Bush Steps in to Curb Mortgage Crisis
MICHEL MARTIN, host:
I'm Michel Martin. This is TELL ME MORE from NPR News.
Just ahead, actor Faizon Love tells all about the music he's listening to.
But first, it's time for the Money Coach, where we check in with personal finance guru, Alvin Hall. A special Money Coach today. You've heard us talk about the subprime crisis on this program. It's being blamed for a record rate of foreclosures. Last week, President Bush announced a plan to help hundreds of thousands of homeowners freeze their mortgage rates.
To talk more about the president's plan, we're joined by Alvin Hall, as usual. We're also welcoming back Carla Douglin. She's a foreclosure consultant, sorry, a foreclosure consultant and author of "The Foreclosure Workbook: The Complete Guide to Understanding Foreclosure and Saving Your Home."
Welcome to you both. Thanks for speaking with us.
Ms. CARLA DOUGLIN (Foreclosure Consultant; Author, "The Foreclosure Workbook: The Complete Guide to Understanding Foreclosure and Saving Your Home"): Thank you.
ALVIN HALL: Glad to be here.
MARTIN: Alvin, if you would, just briefly, tell us the details of this plan.
HALL: Under the plan, borrowers who took out mortgages between January 1st, 2005 and July 31st, 2007 and whose interest rates will reset for the first time between January 1st, 2008 and July 31st, 2010, will be eligible to participate in this.
MARTIN: Why them?
HALL: Because, I think, that was a period where they discovered that there was the most bad selling practices during that period of time. And to me, it seemed rather arbitrary. Actually, it seems that everybody should be eligible for this if you have a subprime mortgage, and then those subprime mortgages that will be excluded from the program.
For example, if your weight has already reset before those dates, then you're not eligible for the program. If you've been seriously delinquent in your loans, you're not eligible. And two other situations: if you have a fixed-rate mortgage, and you have good credit. So some of it doesn't make any sense.
MARTIN: If you have a fixed-rate program, though - I mean, if you have a fixed-rate loan, presumably, your mortgage isn't resetting.
MARTIN: So that's not your issue. But, Carla, if people have already begun the foreclosure process, does this plan help them?
Ms. DOUGLIN: No, it does not. If they've already begun the foreclosure process, they are not eligible for the plan.
MARTIN: And just to refresh our memories here, foreclosure means what? Two months. Just two months.
Ms. DOUGLIN: That means that you have - you're actually in default if you are two months late on your mortgage. But if you've gone through the process of foreclosure, if you're going through the process of foreclosure, it means that the bank intends to recapture your home.
MARTIN: So, Alvin, what do you have to do to - assuming that this plan goes forward, is there something you'd have to do proactively? Is there somebody you have to call? What do you do?
HALL: Yes. You have to call your mortgage servicer to see if you qualify for this. And a lot of people will be right on the line, I suspect. So I think it's going to take some pushing on their part and trying to get the mortgage servicer to view their situation on a case-by-case basis if they do not fall clearly into this pool. And I think a lot of people won't.
MARTIN: You know what I find fascinating, is there's actually been an immediate reaction to this.
MARTIN: We talked quite a bit about this, but there are a lot of people who are furious. They say that this is a government bailout, that this - that people who made bad decisions are being rewarded for their poor decision making. Do you think any of those are fair criticisms?
HALL: I don't think it's all quite fair. I think a lot of people did make bad decisions, especially those who bought properties hoping to flip them out and make a vast profit on them. I also think that many people thought that buying their first home was so important, that any way they could get on the property ladder was good, although, the risk of the mortgages were high. I think there's a whole group of people who just bought into the American dream, and they want to own their properties, and they got caught.
Ms. DOUGLIN: I agree with Alvin completely. And I think that the people who are coming back and saying that the plan is not good, the plan is a bailout for those homeowners who haven't been fiscally responsible need to realize that foreclosure is bad for everyone. Essentially, if somebody is going into foreclosure in your neighborhood, you've been fiscally responsible, their foreclosure still affects you because your home value goes down with that foreclosure or foreclosures in the neighborhood. Your house value goes down. Your equity is affected. So it's bad for everybody.
MARTIN: Why? Why does it? Because the homes get tends to be sold at a discount…
Ms. DOUGLIN: That is correct.
MARTIN: …the lowest property value.
Ms. DOUGLIN: That is the lowest property value. So if the house goes into foreclosure and is worth $395,000, but the bank is able to sell it for $288,000, $288,000 is the record sale, which means that if you try to sell your home for 395, somebody's going to come back and say, well, the last sale is for 288, so we can't give you 395 for this property.
MARTIN: And we don't care what the circumstances were…
Ms. DOUGLIN: That is correct. That is correct.
HALL: It's all about the money.
MARTIN: What about the government bailout argument, Alvin? Is it indeed a government bailout?
HALL: Well, the government is saying no. They're saying they put together a coalition of mortgage servicers, investment bankers, all the people involved in the industry, and they're offering help to people who clearly need it. Is it a bailout? Not quite. I think it is more of an attempt to stem the foreclosure rate before it gets worse. I think a bailout would have been much more far reaching. So I think this is a little attempt to help to see what will happen as a result of this. I suspect they'll have to revisit this.
MARTIN: Carla, you mentioned when you last visited with us that foreclosure has a very serious effect on one's credit rating. Would participating in this plan affect your credit rating?
Ms. DOUGLIN: No. It actually - the thing with the plan is if you have perfect credit, you're not going to be eligible for it. So if your credit has taken a ding and you can only be up to 60 days late, then your credit is still affected, but they give you the opportunity to freeze the rate and then to search for a refinancing option, either through a private mortgage company or through an FHA-backed security.
MARTIN: FHA back loans. What is that, please?
Ms. DOUGLIN: That is a government-secured loan through Fannie Mae or Freddie Mac. And basically, it's a loan that if you default, the government will cover - I think it's up to 80 percent of that default for you.
Ms. DOUGLIN: So your actual credit rating is helped by the hold in the rate, because then you're able to shop more effectively for a plan that's going to work for you.
MARTIN: So there - I think there are two criticisms. One is it doesn't - it goes too far. We already talked about that. The other argument would be it doesn't go far enough. I mean, why people who took out subprime loans between 2005 and this summer who live in the homes - well, living in the homes you can understand, because they're trying to keep…
MARTIN: …speculators and investors…
Ms. DOUGLIN: Correct.
MARTIN: …from benefiting, but that it resets next year as opposed to the people who've already lost their homes, and there's already been a negative effect on their time.
Ms. DOUGLIN: And that's a huge problem. You've got people who've had a reset -even if they reset in December, they're not eligible for the program because the people who reset in January and on are the only ones who benefit. So there are people who qualified for this program now, but they don't get a chance to take advantage of it.
MARTIN: Okay. But I have to push on this question, Alvin, of people who say, listen. You should know what you can afford.
MARTIN: And when you sign that piece of paper, if it says that the rate could go up two points, three points, four points, whatever, you sign the piece of paper. So why is this my problem? What would you say to that?
HALL: I understand the person's questions completely, but I also know that often, the people taking out the mortgages were not told about the reset. It was in writing. They said everything would work out very well, and the person simply didn't know.
And again, I know this from personal experience with a friend of mine who worked in the financial market, who took out one of these mortgages, and the reset happened much more quickly than he thought it would. And he said, nobody ever told me this. And I said, but you're working in the financial market. Why didn't you read the document? I trusted the person who is telling me what was in the document. That's what a lot of people did, and they just didn't read the document. I can understand how people say that it's unfair for them to be bailed out, but they really do need help. A lot of people made the mistake innocently.
MARTIN: Well, you also made the point earlier, Alvin, that there were some predatory lending practices, if I could use that term, that people…
MARTIN: …were being subjected to some very aggressive marketing techniques, people who are perhaps least likely to be able to understand that.
Ms. DOUGLIN: Absolutely.
MARTIN: But if that's the case, why is there not an effort to sanction these folks?
HALL: If I were king of the forest, they would be sanctioned. But I think the financial markets are somewhat reluctant to even slap these people on the hands. Say you've done a bad thing, that you've caused a crisis. What they would say, oh, we don't need to get into the blame game at this point. What we need is a solution. But the same people…
MARTIN: But the market correction, the burden of the market correction is being borne by these people who don't have a home…
MARTIN: …and have seen their credit severely damaged.
Ms. DOUGLIN: That's correct.
MARTIN: So but - so my question…
Mr. HALL: And these people should…
MARTIN: …then becomes, is there any legislative push to hold companies accountable for engaging in marketing practices that are dishonest? If that's what they think is true, if they think it's serious enough to warrant a bailout, why isn't it serious enough to warrant some sort of a sanction? That's my question.
HALL: Because then some of the beloved colleagues would be some of the people who did this, and that's what people don't want to see. So there is no legislative push. At best, there would be one at the state level. I'm not sure the federal government would ever do anything about it.
Ms. DOUGLIN: I agree with that. I think that they are forming some committees to have some discussions, but I don't think that you're going to see any kind of legislation punishing the people who've put out these horrible mortgage products anytime soon.
MARTIN: If you're just joining us, this is TELL ME MORE from NPR News. We're talking with our personal finance guru, Alvin Hall, and foreclosure expert Carla Douglin about the president's plan to offer some relief to homebuyers who are facing foreclosure.
I still don't understand how this works. If this is not a government bailout, what is it? What's the government's role in this? Did it just have a big meeting? I mean, did the Treasury Department just have a big meeting, and jawbone everybody?
(Soundbite of laughter)
MARTIN: They strike…
HALL: And they came up with a few guidelines, and they said here is what we think will work for a certain percentage of the people - a small percentage. So a bailout would have been much bigger. They would have said, okay, let's just, you know, give - fix these people's rates, anybody who took out mortgages during these periods. But they chose such a small window of time, so it strikes me that all they're doing is trying to see if this will work. And if it works a little bit, maybe they will roll it out more. That's what it seems to me. It doesn't seem like at all a bailout. It seems like a slight fix.
MARTIN: So what are you - I still don't understand what the government's role in this. Was it just basically to pressure major lending institutions to act in this way, and they could coordinate it so that it wouldn't be perceived as an antitrust violation? I mean, is that all they did? They just coordinated among the…
HALL: I think they coordinated.
MARTIN: …lending institutions?
HALL: Exactly, I think. Henry Paulson basically pulled all these people together - the lenders, the servicers, the packagers - and said let's come up with something. There's a lot of damage control that's needed. We need to come up and offer the public something. But then you have the people who actually created part of the problem or contributed to the problem helping to fasten a solution.
Ms. DOUGLIN: Mm-hmm. I agree. One of the senators said last week that you've got homeowners who are drowning 20 feet from the boat, and the government threw out a 10-foot rope. And because the homeowners still have to take so much action just to see if this works for them, one of the biggest issues with the plan is the fact that it is voluntary. It is something that the homeowner has to stretch out their hands and say, hello, I need some help, and the hoops that they have to jump through just to get that assistance - it's a problem that we're already having.
MARTIN: Give me an example. I mean, they have to know that this plan exists.
Ms. DOUGLIN: Yup.
MARTIN: They have to proactively contact their mortgage lender.
Ms. DOUGLIN: Correct.
MARTIN: And they have to be aware that they fall within this window, and then, they then say I want this relief?
Ms. DOUGLIN: They have to qualify for it. So there's no guarantee that even if the people fit within these particular parameters, that they're going to qualify for it based on their lenders' practices. And that's one of the issues that they're having is that, you know, there needs to be this underlying education and push out to folks to say, okay, if you're resetting now and you fall within these parameters, call your mortgage company.
But then there's also another piece of that backlash, is that the mortgage company has to work with the homeowner. They have to say that, okay, here's where you fall into the plan, and we can help you in this way. And so far, the mortgage companies have only really helped about 1 percent of the people who have reached out.
MARTIN: The only other thing I'm curious about, though, Alvin, is you've often talked to us about the psychological effect of…
MARTIN: …being in sort of financial difficulty. One of the points you make is that people get frozen, you know?
MARTIN: That they get frozen by their problems. Since I know I'm asking you to speculate here, but I'm curious about whether you think that if this situation is as bad as you say - potentially even worse - whether the people who are most affected by this will be spurred to action, or will they just opt out of the system and just kind of throw their hands up and just…
HALL: I think at first…
HALL: …they're going to be so stunned by, first, the loss of all the money you're putting down in the house, the sort of betrayal of your dreams. It's another domino in the betrayal or seeming indifference of Americans to the average person - or the American business community to the average person. And I think they'll be dumbstruck by that. But then there's that little point that occurs - which we've been reading about more and more in the paper - where people decide, well, if I'm going to lose it, I'm going to lose it in a big way. And they strip the houses.
Ms. DOUGLIN: Oh, yeah.
HALL: They do all of these things and walk out and leave nothing there because they have nothing else to lose. And you never know how people will react in that case. I don't think they will get involved in politics. I think more than likely, they'll opt out of the system and become deeply, deeply cynical.
MARTIN: Well, well, scary scenario.
Alvin Hall is our financial expert. He joined us from our bureau in New York. Carla Douglin is the author of "The Foreclosure Workbook: The Complete Guide to Understand Foreclosure and Saving Your Home." You can find links to both of our guests at our Web site: npr.org/tellmemore.
Carla and Alvin, thank you so much for speaking with us.
HALL: You're welcome.
Ms. DOUGLIN: Thank you.
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