Fighting Foreclosures vs. Maintaining Florida Home Mortgage Market: A Difficult Balance
Freddie Mac and other major lending institutions are taking steps to assist troubled current owners, while also ensuring that future borrowers are not ensnared in bad credit Florida mortgages.
That’s a good thing. But it’s also a complicated line to straddle.
The complexity of the mortgage business sets up a difficult balance between the goal of stemming foreclosures and the need to keep the market robust, experts said Wednesday.
Home mortgage delinquencies and foreclosures have been surging in recent months, especially for people who took out subprime mortgages — higher-priced loans for people with tarnished credit or low incomes who are considered greater risks. The distress has roiled financial markets and stoked anxiety that it could spill over into the broader economy.
“This is a very, very difficult situation for which there are no easy answers,” said Bert Ely, a banking consultant based in Alexandria, Va.
Freddie Mac, the government-sponsored company that is the second-largest buyer and guarantor of home loans in the country, announced Wednesday that it will buy as much as $20 billion in fixed-rate and adjustable-rate mortgages to help borrowers with high-priced loans keep their homes. The new mortgages, expected to be available by midsummer, will include loans with longer fixed-rate terms.
Fannie Mae is also offering new options so that lenders can help subprime borrowers Florida mortgage refinance out of high-interest adjustable-rate mortgages or other difficult loans.
Especially precarious are the millions of adjustable-rate mortgages, known as ARMs, which are prevalent in the subprime market. They are considered higher-risk loans because they typically draw borrowers in with an initial low “teaser” interest rate, which can spike upward after the first few years.
Nearly 2 million ARMs are resetting to higher rates this year and next — setting up a potential wave of foreclosures that has put policymakers on edge.
Lawmakers in positions of authority in Congress are flatly ruling out the possibility of a government bailout to cover mortgage loans in default.
Sen. Christopher Dodd, chairman of the Senate Banking Committee, while stressing “that we want to do everything possible to avoid foreclosures,” said “I’m not interested” in a bailout plan. That “may do more harm than good,” said the Connecticut Democrat, who is seeking his party’s presidential nomination in 2008.
The moves by Freddie Mac and Washington Mutual came a day after federal regulators called on lenders to work with struggling homeowners unable to meet payments on high-risk national and Florida home loans.
At the same time, the sprawling complexity of the home mortgage business complicates the picture and means that not all loans can be restructured. Increasingly in recent years, big financial institutions and Wall Street investment firms buy home loans in bulk from banks and other lenders and bundle them into securities to be sold and resold to investors, spreading the risk.
If a mortgage has been securitized and is not on a lender’s books, that lender often will need the consent of the ultimate holder of the Florida mortgage loan. Around three-quarters of the estimated $600 billion in subprime mortgages taken out last year fell were securitized, according to Wall Street analysts.
“You’re dealing with all kinds of constraints — legal constraints, institutional constraints — and they’re not easy to work around,” Ely said.
Lenders “certainly are aware that mistakes were made” with subprime mortgages during the housing boom, said Jack Aber, a professor of finance at Boston University. Still, he said, it is preferable “to let markets do their work when they can” to remedy the situation.
