As Jen Sees It

I’ve been thinking about the housing market recently and I believe I have made some strides in understanding (at least partially) why there is so much trouble.

On the one hand we have all these people who got subprime loans either through their own stupidity or dubious lending practices. They have adjustable rate mortgages that are not based on the prime rate and their mortgages are starting to adjust. Their payment goes higher and they can’t afford to make the payments anymore. So they think, I guess I need to refinance. The problem is that their house is not worth what it was when they bought it so they can’t get a loan for the amount they need to pay off their current mortgage using their house as collateral. Wow, that’s a heck of a catch 22!

Here are the parts I’m not clear on:

1. If lenders are starting to become amenable to short sales, why won’t they just let people refinance for less than the mortgage is for so they can at least keep their homes?  I know this is still the lender losing money, but isn’t it better than both kicking someone out of their home AND losing money?  I mean, the lender is going to lose money either way.  If the house isn’t worth the amount of the mortgage anymore, then the lender isn’t going to be able to sell the house for the amount of the mortgage and they may accept a short sale to save themselves the cost of foreclosure anyway.
2. Obviously a whole bunch of these subprime mortgages were purchased by Fannie Mae and Freddie Mac, so why not fix these adjustable rate mortgages or interest only loans so that people can afford the payment.  Why not work with the homeowners and figure something out that is amenable in both cases.  I read an article the other day that said it costs lenders $50,000 to foreclose on a property.  If that is the case why not lose the $50,000 in interest instead and let the homeowners keep their homes

What I also don’t understand is what started the backslide to begin with?  Was it just that mortgages were starting to adjust and interest onlys were becoming not interest only and there was a big snowball?  And if that was the case, how long is this going to continue? It’s bad for everyone to have these foreclosures happening.  People are so petrified of losing their homes that they are refusing to spend money elsewhere.  That leads to job loss, which leads to more people losing their homes and the cycle continues.

I can’t wait to hear some good news about the economy.