There’s no doubt that the mortgage meltdown will be one of the most
important issues facing the Obama administration. Finding a logical
resolution won’t be easy. It will require a solution that’s balanced
and beneficial to both mortgage holders and lending institutions. While
there’s no magic answer for such a complex problem, here are some ideas
I believe Washington should consider.
- Discontinue adjustable rate mortgages. It’s true
that today’s stricter lending requirements and more conservative loan
limits have largely eliminated these types of loans, especially the
interest-only mortgages that are causing so much trouble. But there are
still ARMs available, attracting buyers who must stretch their finances
to become home owners. The problem with ARMs is that they are temporary
loans by their very nature. They were initially intended to provide a
way for first-time buyers to establish credit so they could convert to
a fixed-rate loan at the end of three or five years. Today, however,
many ARM borrowers can’t find permanent financing and are trapped with
higher payments or balloons that require the entire loan principal to
be paid off at once. That’s why ARM loans continue to have a
destabilizing effect on the entire real estate market.
- Require lenders to refinance ARMs into fixed-rate mortgages.
The federal government should require lenders not only to refinance the
ARMs they originated into fixed-rate loans but also to make loan
modifications as needed to extend the life of the loan so that
borrowers can afford the monthly payments. This would allow many more
home owners to avoid foreclosure—which would benefit lenders, too.
- Reappraise properties in overappreciated markets.
Mortgage holders in pockets of California, Florida, Nevada, Arizona,
and other areas where home prices showed precipitous price run-ups in
2005 and 2006 should have their properties reappraised to reflect
current market conditions. Lenders should be required to convert these
troubled mortgages to fixed-rate loans based on the new appraisal
values. At the same time, lenders should extend loan terms in order to
ensure they are repaid the entire principal.
- Limit real estate equity lines of credit. Lenders
should stop giving home equity credit lines for more than 100 percent
of current appraised value and start following more prudent measures.
They should introduce equity credit lines based on the actual equity in
the property, rather than the value of the real estate.
- Give tax credits to home owners who pay on time.
Borrowers who are current in their home mortgage repayment schedules
should be rewarded with tax credits. Such a stimulus package would
assist the average American mortgage holder in this current financial
Writer Darrell Gibbs is the broker in charge of Gibbs Realty and
Auction Co. in Easley, S.C. The company is one of the largest privately
owned companies in the Southeast that works exclusively with REO and
bank-owned properties throughout the Carolinas. He can be reached at
864-855-3929 or www.gibbsrealty.net.