Mortgage Maze Can Be Difficult To Navigate for Home Buyers/Sellers
Some borrowers may qualify for a new government insured loan
May 22, 2008
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By: Scott Janke - Real Estate Mortgages
In the confusing, intricate and sometimes perplexing world of lending institutions, it is not difficult to understand how many borrowers can find themselves in a situation of owing more than they thought they did or have payments to make that are larger than they expected.
This is especially true when it comes to financing a home, which in most cases is the borrower's prized possession and the asset he or she is most likely to protect.
It is discouraging therefore, to witness the enormous number of foreclosures that have taken place in the U. S. in the last 12 months (some 1,400.000) and the rate at which they continue (some 8-9,000 per day).
It is of little value to those facing foreclosure to play the blame game. To be sure there have been unscrupulous practices by lenders in what was or was not disclosed in the lending documents. And there was greed on the part of borrowers in believing that home values would continue to soar at ever increasing rates. But now the bubble has burst and someone has to pay.
As often happens in a crisis such as we now have in the mortgage market, the Federal Government will step in to put out the flames of the fire. Whether this is appropriate or the right action to take on the part of the government is the subject of much debate. Any action by the government in intervening with the natural functioning of the private market place carries a "moral hazard." Simply put , the moral hazard for a bail-out by the government in the mortgage market is that borrowers and lenders will continue to act in an irresponsible way if they know the government will be there to save them should things go wrong.
Today it was reported that a Senate non-partisan agreement was reached for legislation that would allow the government to insure up to $300 billion in refinanced loans for struggling homeowners. The agreement would also overhaul supervision of Fannie Mae and Freddie Mac, the enterprises that provide the lion's share of funding for U.S. mortgages.
The Fannie and Freddie enterprises are shareholder-owned corporations authorized to make loans and loan guarantees. They aren't funded by the U.S. government however, there is an underlying moral obligation of the government to maintain the security of principal for the holders of their debt obligations.
Under the plan, borrowers who owe more than their homes are worth could qualify for a new government-insured loan, however their lenders would have to cut the size of the outstanding principal to a level that gives the borrower equity in the property. The incentive for lenders to do this is it may be a cheaper option than foreclosure.
Whether the plan will get implemented and how long it will take to do so, remains to be seen.
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