Why The Mortgage Crisis Is Hard To Fix

Oct 27th, 2008 @ 4:06 PM by Alden Smith

You cannot turn on the news or watch television without hearing about the gloom and doom in the marketplace – stocks tanking, the worst recorded days on Wall Street in its history, people losing their homes due to default, on and on. I have paid closer attention to the markets and mortgages than many of my colleagues since I begin posting to the MM blog back in July of 2007. I have seen such a ride in the marketplace that it frightens me about the future of many Americans. Both the wealthy and Mr. Joe Six Pack are in a world of hurt caused by the fallout on Wall Street, and it doesn’t appear to be getting better. You might, in fact, consider it to be getting even worse than it was.

The NBC Nightly News tonight reported that even though many Wall Street banks have taken advantage of the controversial rescue plan, they are still setting aside billions of dollars for bonuses for faithful employees. This has to be the ultimate slap in the face for many Americans, who struggle each month to meet their monthly mortgage payments, and are ultimately the ones that are contributing to these bonuses through taxpayer money. Here we have banks such as Goldman Sachs and Merrill Lynch putting aside billions for bonuses, yet they are willing to dip into the rescue money to bail them out of a financial crisis. If there is any justice to the American governmental system, this action will be put to a stop. Adding insult to injury is just not the American way, to my way of thinking.

The mortgage crisis is hard to fix for many reasons. The Associated Press has listed five of these, and I quote them here.

1. Home prices are crashing. Median home prices in the U.S. dropped 9 percent in September from a year ago to $191,600, and are down 17 percent from the peak in July 2006. I do not think we have seen a bottom yet.

2. Speculation by investors. Investors have no vested interest in homes, as homeowners do. More than 30 percent of properties in the foreclosure process are owned by someone who does not live there. The popular act of “flipping houses” has caused these investors, with little money into the properties, to walk away.

3. Complex investments. Mortgages have been bundled into securities by banks instead of holding the paper. These have been sold on the open market. Finding both the owner of these securities and what country holds them would be a monumental task. Even then, permission is needed from investors to deal with the securities because they have a vested interest.

4. Job losses are driving the market. People are losing jobs faster than the people who keep the statistics can record them. In Michigan alone, 317K jobs have been lost this year. The high cost of food and pain at the pump has put homeowners on the defensive, barely able to keep their heads above water. Credit card debt is at all time highs, and many people are one paycheck away from living in the streets. Even if troubled home owners can sell their property, they are many times doing so at a loss.

5. People keep falling behind. Even though some subprime loans have been fixed, when they reset again, the home owner will once again be behind.

These 5 reasons are going to keep the mortgage debacle alive for a long time. Politicians in Washington are scrambling, attempting to find ways to stop the bleeding. According to the AP, in December a settlement of $8 billion will be reached with Countrywide, helping 400,000 Countrywide borrowers replace risky loans with a more stable rate. I have to think that this is hardly enough to get the country on track once again. It is, however, a beginning.

Posted in Mortgage Refinancing, Mortgages
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