It was announced today that Obama will soon reveal a new economic strategy that would lower mortgage costs. But, we also need more realistic qualifying standards that reflect today's financial realities; otherwise, if few can get a new favorable mortgage loan, what is the benefit of having lower rates?
The general consensus in the mortgage industry right now is that more than 50% of refinance applications are being declined and some banks are financing less than 25%. Many of these applicants are not being declined due to poor credit, lack of income or payment defaults, they are being declined simply because the current credit standards are too tight during this credit crisis. Even applicants that are accepted are not being approved for the low average rates we are hearing about. Various points are being added to loans along with "penalty" interest rate increases. We have swung from the too loose sub-prime days to the credit crunch we are experiencing today and we must find an acceptable median.
Most homeowners that responsibly put 20% down on a home purchased anytime in the last 7 years (or longer in some areas) have seen their 20% equity vanish. Many people also have experienced pay cuts and small business owner revenue has declined, which has (hopefully temporarily) raised their income to debt ratios above 50%. Many banks are now requiring income to debt ratios of 45% or less and 20% equity so this new group of homeowners are getting squeezed out of the refinance boom. Money is tight, but these applicants are still making their mortgage payments. Without some rate relief, however, they might end up being forced into the next wave of foreclosures.
Acceptable equity requirements for refinancing should be 0-5% of the current home appraisal value (many bank appraisers are already low balling house values) and income to debt ratios should be raised to 55 or 60% (lower rates will also help lower this ratio). These are reasonable terms for today's responsible, working class that are being pulled down by our current economic slump. We need to help the working class weather this storm so that, when we get through this, they can rebuild their equity and enjoy reasonable housing costs.
Millions of households were sold ARMs that will begin resetting in 2009 to 2012. At current low interest rate levels, most of the resets in 2009 should be fine since their rates will remain similar to what they are paying now. But why allow this group to be a ticking time bomb sometime down the road when rates increase? We can help them into affordable lower rates now.
Experts are expecting another wave of mortgage defaults on Alt-A and Option ARMs mortgages which will dwarf the Subprime mortgage crisis. Plus, many small businesses which employ 1-10 employees (which represent millions of jobs total) will be caught in this mess. It is estimated by the National Association for the Self-Employed (NASE) that 3,709,800 small business owners hold Alt-A and ARMs that are coming due between 2009 and 2012. If these businesses -- many of which are owner home-based -- are overburdened with mortgage payment debt, many could fail. These business failures will accelerate job losses and contribute to the overall economic problems we are facing today.
By stipulating a 30 year mortgage lending rate of around 4.5% or less, the government can help homeowners refinance their current ARMs (and those with higher rate current 30 year fixed) into lower monthly payments. This does not mean we have to go back to weakened sub-prime loan criteria; but that current homeowners are given a real chance to stay in their homes with lower, stable interest rate payments.
I can already hear the groans of some readers, "why should they get bailed out, they took the risk of getting the loan" or "it's risky to loan money to someone who has little equity and might lose their job, let the free market sort it out". But if we continue to do nothing to help our neighbors during these difficult times, then this severe recession will most definitely turn into a full blow depression. It's time we stemmed this free fall from the bottom up. Instead of using tactics that support a "free market for the working class" and "socialism for the rich and corporations," it's time to accept today's reality.
The fact is the government is going to give out trillions of dollars to try and stem this economic collapse. We can continue bailing out the banks and Wall Street or, we can take a more reasonable approach by helping out the middle class in a real tangible way. I vote my tax dollars to help my neighbor into a stable, low rate 30 year fixed loan. And, if some of them still default, so be it. But for most, this will help stabilize their financial situation which will help us all by stabilizing the economy.
Lowering mortgage rates and easing qualifying standards for both new home buying and for refinances will help stimulate the economy and buoy the middle class. This directly puts money in the pocket of the middle class consumer instead of the helping fuel lavish banker lifestyles. We should be focusing on getting tangible relief to responsible homeowners caught in the housing meltdown and economic crisis by helping them get into stable 30 year fixed mortgages at current low rates. Any housing legislation needs to address the availability as well as the cost of loaned money.