In an effort to prevent a repeat of the current mortgage mess, Federal
Reserve Bank Chairman Ben Bernanke, speaking last Tuesday at an FDIC forum on
mortgage lending, said the Fed will issue new rules this week aimed at
protecting future home buyers from dubious lending practices.
Sketchy lending practices by an overly aggressive lending industry, including
adjustable rate mortgages, known as ARMs, and mortgages made without requiring
proof of ability to pay, resulted in a mortgage market meltdown in the United
States that started last year and has yet to reach its end.
According to RealtyTrac, U.S. foreclosures in June were up more than 50
percent compared to a year ago.
Hundreds of thousands of American families, using ARMs, bought houses that
they normally would not have been able to afford, betting on rising home
values to create equity that would allow them to refinance on more favorable
terms once the loans were due to reset at a higher interest rate.
However, falling home values evaporated the anticipated equity and, when the
time came for the interest rate to reset, usually after a term of one to two
years and at an interest rate several points higher than the initial teaser
rate, the borrowers found the home to be worth less than the original mortgage
amount. This left borrowers not only unable to refinance the home at a better
rate, but also unable to afford the current mortgage, which, with the increase
in points, was often several hundred dollars or more per month higher.
Many homeowners just walked away. As foreclosed homes started popping up in
neighborhoods, they drove down the value of much of the housing stock
surrounding them, exacerbating the problem.
Much
of Texas, where home values tend to only rise 1 to 2 percent a year, escaped
the problem. According to Irvine, Ca,-based RealtyTrac, Texas ranks 18th among
the states in foreclosures, with 1 in 835 homeowners receiving a foreclosure
filing. Nevada leads the nation with 1 in 122 homes being foreclosed on. North
Dakota has had the least problems, with only 1 in 27,982 homeowners facing the
loss of their home.
A search of foreclosure notices at the Jack County Courthouse revealed three
foreclosures in the county this year and 14 in 2007.
Contrast that with the four largest counties in the DFW metroplex: Dallas,
Tarrant, Denton and Collin.
Denton County, with a population of 545,000, had 1,890 foreclosures in 2007.
Collin County, which includes the fast-growing McKinney and Frisco areas, had
2,010 foreclosures, while Tarrant County had 5,988 and more than 9,000 Dallas
County residents lost their homes.
Two fast-growing Denton County cities, Aubrey and Little Elm, had foreclosure
rates averaging 20 percent of their housing units.
Although it is not known exactly what the new rules will be, they should crack
down on a range of shady lending practices that has hurt many of the
nation’s “sub-prime” borrowers – the riskiest borrowers with spotty
credit or low incomes – who were hardest hit by the housing and credit
fiascos. The plan would apply to new loans made by lenders of all types,
including banks and brokers.
Though the personal details of the Jack County foreclosures are not known –
why the borrowers defaulted – a review of the court filings indicates that
they are likely part of the loosey-goosey mortgage mess; only one of 17
foreclosures shows an initial deed date prior to 2001, which is about the time
that lending practices were loosened.
Of the three Jack County foreclosures recorded thus far in 2008, none of the
loans was even three years old.
According to reports in the Associated Press, the new rules would restrict
lenders from penalizing risky borrowers who pay loans off early, require
lenders to make sure these borrowers escrow money to pay for taxes and
insurance and bar lenders from making loans without proof of a borrower’s
income. It also would prohibit lenders from engaging in a pattern or practice
of lending without considering a borrower’s ability to repay a home loan
from sources other than the home’s value.
Some analysts blame the current fuel-price debacle on the mortgage securities
meltdown, saying that when it became clear that investments in the mortgage
industry were becoming increasingly risky, investors decided to park their
money in commodities instead, with oil being the primary investment vehicle.
The Federal Reserve, trying to stabilize a shaky U.S. financial system, may
also give squeezed Wall Street firms more time to tap the central bank’s
emergency loan program, Bernanke said Tuesday.
(6 votes)
