Ever since the announcements began coming out that there were going to be some bailouts to help the mortgage “crisis”, I’ve been a bit ticked off, and according to a recent Yahoo! Finance article, I’m not alone.
An Absurd Example
The article talks about one common example that I find absurd:
For example, one subprime borrower had a riskier hybrid adjustable rate mortgage (ARM) with a rate of just under 7 percent that was going to reset in December to 10.5 percent. But last month, as part of a new bailout plan from Countrywide Financial, the lender gave him a rate reduction to 5 percent on his loan, saving him hundreds of dollars a month.
Now wait a minute, 5 percent? That is lower than what most people even with good credit can get on a 15-year fixed mortgage right now! How on earth do you somehow find yourself getting out of a 7% to 10.5% ARM and getting refinanced into something lower than what someone with good credit can even get? I could see if the refinancing put the new rate in the ballpark of current rates of 5.5%-6.5%, but to be significantly lower?
Countrywide said it will refinance or restructure loans or reduce interest for hybrid ARM borrowers whose rates are scheduled to reset. And no one will have to pony up prepayment penalties for retiring loans early…The company will administer the program with non-profit community advocate, the Neighborhood Assistance Corporation of America (NACA). Some troubled borrowers will escape with refinanced loans as low as 5.25 percent.
Is This Alternative Better Than the Greater Sin?
According to Countrywide’s CEO of loan administration, this is a better alternative of the greater sin of letting the homes go into foreclosure. He argues that a vacant home in the community would just drive down property values for everyone. I can see that, and it is a reasonable justification, but is handing out money to the irresponsible really a better alternative?
All this is doing is encouraging someone to remain in a house that is more than they can afford, even with the slashed rates. If someone is in a position to require the bailout, they have clearly bit off more than they can chew. While their mortgage payment may have gone down, they still have an expensive house that requires property taxes, maintenance, higher utility bills, and so on. This is sending the wrong message to borrowers.
Taxpayers May End Up Funding The Bailouts
If you are a responsible borrower that makes your payments on time and took out a reasonable mortgage, how would you feel if your tax dollars were going to people who are getting their interest rates cut to lower than what you’re paying just because they bought more house than they could afford? As more and more money is required to fund these bailout plans, it will start coming right out of your pocket.
If people who get in over their head find the government or their lender coming to their rescue to make everything better, what kind of message are we sending? If there is no negative consequence for their actions, there is no incentive to act any differently in the future. This just further promotes the hand-holding that goes on in this country where someone will be there to help you when you mess up.
If someone with a ridiculous mortgage can refinance without fees and get a rate around 5%, why can’t I be able to do the same and refinance to around 4%? What is the reward for acting responsibly? There isn’t one, unless you just want to pat yourself on the back for making a sound decision.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.