Rejuvenating the Economy by Refinancing Mortgages
Politicians and economic experts know that perhaps the most necessary part of fixing our economy is stabilizing the housing market. Home ownership creates jobs, and with millions sliding into foreclosure, the pattern also follows that losing homes will result in losing jobs. Currently the United States home owners are nearly a collective 3/4 of a trillion dollars underwater. This means that American mortgages now cost home owners of total of $700 billion more than homes are worth; for many, owing more on your home than what you could sell it for is reason enough to default and let their home slide into foreclosure. For others, losing a job in the recession meant losing a home. Still others bought a home they could not afford, and when the market collapsed they found themselves unable to pay their loan on a home that is now only worth half of what it was bought for. Something has to be done to stabilize the market, and resurrect the economy: President Obama believes he has that answer. Earlier today President Obama, in conjunction with 49 state attorneys general (Oklahoma did not sign on) and the justice department announced a settlement of $26 billion with five of the biggest banking lenders in the nation.
This deal is not the deal highlighted by patriotslog last summer, which would exempt the banks from any criminal prosecution. Under this deal the banks are still open to criminal prosecution and civil suit from individual mortgage owners, as well as criminal prosecution from the government. Furthermore, this deal pertains only to the faulty foreclosure practices which happened following the financial crises; all faulty banking practices contributing to the financial crises are not included in this deal, and can still be prosecuted. What the deal does is provide relief for families in danger of foreclosure, and compensation in to those who lost their house to faulty foreclosure practices. Bank backed mortgages–this does not include Fanny May and Freddie Mack, which are government corporations, and own about half of American mortgages–will be eligible to refinance at low rates, where $17 billion has been set aside by the deal over the next three years to help owners who are now underwater, potentially saving a family as much as five to ten thousand dollars each year; however, the ruling may allow banks to choose which mortgages get refinanced. Finally, 750,000 families already foreclosed upon will be compensated with a check of $2000. Many feel this deal is not significant enough, and they have a valid argument considering a similar settlement with big tobacco companies in 1998 was eight times larger. Moreover, $2,000 hardly seems fair for a family that now has lost their home; however, many of the foreclosures would have happened whether the banks were rob signing or not, and for those families $2,000 is a very generous contribution. The other side of this deal means the banks will now be free to open the flood gates—legally, we can only hope—on many of the underwater mortgages they have not put into foreclosure while waiting for this settlement to finalize. Experts predict as many as two million homes will be foreclosed in 2012 now that the settlement has been reached; however, it is widely agreed that this is best in the long run, as banks must purge their markets of these toxic mortgages in order for the markets to rebound.
President Obama has decided this settlement is not enough. While $26 billion is a large sum, it is still only 3.5% of the total underwater mortgages. The remaining 96.5% of the crises has President Obama lobbying congress to pass a bill which would allow government backed mortgages—the majority of American mortgages owned by Fanny May and Freddie Mack—to refinance at the historically low rates, likewise saving thousands of dollars each year in interest. In the President’s proposal these refinancing would be paid for by fees on large banks, causing many to cry foul because it is assumed the banks will then pass those fees onto customers who are current in their mortgages. What the President has called shared sacrifice many have called an unjust punishment. Why should those who were responsible, bought homes they could afford, lived within their means, and stayed up to date on their mortgages foot the bill for millions who were irresponsible and negligent with their homes and finances? This is a valid point indeed, and one which requires serious thought. It does not seem right for hard working honest middle class America to be the ones to pay or dishonest middle class America to be bailed out of their upper class homes they should not have bought in the first place; however, this may not be the case. President Obama has stressed these refinancing will be available to responsible homeowners only (though we cannot blame people for being skeptical). Moreover, we cannot forget that the recession has taken a toll on many honest Americans as well. Many who have scratched the bottom of the barrel to keep their homes from going into foreclosure desperately need help because they cannot find work, or have taken pay cuts on the recession. The only valid argument for President Obama is to have the responsible home owners consider the alternative. We cannot fix the economy if the housing market stays in the doldrums. Millions more homes may go into foreclosure; when this occurs the value of all the other responsible homeowner’s houses on the street, block, and in the neighborhood fall because of the foreclosure. Getting rid of foreclosures would be an investment for many Americans in their own homes value. Furthermore saving money on mortgages will put more money in the hands of the middle class; this is truly what creates jobs. The middle class has the buying power in America and if middle class families can save thousands every year on their mortgage by refinancing at the expense of hundreds per year to the masses, this an overall net gain in spending power for the American economy. All the talk of tax breaks and investments for businesses to create jobs misses possible the single most important rule of macroeconomics: in order for people to have jobs providing goods or services, there must first be people with money to create a demand for these goods and services. A net gain in buying power often means more purchasing, creating more demand for goods or services, thereby creating more demand for providers of goods and services; i.e. jobs. When the middle class has more money our economy flourishes. As unfair as asking for fees to pay for refinancing may be, it could have a very beneficial long term effect for those footing the bill.
Another trend is growing in the housing market to help avoid foreclosures, it is very unorthodox, but gaining momentum in our nation: banks volunteering to lose money on homes. It sounds unbelievable, but recently in some areas of the country banks or third party groups have been buying homes from responsible Americans who have worked hard to stay on top of their mortgage, but have fallen on hard times, and selling them back to the homeowner at the lower price, incurring thousands in losses with each home. As nice as it would be to believe banks are doing this out of the goodness of their heart, every person in the world knows that is not the case, of course there has to be something in it for the banks. The truth is that banks settle for their losses because in foreclosure banks lose even more money. This trend of buying and reselling at a lower price just means banks lose less; however, it still provides valuable relief for honest Americans working hard to keep their homes. Banks worry some homeowners will miss payments intentionally in order to be allowed to take advantage of this reduction process, but their fears are helped by the fact that third parties are willing to take some of the risk in the process, and an optimism in American honesty. The economy continues to grow; although at a slow pace it is growing none the less. If Americans can have help fixing their mortgage problems our economy will be rid of the uncertainty and private debts holding it back. Many experts believe the economy will recover with the housing market. The question for most Americans now is whether or not a few hundred dollars in bank fees over the next few years is fair and right; and if it is, are those bank fees worth the overall reduction in mortgage debt which will help our economy? President Obama is banking on a “yes”.
10 February, 2012
Posted on February 12, 2012, in Patriotslog Articles, Politics, Poverty and Welfare and tagged Aly financial, Bank of America, economic experts, economy, financial crises, foreclosure, housing crises, JP Morgan Chase, losing a job, Obama, refinancing, state attorneys general, under water mortgage, Wells Fargo. Bookmark the permalink. Leave a comment.