The Fallout of Subprime Lending...

I think you'll find the following information, right in line with the last three blogs I've written. Many of the things the government is suggesting, are things I've been saying for the last three years. Here's what they had to say, and I'd be interested in your comments as well.

There were some pretty scary statistics swirling around Capitol Hill on Thursday as the Joint Economic Committee (JEC) released a report attaching dollar figures to the impact of the subprime mortgage fallout.

The report, entitled "The Subprime Lending Crisis: The Economic Impact on Wealth, Property Values and Tax Revenues, and How We Got There" estimates that two million homes will be foreclosed over the next two years as their owners fail to make payments on their subprime mortgages and that families, state and local governments
will lose billions of dollars in equity, property values, and lost property tax revenue.

Committee Chairman Chuck Schumer (D-NY), in releasing the report said "The current tidal wave of foreclosures will soon turn into a tsunami of losses and debt for families and communities. The administration must act quickly to save financially-strapped families from drowning in this flood of subprime foreclosures."

The report speculated that the catastrophe is likely to feed on itself as prices continue to spiral downward. Using data from the various states, the report makes several estimates for the remainder of this year and for 2008:

There will, as stated above, be 2 million foreclosures as the riskiest of the subprime adjustable rate mortgages reset to higher interest rates.

Approximately $71 billion in housing related wealth will be destroyed by those 2 million foreclosures and another $32 billion will be lost because of the spillover effect of foreclosures in neighborhoods and communities. The report quoted a study on housing values in Philadelphia which found that an abandoned property lowered the value of homes located within 150 feet by an average of 10 percent and those within 450 feet declined in value by an average of 5 percent.

Collectively the states stand to lose close to $1 billion in revenues as property tax assessments drop in value.

Foreclosures aside, there will be a 10 percent decline in housing prices which will lead to a $2.3 trillion economic loss. The ten states which are expected to suffer the greatest number of foreclosures are California, Florida, Ohio, New York, Michigan, Texas, Illinois, Arizona, and Pennsylvania but there are other states which are not far behind in the rankings.

The report argues strongly for foreclosure prevention and makes the
following suggestions:

Provide more resources to legitimate companies that specialize in foreclosure prevention counseling. They have been highly effective in helping borrowers negotiate safe and affordable loan modifications and refinancings but "they're inundated."

Pass legislation currently before Congress to modernize the Federal Housing Administration, increasing its capacity and flexibility to insure subprime mortgages that can be refinanced.

Amend the new bankruptcy code which prevents the courts from providing relief on mortgage loans. The report recommends that the code be amended to either temporarily or permanently exclude primary home loans from the remedies that are available on other less important debts.

Encourage more loan modifications and refinancings, perhaps even requiring specific loss mitigation efforts prior to any foreclosure filing.

Waive the requirement that debt forgiven by lenders in the course of foreclosure or loan restructurings be reported as taxable income to the borrower.

And of course, the report joined the chorus decrying predatory lending practices and calling for reform including elimination of prepayment penalties, consumer education and enhanced disclosure of loan terms and mechanisms. Other suggested reforms include
increased regulation of mortgage brokers and originators by establishing a fiduciary duty between brokers and their customers and requiring lenders to escrow tax and insurance payments so that borrowers are clearly informed about the real costs of owning a home.

Finally, I think the government is starting to take some responsibility in the epidemic of foreclosures we're facing. Some of these recommendations in my opinion is still putting a band aid on the real problems. As you've heard me say many times before, there are only two real causes to foreclosure or falling behind in mortgage payments. They all fall under the categories of:

1. Poor or no planning
2. Lack of financial literacy.

We have demonstrated this countless times with the clients we have successfully assisted over the years, with a low percentage of repeat occurrences.

Stay tuned for a tele-seminar we will be hosting in November. I'll give you the details as we closer. Enjoy the rest of your weekend.

Yours In Prosperity,

Robert Brown
Keep My Home Today
www.keepmyhometoday.com