CT Governor Rell Allots $50 Million To Aid Subprime Borrowers
The details are rather murky. The State of Connecticut has set aside $50 million to aid subprime borrowers having difficulty making their mortgage payments.
Rell said the Connecticut Housing Finance Authority will create the $50 million CT Families fund to refinance subprime loans for those who qualify. The money comes from previously issued bonds.
Subprime loans are those given to borrowers who are considered a higher credit risk than people with perfect or near-perfect credit scores. During the recent real estate boom, many of these subprime borrowers were given mortgages with low introductory interest rates for the first two years that reset to higher rates in later years. They often were offered these loans with assurances that they could be refinanced because the home’s value would rise.
A large number of people are defaulting on these loans because housing prices have declined, pushing some home values below the outstanding mortgage.
I find several things disturbing with the above paragraph. First there is the phrase “for those who qualify“. If these people could qualify for another loan, there would be no need to set up this fund. The qualification details are still in the works and have not been released.
However, in order to help these people, people who arguably shouldn’t have been given loans in the first place, Connecticut Housing Finance Authority underwriting guidelines will need to be liberalized. They will need to be liberalized to an extent that is even more liberal than the mortgage loans that put these home owners in jeopardy to begin with.
Not even subprime lenders would grant loans to people whose collateral is insufficient to cover the full amount of the loans. Yet this press release will have you believe that is what CHFA is planning on doing.
So lets take a well performing group of loans (traditional CHFA loans) and mix in $50 million in mortgages that are more liberally underwritten than the loans that are causing the real estate and mortgage meltdown in the first place. This is exactly what happens when those in government who are clueless about an industry, come in to fix an ill perceived problem.
I also resent the demonization of mortgage originators which is accomplished through the sentence “They often were offered these loans with assurances that they could be refinanced because the home’s value would rise.”
I’ve been in this business since 1991. I have seen shady dealings in this industry some serious and some not so. However, I have never seen future real estate value guarantees made by any savvy originator. That is not the purview of an originator.
Real Estate values, past present and future, are in the realm of the Real Estate Agent. If future value guarantees are being made, I would think it is the Real Estate Agent making them and not the originator.
Even if mortgage people did make representations to the like, it would have the same weight as your plummer telling you that you should have that mole looked at before it turns cancerous. Thanks for the concern, but I get my medical advice from medical professionals.
To support my statement that government really doesn’t understand this problem and thus are ill equipped to deal with it, lets examine the last sentence in the block quote above.
A large number of people are defaulting on these loans because housing prices have declined, pushing some home values below the outstanding mortgage.
Historically, real estate values have risen and declined without any effect on a home owner’s ability to repay their mortgage. The underlying real estate value has nothing to do with a home owner’s capacity to repay a loan. Repayment capacity is based solely on the cash flow attributes of the home owner not the value of the real estate.
The value of the real estate can effect the home owner’s ability to refinance. This is especially true when the value of the home declines to a lower level than the amount of the mortgage, which is the case for many home owners nationally.
The large number of mortgage defaults are a result of borrowers not having to prove their capacity to repay the loans (no income, no ratio and no doc loans) and the fact that many of these loans are adjusting their rates and payments upward. Again, declining real estate values have little to do with the mechanics of home owners defaulting.
As for these loans adjusting upwards, there is little excuse for the home owner not to know it was a realistic possibility. Before, during and after a mortgage transaction, the borrower is provided a “Truth In Lending” disclosure which clearly illustrates the possible stream of future payments (note item 11 on the example disclosre “Your payment schedule will be…). In other words, borrowers had the possibility of higher payments disclosed to them several times prior to closing their loan.
The subprime debacle is in essence a microcosm of what is wrong with our society today.
- There is no personal responsibility for one’s actions, someone else is always to blame
- Government is the panacea for all of society’s ills
- The belief that personal responsibility and intelligence can be legislated
While well intentioned and being wonderful pubic relation releases for politicians, initiatives such as this one being undertaken by Connecticut, miss the mark in solving the problems at hand. Sometimes, many times, government cannot fix problems in question. When the government tries to, they often make the problems worse.
This may be one of those times as it can be argued that by bailing out home owners who got themselves in trouble with liberal mortgage loans by giving them yet another liberal mortgage loan is basically institutionalizing the subprime practices that are being blamed for the meltdown in the first place.
As the saying goes, “the road to hell is paved with good intentions”. Here are the details on the Connecticut subprime mortgage bailout initiative.
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