
I have some Cypress Hill in my head: "when the ship goes down..."
RACE - The Power of an Illusion
Excerpt of an interview with Melvin Oliver
Melvin L. Oliver, Ph.D., is curently the Vice President for Asset Building and Community Development at the Ford Foundation. He also holds academic appointments as a Professor at the University of California, Los Angeles and Director of the University's Center for the Study of Urban Poverty.
The excerpt posted below is part of the supplementary background readings that were developed by California Newsreel to accompany their powerful documentary film RACE - The Power of an Illusion
How does housing history and homeownership contribute to racialized discrepancies in wealth?
I think one of the most interesting sets of decisions has to do with the realm of housing. In order to purchase a house in America prior to the 1930s, you had to pay up to 50% of the sales price up front. The rest was subject to interest, and at the end of five years you had to pay the remaining balance as a lump sum. Obviously, with that type of arrangement, there were very few middle class people who could buy a home in America. Mainly buying homes was an upper middle class and upper class phenomenon. But the 1930s created a whole new set of opportunities for Americans to purchase homes. The federal government came in to create and sustain the construction industry. And to do that, they created the Federal Housing Administration, whose job it was to provide loans, or the backing for loans, to average Americans so they could purchase a home.
The tables were turned completely around. The new terms of purchasing a home was that you put 10% or 20% down, and the bank financed 80% of it - not over five years, but over thirty years - at relatively low rates. This opened up the opportunities for Americans to own homes like never before. The average person could own a home. Furthermore, the FHA allowed no or low down payments for certain kinds of homes. So as a consequence the housing industry boomed in the midst of the Depression, because the federal government was trying to create jobs for people, boost the housing industry.
So you had this great opportunity. But it was a color-coded opportunity. How? In order for homes to receive financing, they would have to be certified by home appraisers. The appraisers were given written criteria that assigned colors to different types of homes. Green was the highest value - green homes were homes that were in all-white neighborhoods, usually suburban, and far away from communities that were either integrated or all black. Red was the lowest value - red neighborhoods were in all-minority or mixed communities and were usually in inner cities. These homes rarely got mortgages. The vast majority of mortgages were reserved for homes in all-white suburban areas. This appraisal method came to be known as redlining. This color-coded criteria was central in determining who got loans and who didn't. They didn't say blacks couldn't get loans. But they did say communities in which there were few blacks could get loans. As a consequence, most of the mortgages went to suburbanizing America, and it suburbanized it racially. Today metropolitan America is made up of white suburbs and African American inner cities.