Real Answer to Mortgage Crisis Is Delayed Gratification

While the Federal Reserve tries to rescue the stock market from the collapse of subprime mortgage lending, the Congress is trying to save some of its victims.

A bill passed Tuesday by the U.S. House of Representatives will allow some people on the verge of foreclosure to refinance their home loans for longer periods at lower monthly payments.

In what could turn out to be a campaign issue in Colorado, all three of the state’s Republican Representatives voted against the bill. All four Democrats voted for it.

The bill lets the Federal Housing Administration, known as FHA, lend higher amounts on government-insured home loans for up to 40 years. The move, approved by a 348 to 72 vote in the House, lets qualified borrowers move from unaffordable adjustable rate mortgages with ever-increasing monthly payments to fixed payments for the life of a loan.

“These are not no-doc loans,” Colorado Congressman Ed Perlmutter said, referring to certain subprime mortgages that gave hundreds of thousands of dollars to borrowers without documenting their ability to repay. “You have to demonstrate income with tax returns and all the other things we used to require to insure that you can repay.”

There is also a counseling component in the law that helps borrowers understand fine print.

These parts of the legislation are critical.If folks borrowing money simply lack the means to repay, raising the amount government-insured lenders can provide because housing stock in Colorado and other places runs well above the national average means nothing. Neither does stringing payments out for five and 10 years longer than usual.

The problem with too many subprime mortgages was that borrowers and investors didn’t know they were houses of cards. The subprime loans often went to people who mortgage brokers, real estate agents, builders and other middle men knew would default. They just didn’t care. After everybody else took their cut in the form of generous commissions and fees, the financial risk was passed on to borrowers and investors in mortgage-backed securities. Investment firms packaged bad loans with good loans in ratios that brokerages thought would overcome the risk of an overall collapse in the home mortgage market.

They were very wrong.

As teaser interest rates went up and monthly payments skyrocketed, already unqualified borrowers could no longer make their mortgage payments. Houses of cards collapsed and buried many of the financial institutions that had invested in mortgage-backed securities. Some had to suspend withdrawals by investors because they didn’t have enough cash to cover the runs. The Federal Reserve had to step in after mortgage defaults started to devastate the entire world securities markets.

Even as the House tried to save the American Dream, the prognosis remained iffy.

“This is not a silver bullet,” Colorado Congressman Mark Udall acknowledged of the homeownership act. “But it sends a message to consumers and the markets that we’re taking action. There is a psychological mindset that things are going in the wrong direction.”

It is more than a mindset.

  As the new housing bill passed Tuesday, Bloomberg business news reported that “the number of Americans who may lose their homes to foreclosure more than doubled in August from a year earlier as subprime borrowers with adjustable rate mortgages saw their payments rise.”

Colorado, said Udall, ranks fifth nationally in foreclosures.

The answer here involves more than easy money, more than letting FHA insure higher loans because housing prices in states like Colorado run well ahead of national averages.

Fixed monthly payments strung out for a decade longer than usual might allow more folks to make their mortgage payment. But the real answer in America’s credit crazed society is delayed gratification.

Save some money for a down payment. Plan and stick to a budget. Above all, buy what you can afford.

Along with whatever Congress or the Fed need to do about the subprime lending scandal, that will be the best way to buy – and keep – a home.