Mortgage situation

I've been woefully inattentive to the blog with my recent move, and I realize there is a lot happening with the mortgage market that warrants closer attention.

For a good take on the situation, Here's Reason on a proposed bailout of mortgage borrowers.

One of the disturbing things about all this is the way lenders are being characterized. Credit card companies are evil, sure. And maybe some mortgage lenders are too, but Steve Chapman's take is much closer to reality. Lenders just aren't eager to evict sub-prime borrowers and take their homes. They lose a lot of money when it comes to that (money they deserve to lose for indiscriminate lending).

In truth, mortgage lenders finally saw the light when it came to counseling, and have teamed up with counselors to help people who are in trouble. It took a lot of work by a few visionary credit counselors to get mortgage lenders to see the benefits and look past all the anti-credit counseling lies that have taken root (like the Wikipedia entry, or in the anti-BAPCPA rhetoric that's all over the net). Thankfully, some foresighted lenders worked with some credit counselors to create this: The Homeownership Preservation Foundation.

This is the 888-995-HOPE hotline that made headlines a few weeks ago when George Bush got the number wrong.

To me, this effort is an unimpeachably good thing. This is the way it's supposed to work. Everybody coming together to find solutions that work for everyone. The lenders really aren't ogres, and they really want these mortgages to work out. And yeah, they want the loans repaid, too, so they're not motivated by pure altruism here. (And so what if they aren't? Incentives matter.)

I look at the Homeownership Preservation Foundation and wonder how anyone could argue that any of those credit counselors should have their non-profit status revoked by the IRS. All off the agencies on board with this effort are providing a valuable non-profit service and should be applauded.

Where I'm less in line with Steve Chapman's Reason article is the treatment of borrowers.

... they punish lenders for the failings of borrowers. Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn't? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they'd be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.

It's true that if lenders have committed fraud with phony information about their loans, they deserve to be separated from their ill-gotten gains. At the same time, honest ones shouldn't be punished for offering creative terms just because the loans sometimes go bad.

I don't think it's as simple as that; the borrowers don't necessarily need to be victims of fraud to be tripped up by a predatory loan. If a mortgage broker or lender puts a borrower into a loan without explaining the "creative terms," the borrower can be caught off guard by unexpected balloon payments or rising interest rates. Even if everything was above-board and legal, sins of omission in the disclosure process can leave a borrower on the brink of foreclosure a few years later. And just because we can't point out specific examples of actionable fraud in the loan doesn't mean the lender didn't misbehave.

It can be said that these borrowers should understand what they're getting into, and they should be held accountable for agreements they sign. Of course, but I just completed a move, and the mortgage paperwork was a mountain of stuff. It would literally have taken me weeks to read every word. I signed so many documents so quickly that there's no way I could tell you what it all meant. I have to trust that the mortgage broker told me what I needed to know and that I won't get blindsided down the road.

If that did happen, at least it's good to know there's a number I can call for help.