To try to deal with looming foreclosures, about 1.2 million U.S. homeowners may find relief from a plan released Thursday by President Bush.
Subprime mortgages were sold to people with low credit scores, those who may not have been able to get a loan had mortgage companies not relaxed their standards.
“Under today’s guidelines, some of these people wouldn’t have been approved for a loan in the first place,” said Karl Voss, senior loan officer for Texas Mortgage Co. “But it was a good deal because the first two years you started out at a low rate.”
Beyond the two-year grace period, the rates only rose.
With a subprime mortgage, borrowers could begin with a 7.5 percent interest rate for the first two years. After that time, interest rates could balloon anywhere from 8.5 percent to 12.5 percent.
To combat home foreclosures stemming from subprime mortgages, Bush unveiled a five-year freeze on current interest rates for borrowers who can afford the current starter rate.
The Federal Reserve will also establish stricter lending standards and improve disclosure requirements “so that homeowners can be confident they are receiving complete, accurate and understandable information about their mortgages,” Bush said.
With a little bit of assistance, Bush believes “responsible” homeowners will be able to pull themselves out of the loan pit.
However, he said “those who made the reckless decision to buy a home they knew they could never afford” are on their own.
With at least 69 foreclosed houses for sale in Temple and 32 in Belton, according to Yahoo Real Estate, Bell County may be seeing an impact from subprime mortgages.
“This is just starting,” said Voss, who has begun receiving phone calls from previous borrowers this year seeking help for foreclosures.
“That market where everybody is buying homes has dried up,” Voss said. “Now, you’re looking for people with good credit with a down payment, and a lot of people don’t have that.”
“Central Texas has a lot of people that work pretty good. They have good jobs. They have good credit scores,” Voss added. “They just don’t save a lot of money.”
One of Bush’s alternate solutions to freezing interest rates is to help homeowners refinance their existing loans into a new private mortgage.
But that could be easier said than done.
With new mortgages also come closing costs, and Voss is concerned about who will be footing the bill.
He said that traditionally closing costs run 2 to 4 percent of the loan amount, which many people don’t have.
“These people out there need a lot of help,” Voss said. “They’re stuck.”
Dr. Larry Woodward, University of Mary Hardin-Baylor associate professor of accounting/economics/finance, said he believes the government shouldn’t interfere.
“The essential problem that we have to address is a ‘moral hazard problem’,” Woodward said. “When the government comes in and makes a law that bails people out from a bad decision that will tend to motivate people to take excessive risks, knowing that if things go the way they don’t want them to go, the government will bail them out.
“The people who have taken the risk need to take the losses,” he said.
In the early 1980s, Woodward said, the government bailed Chrysler out of financial ruin. And only a few years ago, he noted Long-Term Capital Management’s financial rescue from the government.
“A strong argument can be made that such systematic government behavior results in excessive risk taking on the part of the business community,” he said.
He believes the nation’s economy will grow stronger without government censorship.
