Guest Author - Nicole Collins
On Friday the Senate voted in an unprecedented measure to aid homeowners who entered the housing market risking astronomical interest rates. All but one Senator, Jon Kyl, R-AZ, voted to approve the bill.
Recently, controversy has been swirling around the subprime mortgage crisis, but to many people it is an issue that is difficult to understand. In short, subprime mortgages are loans to consumers who have poor credit ratings. Because the borrower typically does not qualify for a loan from a conventional lending company, subprime lenders offer a higher-than-market interest rate in exchange for the risk they take on the borrower with poor credit.
The catch is that many of these loans offer a very low initial “teaser” rate for a short period of time. The borrowers’ hope is that they can pay the low initial rate and then sell their property before the rate goes up, making a profit. But this is a risky procedure. Due to the current housing slump, many of these borrowers are facing foreclosure because they are unable to sell their house as they had banked on…which is where the government recently stepped in.
Borrowers with credit ratings lower than 620 are prime targets for subprime lenders. A history of late payments or bankruptcy, qualify borrowers for subprime lending situations. Of course, it is optimal for individuals with poor credit who are seeking a mortgage to wait a period of time and re-establish their credit rating before applying for a loan.
On Friday, the Senate approved a bill 93-1 that will assist homeowners by allowing them to refinance into government-insured loans. Last week President Bush came to an agreement with mortgage companies to freeze interest rates for five years. But Congress wanted to do more. According to AOLnews.com, the new legislation “would allow the Federal Housing Administration to back refinanced loans for borrowers who are delinquent on payments because their mortgages are resetting to sharply higher rates from low initial "teaser" levels.”
These FHA loans will also be more attractive to high-risk borrowers because of their lower down payments and more comprehensive counseling for people having difficulty paying their monthly mortgage on time.
So far, hundreds of thousands of homeowners are facing foreclosure. Close to 3 million subprime adjustable-rate mortgages were reviewed by the Mortgage Bankers Association and a record nearly 19 percent of those were past-due.
In theory, the new legislation seems generous, especially during the Christmas season. The FHA will pay mortgage companies past-due amounts to aid delinquent homeowners. However, opposition argues that taxpayers should not be responsible for bailing out people who take out a loan that they cannot afford to pay back. The lone dissenting Senator, Jon Kyl, R-AZ, said, “With the mortgage market already in turmoil as a result of too many mortgages being made available to those who cannot afford them, now is not the time to relax standards even further and make taxpayers liable if borrowers default.”
In addition, critics of the bill and the rate freeze recognize the detriment to the banks and lending companies who entered into contracts with these borrowers who have now defaulted. Many companies have been forced to close down because they are no longer receiving the income they counted on from these loans. The lenders are being punished for the borrowers’ mistakes. Many of the borrowers took a big gamble on interest rates and the housing market. They unfortunately bet red when the market went black. But instead of punishing the lenders, they should have to face the consequences of their risky decision.
Time will tell of the effect of this recent legislation on the economy and taxpayers. But for now, many homeowners have been granted a stay.