Fed Mortgage Help Plan Outline

Fortunately, the US government and Federal Reserve or Fed is burning all night’s oil to not only find a solution to avoid the US economy from going into a recession, but at the same time, they are also up in arms to help the debt ridden mortgage borrowers who are facing the dangers of foreclosures and ultimately leading to the write-offs for the mortgage lenders. The Hope Now alliance, which was an initiative by Fed was aimed at helping the debt ridden mortgage borrowers. Very recently, the Bear Stearns Bank was sold out to JP Morgan due to subprime mortgage crisis.

The Fed chief, Bernanke, has come out with an outline including 4 key points that the Fed is proposing to avoid the mortgage crisis. All these 4 points are targeted more towards the lenders, as they are the ones who tend to get carried away for want of generating more and more business and end up offering risky credits to the much ignorant mortgage borrowers, who are unable to pay back.

The 4 points that Bernanke proposed are as follows:
Prohibit mortgage lenders from offering mortgage loans which borrowers cannot repay. The major part of crisis in the mortgage sector was the result of the way mortgage operators were offering loans. They offered complex loans to ignorant borrowers which initially had a low interest rate of repayment, and later went on to a much higher interest rate making it unaffordable to the loan borrowers to repay the loan amount and ultimately, their loans resulted in foreclosure.

Make lenders verify the income and assets of the borrower. All one required to borrow loans was a declaration that he has this much income and this many assets. No verification was done by the mortgage lender to ensure that whether the loan borrower really had that many assets and income. Hence, the Fed will tighten the verification process for lending to see whether the borrower with poor credit or insufficient income really have the ability to to repay a loan.

Require escrow accounts for higher-priced loans. For borrowers who do not understand the scope of repaying loans, the Fed suggests higher-priced loans have a separate account for real estate taxes and hazard insurance, which is standard in prime lending.

Ban repayment penalties including "loan-flipping. The Fed proposes to ban schemes in which lenders force borrowers to refinance at a higher rate that they cannot afford.

Hopefully, this will brng some respite to the industry in the long run. The less regulation a market has, the more prone it is for fallout. Lacking of asset checking and credibility checks and greedy mortgage lending practices were the main reasons for subprime mortgage crisis.

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Fed to Unveil Mortgage Help Plan with Six US Mortgage Lenders

The mortgage markets in US are on the verge of a complete collapse. Due to the subprime mortgage crisis, the home prices are falling, so even some people with good credit ratings are having tough times as they have been left behind on their mortgage payments. Similar to many subprime mortgage borrowers, these people with good credit ratings signed up for adjustable-rate mortgages that allowed them to make smaller initial payments for first few years and later a fluctuating interest rate. Unfortunately, the “later part” that has come in now, is having a HIGH and fluctuating interest rates, which are translating into a higher repayment each month for the mortgage.

Some other “smart” borrowers borrowed mortgage loans against their rising share holding - believing that they will be able to keep up with the mortgage repayments with the “ever rising” shares prices before the higher payments began. Even in the worst case, they had assumed that the prices of the house they have bought will be sufficient enough for repaying the mortgage. But as prices have plummeted, many homeowners now owe more than their home is worth, and banks have tightened their lending practices, leaving even people with good credit ratings struggling with higher payments.

This is what happens when we thing that the entire picture is looking very rosy and goody-goody, so let’s dive in. Everyone else is taking a loan, so should I. Everyone else is buying a house, so should I. My salary will continue forever, I work for MNC.

Highly costly assumptions – leading to tremendous debacles.

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

Fortunately, the government in US is working on this issue. Just yesterday, it had declared a Tax Rebate or Tax Refund. The Hope Now alliance, which includes lenders, investors and nonprofit groups, has helped around 8 percent of subprime borrowers in the last 2 quarters of 2007 — more than its original estimate. Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo, which form the Hope New Alliance are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms. The same is cited under the name “Project Lifeline”, where the above mentioned six US banks are willing to help possible mortgage defaulters.

I wonder if something similar collapses in India – what will happen?

Will the Left backed Indian government running on the support of so many parties come to the rescue of its citizens?

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