With Homeowners on a Precipice, What Did the Billions Given to Banks, Carmakers Do?

As we hear reports of how the delivery of the second $350 billion installment to the American auto industry will actually have strings attached (will wonders ever cease?), I’m still left wondering when homeowners ⎯ those who were complicit with lenders about fudging their income or not savvy enough to recognize the risks of interest-rate resets on sub-prime adjustable rate mortgages (ARMs) ⎯ will get some relief. It was, after all, the abuse of traditional sub-prime lending standards that triggered a global credit crisis.

The Federal Reserve has driven down home mortgage rates to record lows (5.10% on a 30-year fixed mortgage at time of publication), and yes, it’s spurred some refinancing, but lower rates aren’t going to do much for those holding ARMs that reset to an index plus an extra three to five points. And for anyone who bought their home within the past five years, at the market’s peak, they can’t even qualify to refinance because plunging real estate values mean they owe more than their home is worth.

Low refinance rates are really just helping those homeowners who bought their homes well before the credit crisis of 2007 and face no imminent foreclosure threat.

Most sub-prime ARM-holders who bought their homes since 2004 won’t qualify for a refinance, based on these typical requirements:

• At least 20% equity in your home
• A credit score above 700
• A mortgage debt-to-income ratio of less than 36%

Low mortgage rates aside, the federal government has patched together a medley of programs that together are expected to help about a million homeowners:

• The Federal Housing Administration’s Hope for Homeowners program, which failed to ignite enthusiasm by lenders interested in participating
• The Hope Now program, created by the federal government, lenders and nonprofit groups to help borrowers who have already missed payments but haven’t yet filed for bankruptcy
• Individual programs created by major retail banks to help borrowers
• The FDIC’s program for IndyMac borrowers

Do you think our leadership has failed to adequately address the mortgage crisis?

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