Congress Sits Back While American Dream Gets Foreclosed
If Congress would quickly pass the “Expanding the American Homeownership Act" instead of sitting back and doing nothing, then the following situation could be avoided entirely. Instead of losing their homes to foreclosure, American families could obtain an FHA mortgage or even refinance with the FHA, which offers incredible foreclosure-prevention measures. If you want to see an improvement in the housing situation for millions of Americans across the country, call or write your local congressman or senator and tell them you want this bill passed, and passed quickly!
This shouldn’t come as news to anyone who has obtained a mortgage recently: America’s housing and mortgage markets are currently dealing with serious problems. In the last several years, many more low- and moderate-income families turned to subprime mortgage loans that were attractive at first, but turned out to be extremely risky. These loans often offered a low introductory monthly mortgage payment and interest rate, and usually no downpayment requirement.
The problem is that these subprime loans don’t stay cheap – their rates reset to higher levels, causing a jump in the monthly mortgage payments. Many of these families can’t afford the new payments and quickly lose the ability to keep pace, creating a huge financial burden. In the worst case scenario, after a borrower misses a certain number of payments, the lender will foreclose on the house, a process which forces the family out onto the streets.
Foreclosures On the Rise
A foreclosure may seem like one of those “It will never happen to me” situations, but recent studies have demonstrated that foreclosures are on the rise in America: In the first quarter of last year, 323,102 properties across America were in some stage of the foreclosure process. This amount corresponds to a 38 percent jump from 2005 and a 72 percent from 2004.
The recent increase in the number of foreclosures has given banks and other lenders the image of being greedy corporate machines who’d like nothing more than to kick a family to the curb. The fact is, however, that foreclosures are bad news for everybody: because they have to sell the house back on an open market, banks lose an average of $40,000 per foreclosure. Foreclosures also lower property values in the surrounding neighborhood. As Brian Montgomery put it in his recent testimony to the Senate, “foreclosures are bad for families, bad for neighborhoods, and bad for the economy as a whole.”
Fault of the People?
This may seem like the fault of the people. It would be easy to say “Well, they shouldn’t have taken the ‘teaser’ mortgage” or “They should have planned better financially,” but it must be pointed out that for these families, they often didn’t have a choice. In order for many low- and moderate-income families to afford a home, they had to take what they could get, and their only option was a subprime mortgage with a low monthly payment. The real problem is that Congress has the ability to offer these families another option for housing loans, an option that is less risky and more flexible, and yet Congress is taking its time while more and more families succumb to foreclosure.
This option, the solution to the growing foreclosure problem, is modernizing FHA mortgage insurance. The FHA (Federal Housing Administration) has for decades provided low- and moderate-income families with housing by insuring their mortgage loans, so that lenders are more willing to provide them with the financial backing necessary to buy a house. In recent years, however, the FHA and its practices have become antiquated as the private mortgage market has passed it by. By modernizing the FHA and its practices the government could potentially help millions of Americans purchase a house when they otherwise could not.
Modernize the FHA
For instance, one of the reasons why the FHA desperately needs modernization in order to help low- and moderate-income families involves the initial downpayment on a house. While the FHA still requires a “complicated downpayment calculation and three percent cash investment,” almost half of the conventional mortgages being taken do not require a downpayment at all.
Montgomery, who is our Assistant Secretary for Housing by the way, asserted in his March 15th testimony to the Senate that this three percent downpayment is the “biggest barrier to homeownership in this country.” He goes on to show that if Congress would only pass the “Expanding the American Homeownership Act” bill, then the FHA modernization process could begin and Americans could escape the pressure of risky mortgage loans.
The other main ways in which the FHA would be modernized include the introduction of a risk-based system for FHA insurance premiums and an increase in FHA’s loan limits. Currently, the FHA has set loan limits that are simply too low for many areas of the country with high median home prices like New York and California. In these areas, low- and moderate-income families have had to rely on subprime loans simply because the FHA limits could not cover the purchase of even a cheap house.
FHA Must Raise Loan Limits
By raising the limits, the FHA’s scope could increase by a huge margin. These improvements and modernizations to the FHA seem like a dream come true to many Americans facing dire financial troubles. But while the “Expanding the American Homeownership Act” was passed in the House last year by a vote of 415-7, it stalled in the Senate and was eventually dropped.
Now, in 2007, the bill is set for reintroduction into the 110th Congress, and hopefully it will be passed by both the House and the Senate this time around. Now, more than ever, these changes to the FHA are needed.
According to Mortgage Strategist, more than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, is due for interest rate resets in 2007 and 2008. While some borrowers will make the higher payments and many others will refinance, some will struggle and some will be forced to sell or lose their homes to foreclosure.
Unless we want the American Dream to become a foreclosure, Congress must take action.