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Confused yet?

By: 25 September 2011 2 Comments

Trying to keep up with the changes that may be on the horizon in the mortgage industry can be either confusing or frustrating (or, perhaps, both) as there are a lot of proposals out there on how to prevent a similar set of circumstances that gave rise to the rash of foreclosures that started popping up in 2007.

Fortunately, there are at least two things upon which the groups coming up with proposals appear to agree – a record number of foreclosures is bad and those people who take out mortgages ought to have the ability to pay them back.

The challenges facing the mortgage industry are easy enough to understand. Back when lending standards were considerably lax and exotic loan products were available due to pressure from consumers, the government and other groups that are pointing fingers at each other now, a number of subprime loans were issued.

Those loans typically contained provisions that were very inviting up front but were generally set up to hit consumers with high mortgage payments after about five years. We’ve seen how that worked. A consumer that got an adjustable rate mortgage may have paid just fine on a home loan until five years passed and the interest rates reset and the buyer was left with a substantially higher payment.

The resulting fallout is still felt around the nation. Bloomberg reports the rash of foreclosures may have cost the nation’s five largest banks as much as $66 billion and monthly reports make it clear that foreclosures aren’t dropping substantially.

Some looking at the mortgage market, then, have asked a couple of questions – what can be done about those Americans currently facing foreclosure and what can be done to decrease the likelihood of people falling behind on their home loans in the future? While President Barack Obama’s administration is tinkering with a program set up to extend relief to Americans struggling with their home payments, Fannie Mae and Freddie Mac have a program of their own set to go in place on Oct. 1.

Fannie Mae and Freddie Mac – the two government-sponsored entities that hold most of the mortgage debt in the nation – worked out a plan with the Federal Housing Finance Agency to reward or fine those lenders that follow a set of guidelines developed to help people avoid foreclosure. How effective will those measures be? Like other foreclosure prevention programs, we’ll have to wait and see.

Bear in mind that the Obama administration’s Home Affordable Refinance Program (HARP) program was released with lofty goals a few years. It is being reexamined because it helped only 883,000 Americans work out loans in hopes of avoiding foreclosure.

As for the question of how to prevent consumers from taking out loans which put them at risk of going through foreclosures, we’ve seen a number of proposals over the past couple of years from the government and the mortgage industry. The bulk of those proposals have to do with risk reduction – loans should be given to those Americans who have a good shot at paying them back.

One of the more recent groups to talk about that side of the coin is the federal Consumer Protection Bureau, which is charged with the task of releasing a rule next year setting out guidelines that ideally establish whether prospective borrowers have the ability to pay their mortgages.

That rule is required by the 2010 Dodd-Frank financial oversight law. What will the rule look like? Again, we’ll have to wait and see.

We know consumers and mortgage bankers have dealt with a number of changes and will continue to do so. The extent of those changes, however, is still an unknown factor.

Home Sweet Home is written by Ethan C. Nobles and is sent weekly to publications throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email =

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