How to Solve the Foreclosure Crisis
The answer to the foreclosure crisis is simple. Make sure all homeowners for the affected properties are qualified and can afford their mortgage payments. The solution is much more difficult. There is no simple solution to cover all the complexities of the foreclosure crisis, but by adhering to the basics, long-term solutions will be realized. The best answer is to allow responsible people to manage the situation.
First, a brief history of the mortgage and foreclosure crisis. In the 1930’s President Roosevelt helped establish Fannie Mae to facilitate liquidity for lending institutions and an insurance to protect the banks from defaulting loans. It made home ownership easier and more affordable for a majority of Americans. It had strict guidelines to follow and allowed more people access to the home purchasing market. There were not any creative financing techniques involved, just fully amortized loans.
Under President Johnson’s Great Society, Fannie Mae became private yet backed by the government as a Government Sponsored Enterprise. President Nixon later started Freddie Mac to compete with Fannie Mae as another GSE. Loans were still limited to fixed rate and fully amortized.
During the 1970’s, President Carter expanded the program primarily to limit “redlining”, the practice of limiting exposure to low-income neighborhoods. The intentions were good, but the laws required more leniency in the approval process. The process was further expanded to fight discrimination with affirmative action goals in mind. No longer primarily concerned with qualifications based on eligibility to pay, the new standards allowed less than qualified people to buy homes. The loans were still standard fully amortized loans, a safe product, but lowered the requirements to qualify. Instead of lowering the requirements, it would have been wiser to improve the quality of the buyer. Training in how to manage one’s finances, starting in high school, would have had a better long lasting effect.
During the 1980’s more options for loans were developed and some had negative amortization payments, but the loan to value limits were low, below 75%. The optional payment loan was made available with negative amortization and allowed people to afford a home. In 1993, the Subprime loan was initiated with lower qualifying credit scores and less money down. The stated income loans also evolved, but most stated income loans had high requirements in order to qualify. Great credit, low loan to value and cash reserves equal to 6 months of stated monthly income. The 100% financing, which evolved in the 1990’s, actually served a couple of good purposes. One, it allowed people to get into a home with no money down and as long as values were going up, were able to get refinancing into a standard 30 year fixed. The other purpose allowed homeowners who were currently underwater to buy up without being forced to sell their current home at a loss. They could...