Opinion: Spared their mortgage judgment day
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It was supposed to be the moment those of us who passed up on buying overvalued houses were waiting for — when the low introductory rates on hundreds of thousands of sub-prime mortgages would jump higher, resulting in mass foreclosures and downward pressure on already falling home prices. In other words, more affordable homes. Thanks to Gov. Arnold Schwarzenegger and a few lenders who fear foreclosure costs and having to write off thousands of unpaid loans, that day may never come:
Four major sub-prime lenders promised to give a break to California homeowners who cannot afford escalating mortgage payments, under a plan announced Tuesday by the lenders and Gov. Arnold Schwarzenegger. Countrywide, GMAC, Litton and HomeEq — which collectively service more than one quarter of sub-prime loans to people with poor credit — agreed to maintain the initial, lower interest rate for some sub-prime borrowers whose rates are scheduled to jump significantly higher. To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate. The voluntary program is designed to stem a huge wave of foreclosures. Half a million homeowners in the state have sub-prime mortgages that are scheduled to jump higher within the next two years after their introductory period elapses. Such loan resets, in combination with a slumping real estate market, already have led to a record number of foreclosures across California and the nation.
More on the deferred judgment day — and why it may be more of a problem than an actual judgment day — after the jump.
How long will these extended teaser rates last? Apparently, however long it takes for the housing values to tick up again:
It was unclear for how long the loan servicers would freeze the interest rates. ‘The word that was chosen is it’s for a ‘sustainable’ period of time,’ said Mark Leyes, a spokesman for the California Department of Corporations, which oversees nondepository lending institutions. ‘What does that mean? The answer is, it depends. It could be two years, five years, even seven years. The idea is until the housing market recovers. At that point, housing values would be restored; equity is restored, refinancing becomes an option. But nobody knows how long that’s going to be.’
OK, so this isn’t a blatantly unfair taxpayer-funded bailout. But, for the chickens-coming-home-to-roost reasons stated above, it’s still annoying. Why? Because foreclosures and falling home prices are supposed to happen as a market corrects itself during a bust. Sub-prime mortgages with low introductory rates are inherently risky, and the homeowners who bought into them (which they weren’t forced to do, remember) knew at least two things: First, when their interest rates would reset and they’d be on the hook for higher monthly payments; and second, a range of what those higher payments would be.
Knowing that risk, what many lenders and borrowers were counting on was the continued upward push of home prices, allowing buyers to sell and pay off the loans or refinance their houses with a few years’ solid credit under their belts after making lower mortgage payments. Instead, average home prices in many areas flattened or nudged downward, leaving many owners stuck in their homes and unable to avoid rising payments by refinancing with a fixed-rate mortgage or selling for a profit. Eventually, increased rates of foreclosures were bound to happen — and so were falling home prices.
Alas, a California with more affordable homes thanks to the housing bust is less likely, and Schwarzenegger shouldn’t celebrate that as a victory. The least he should do is explain to renters why he wants to keep homeownership unaffordable for the rest of us.