I read an interesting article on MSN Money yesterday – Next shoe to drop: Prime mortgages. The article covers the correlation between the housing market, consumer spending, and the economy.
Basically, the more often banks foreclose on houses, the less people are willing to spend on consumer items, which further weakens the economy, potentially causing a downward spiral and leading to a recession. Of course, there are other issues causing the current economic landscape in the US – the weak dollar and higher oil prices play a large role in our economy.
Reducing foreclosures can help the economy
One of the interesting parts of the article was about home foreclosures. When it comes down to it, foreclosures are bad for everyone involved – people are forced out of their homes and have a horrible mark on their credit for years, banks lose large amounts of money, and the housing market is damaged. The entire US economy is affected by multiple foreclosures.
This has lead some mortgage lending institutions, including Fanny Mae, to provide borrowers more loans to cover their mortgage. Yes, you read that correctly! People cannot pay their mortgage, so banks are loaning them more money to cover their debts!
Something about that just doesn’t seem right.
Here is a quote from Fannie Mae’s latest quarterly financial report (emphasis mine):
“We recently introduced a new HomeSaver Advance initiative, which is a loss mitigation tool that we began implementing in the first quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their payment defaults under mortgage loans without requiring modification of their mortgage loans. By permitting qualified borrowers to cure their payment defaults without requiring that we purchase the loans from the MBS (mortgage-backed security) trusts in order to modify the loans, this loss mitigation tool may reduce the number of delinquent mortgage loans that we purchase from MBS trusts in the future and the fair value losses we record in connection with those purchases.”
Translation: Fannie Mae offers borrowers with delinquent mortgages an unsecured loan to cover their delinquent mortgage payments to prevent foreclosures from occurring (more like delaying foreclosures).
You can’t borrow your way out of debt
I understand how this might work for a few people who were temporarily out of work or hit hard times… They are late $10,000 on their mortgage payments, so they can take out a $10,000 personal loan which they can pay back over several years. If you stretch it out long enough, perhaps some people may be able to afford to stay in their house for a few more months. Perhaps they may even be able to honor the entire mortgage and unsecured loan.
But most people who can’t meet their current obligations aren’t going to be able to meet the same payments, plus an additional payment. The math just doesn’t work.
This reeks of creative accounting: get the delinquencies off the books for a couple months, slow down the rate of foreclosures, and hope to appear under control. Perhaps the loan can even be packaged off and sold as “current.”
In any case, borrowing your way out of debt is not a solution. All this does is delay the inevitable.