Is the Subprime Mortgage Crisis at an End?
Has the Mortgage Bail-Out Strategy Prevented Further Foreclosures?
Apr 22, 2009
RealtyTrac's latest figures showed that there were 861,664 foreclosures in 2008. The US housing market is providing mixed signals regarding whether a recovery really is beginning to take place. There remains serious doubts over whether President Obama's Homeowner Affordability and Stability Plan really is helping the subprime mortgage crisis.
Obama's "glimmers of hope" prognosis may have been slightly premature. However, Tu Packard, senior economist at Moody's Economy.com, stated: "The plan was an important step in stabilising asset prices".
Why Did the Subprime Mortgage Market Collapse?
The subprime mortgage crisis occurred as a direct result of atrocious lending decisions. No single party can be held responsible for the collapse of the US housing market, but some of the principle reasons are alluded to below:
- Regulatory bodies failed to control subprime mortgage lending activity properly and lax rules were subsequently exploited;
- A number of mortgage brokers helped borrowers qualify for loans they should never have been granted. Earnings and documentation were both fudged in order that they were a 'fit' for lenders;
- Property appraisers were providing overly-optimistic property valuations. Many valuations were based on US house prices continuing to grow at the same unsustainable rate;
- Whilst lenders now require borrowers to provide a 20 per cent house deposit, 100 per cent subprime mortgage deals were widely available during the property boom. This provided no cushion against negative equity in the event of any serious economic downturn;
- Personal debts were spiraling out of control at the very time that unemployment was starting to rise.
What is the Purpose of Obama’s Mortgage Bail-Out Strategy?
The Obama Administration introduced the Homeowners Affordability and Stability Plan with the intention of helping homeowners avoid foreclosure. Given the number of people who are "under water" and struggling with negative equity, it is argued that steps needed to be taken to address this problem.
President Obama's plan aims to help 9 million struggling subprime mortgage holders to stay in their homes by allowing them to refinance. A total of $75 billion has been provided as an incentive for lenders to reduce interest rates for those homeowners most likely to face foreclosure. A further £200 billion has been provided to Fannie Mae and Freddie Mac to offer more affordable mortgages to struggling borrowers.
Is Obama's Mortgage Bail-Out Strategy Working?
John Courson, the chief executive of the Mortgage Bankers Association, stated that: "The Homeowner Affordability and Stability Plan seems to offer little help to borrowers whose loan exceeds their property value by more than 5%".
First American CoreLogic, a real estate data service, stated that 58.2 per cent of homeowners in Nevada were struggling with negative equity. Approximately 28 per cent owe in excess of 125 percent of their home's value. This means that subprime mortgage holders do not qualify under the Homeowners Affordability and Stability Plan as it only covers up to 105 per cent of a homes current market value.
A recent survey by Foreclosures.com discovered that there were a total of 175,199 foreclosure by lenders in March 2009.
It doesn't appear that the mortgage bail-out strategy has solved the subprime mortgage crisis, although it is still early days yet. The Federal Reserve's Beige Book stated that US housing prices remain depressed. Foreclosures by lenders are also still rising.
Individuals struggling with serious financial problems may be interested in discovering how bankruptcy can eliminate or reorganize their personal debts.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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