From Homescape

Adding to the fast-growing number of home foreclosures across the country and ballooning high-interest mortgage payments, another phenomenon is surfacing from beneath the depths of the housing market slump. An article in Friday’s New York Times, “Rescues for Homeowners in Debt Weighed,” reports that with U.S. home values declining drastically, a growing number of homeowners are now finding that their mortgages are higher than the value of their houses.

Viewed as the worst housing bust since the Depression, nearly 8.8 million homeowners are in the red with negative equity. Rather than attempting to rescue their sinking vessel, many owners are simply abandoning their properties and have stopped making payments all together. With current efforts such as the HOPE NOW initiative, bearing little fruit, “Washington is being forced to explore new ideas, among them the idea of a federal mortgage guarantee for troubled borrowers,” the Times reports. So what’s the real million dollar solution? It depends on whom you ask.

Bank of America
Bank of America, which is in the process of acquiring Countrywide Financial and has potentially huge exposure, has circulated a proposal to create a new federal agency that would buy vast quantities of delinquent mortgages at a deep discount and replace them with fixed-rate federally guaranteed loans.

The bank warned that tightening credit conditions were leading to “escalating levels of delinquency and default among borrowers” and “an unprecedented number” of homes that would enter foreclosure, the Times reports. The plan is getting a cold reception from administration officials.

Federal Housing Administration
The Federal Housing Administration (FHA), meanwhile, is examining ways to expand its new insurance program — known as FHA Secure — to help people replace their costly subprime mortgages with federally guaranteed fixed-rate mortgages.
But mortgage industry executives have complained that the FHA’s eligibility requirements are so restrictive that the new program has helped only a trickle. A blogger, on the real estate networking site ActiveRain.com, wrote last week that he received an email that informed him that his FHA lender in Michigan is now putting a new minimum credit score requirement on all their FHA products. FHA itself does not have required minimum credit scores. But with the death of subprime loans, many loan officers have been trying their best to force their subprime business into an FHA “manual underwrite” loan mortgage. And as a result, FHA-approved lenders across the country are imposing their own credit requirements. Some mortgage industry bloggers say they’re seeing between 550 and 580 as the average score that lenders seem to be seeking.

To help ease the FHA requirements, company officials say one idea is to allow borrowers who had simply made six payments during the course of their mortgage to automatically qualify for the government insured-program.

John Reich
John Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies, tells the Times that his plan (still in its first draft) would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home. It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher. Reich also hopes that most of the old mortgages would be replaced by cheaper FHA insured mortgages.

You can dress it down and call it a bailout, or dress it up and pitch it as a market-driven solution. Regardless, the problem started with people borrowing more than they could afford and banks making foolish loans during a buying frenzy. I believe there are families out there that did get mislead into predatory loans and are now paying outrageously high-interest mortgages. Those families should be getting help from lenders and government officials.

But there is also a subgroup of people, such as the “flippers” and investors who bought eight houses in four states with little or no money down, and now can’t sell them and are losing them to foreclosure. I have a hard time sympathizing with them. If you go to Vegas, put your life savings down at the blackjack table and lose your hand, the casino isn’t going to give you your money back just because you made a stupid wager and now regret it. Here’s some wise advice from legendary gambler, Nick ‘The Greek’ Dandalos: “The house doesn't beat the player. It just gives him the opportunity to beat himself.”

Do you think more or less government intervention is needed to help the housing market rebound?

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com