Why the Housing Problem Isn't Going Away

With all the attention that the mortgage crisis has gotten over the past year, you might expect us to be closer to solving the housing problem. Yet while waves of government actions and programs have put some of the pieces in place for a solution, their eventual success or failure depends on what homeowners do with them.

Ironically, what could potentially give homeowners the largest amount of help is exactly what many critics blame for the housing crisis in the first place: low interest rates. As mortgage rates sink to their lowest levels in decades, many homeowners now have an unprecedented opportunity to refinance to more affordable loans at a time when they need them the most.

Cheap refinancing, if you can get it
Many believe that easy financing played a huge role in pushing home prices higher, especially in hot real estate markets where a lack of affordable homes already required most buyers to stretch their budgets to the breaking point. Innovative mortgage products like adjustable-rate, interest-only, and negative-amortization mortgages gave borrowers the chance to lower their monthly payments to a point at which they could nominally afford them. But in the long run, they would only be viable as long as home prices continued to rise.

One of the focal points of the government's attempts to restore confidence to the housing market has been to give homeowners a reasonable opportunity to get affordable, sustainable financing. Through a combination of those actions and the slowing economy, long-term interest rates on which most fixed mortgages are based have sunk to incredibly low levels. Consider the mortgage rates at these well-known banks:

Bank

Current APR on
30-Year Mortgage

Wachovia Bank

4.991%

BB&T (NYSE: BBT  )

4.782%

SunTrust Banks (NYSE: STI  )

4.974%

Capital One (NYSE: COF  )

5.426%

Source: Bankrate.com, for mortgages in metro D.C. area as of Jan. 14.

Rates below 5% have allowed many borrowers to cut hundreds off their current monthly payments -- or to get rid of interest-rate risk entirely by switching from adjustable mortgages to fixed-rate financing.

Tighter credit
Unfortunately, not everyone has taken advantage of these low rates. Some can't, as the subprime lenders who gave marginal borrowers credit are largely gone. Big banks like Wells Fargo (NYSE: WFC  ) , US Bancorp (NYSE: USB  ) , and Bank of America (NYSE: BAC  ) aren't in any hurry to loosen their credit standards to let those borrowers refinance. Despite multiple cash infusions from the government, institutions like Citigroup (NYSE: C  ) aren't in a great position to extend lots of credit to homeowners right now.

Many homeowners are refinancing. But some of those who need new mortgages the most probably won't. In particular, those who've already gotten bitten once by unscrupulous mortgage lending tactics may not think solving their problems with another loan is a real answer. Even those who know next to nothing about finances typically understand that they shouldn't let themselves get tricked twice the same way.

Of course, giving up the chance to refinance to a better mortgage is just about the worst move these homeowners can make. Yet the problem boils down to a fundamental lack of understanding of how home financing works.

Educating the public
The Motley Fool believes that these problems start from a lack of financial education. Through our Foolanthropy fundraising effort for partner DonorsChoose.org, we're looking to sponsor programs that will give kids the basic financial skills they need to understand investing, credit, and the other things they'll need to know to survive in a tough economy.

We're looking at many different types of interesting programs -- to see them all, click here. Your tax-deductible donation can help us do just a little bit more to help future generations handle their finances better -- and avoid the mistakes many of us have made.

For more on Foolanthropy:

Fool contributor Dan Caplinger is looking to save money by refinancing in the near future. He doesn't own shares of the companies mentioned in this article. US Bancorp, BB&T, and Bank of America are Motley Fool Income Investor recommendations. Bankrate is a Rule Breakers pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is on your side.


Read/Post Comments (9) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2009, at 3:39 PM, gldiii wrote:

    Seems like this article missed THE biggest reason the housing problem isn't going away! You talk about refinancing, and people not willing to do it, WRONG! People would be more than willing, they just OWE MORE THAN THE HOUSE IS WORTH SO THEY CAN'T REFINANCE! DUH!!!!

  • Report this Comment On January 14, 2009, at 4:57 PM, fool425 wrote:

    What is missed in this article is the waves of other types of distressed borrowers

    see: http://www.calculatedriskblog.com/2007/10/imf-mortgage-reset...

    who will ultimately default on their loans throwing ever increasing inventory onto the already over-saturated housing market in many communities. This excess supply can only repress any hope of future appreciation until and unless housing prices come into line with incomes which have historically been 15 times the annual rent in a typical neighborhood. Either wages have to rise a whole bunch or prices must decline. I'm betting on the latter.

    In addition, any attempt to manipulate these ratios through low mortgage rates or cram-downs of existing contracts will only delay future housing price appreciation which will further exacerbate buyer remorse. If homeownership is not profitable, why try to catch a falling knife?

    Until and unless housing prices fall to "affordable" levels as defined by the old "conforming loan" model, stimulus in the form of buy-downs will have much the same effect as cash-back on automobile purchases; short-term gains (fewer foreclosures) offset by longer term negative consequences (price stagnation). And I haven't even touched on the adverse demographic influence of the boomer retirement wave that lies just ahead throwing large numbers of McMansions into the equation. Excuse me while I pay the rent and offer a prayer for my landlord!

  • Report this Comment On January 14, 2009, at 5:13 PM, forexfenom wrote:

    No to mention the ARM issue:

    http://www.learningmarkets.com/index.php/200812151133/Stocks...

    This problem will stay for a while.

  • Report this Comment On January 14, 2009, at 5:37 PM, handhb wrote:

    Most refis are not possible now because most properties bought between 2005 & 2007 are under water. It doesn't matter what the terms are, the mortgages outstanding are more than market value and values are still falling. Banks are also requiring down payments in the 10 - 25% range. Most people can't afford that.

    Appraised values are also being adversely affected by numerous foreclosures, deeds in lieu, distressed sales & short sales.

  • Report this Comment On January 14, 2009, at 9:35 PM, zenitram wrote:

    Ability to refi and foreclosures from pending ARM re-sets aside, the Journal of the American Planning Association had an interesting article this past year arguing that the recent housing bubble was a mini-bubble nestled inside a much larger bubble based ona demographic analysis of the aging baby-boomer population and their anticipated housing needs (or lack thereof). The authors argued that with a large number of boomer aging, many will be downsizing, going into assisted living, or will die, leaving a much larger glut of homes on the market. If there's a larger secular supply/demand imbalance looming in housing, what does that do for most people's investment planning?

  • Report this Comment On January 14, 2009, at 11:53 PM, TrailerParkJawa wrote:

    Are boomers really going to downsize in large numbers? I can only speak for the SF Bay Area but it doesn't look like many boomers will downsize here. Property taxes on a new property can often wash away any savings on a lower priced place. Thats because someone who bought a 4 bedroom 20 years ago is probably paying less property taxes than someone who bought a 2 bedroom condo lass year.

    So, at least with the boomers I've talked to, they intested to keep their homes unless they want a change in living. ie) no more yard or closer to mass transit.

  • Report this Comment On January 15, 2009, at 10:13 AM, RHaganC wrote:

    Trailer Park -

    you are looking at it for a unique perspective; were there is a GIANT tax benefit to staying in what you have if you can.

    That is not the case for other states; you pay tax on what it's worth today. Where I am (GA) they don't give a dern if the property taxes a year are as much as you paid for the house in 1970; deal with it. Why would an elderly per NOT move? It's more of a reason to.

  • Report this Comment On January 20, 2009, at 3:27 PM, Pilm wrote:

    The main housing problem we have today is not falling home prices but home prices that are way out of line with peoples income! If you make $50k/year, how can you afford a $400k home with $0 downpayment. Sure, a few years ago some idiot fly by night mortgage company would tell you "no sweat", but today, now that some common sense has returned to the mortgage market you ain't gonna get that loan. Should not have happened in the past, but that's water under da bridge, we can only fix going forward.

  • Report this Comment On February 22, 2009, at 12:49 AM, happyashell wrote:

    The President has released his plan to improve the economy. As usual it is complicated and does not reflect the real world. Please read the enclosed copy of the telegram I sent him on 2-15-09. I do not believe he has read it yet, since he has been out of the White House for the last 3 days. I need yours and the banking industries support to have my Alternative Stimulus Plan enacted. Please read it and have it analyzed. Your opinion and help would be greatly appreciated. The Alternative Stimulus Plan is much simpler and I believe it to be more helpful to solving the banking industries problems of falling collateral prices and economic contraction.

    My name is Leonard C. Tekaat. I am a retired Economic Analyst, Financier, Businessman, investor, author and former candidate for California Congress. I have over forty years in the financial and business world. For 28yrs I have been saying that there is a major flaw in our economic policies. The currant economic crisis could have been prevented if the changes I have been proposing would have been enacted 28yrs ago. That is not to say that we cannot correct the currant crisis. I would like to share a copy of a telegram I sent to President Obama and Treasurer Geithner.

    Telegram

    To President Obama and Treasurer Geithner:

    There is a major flaw in our economic theories. I want you to ask yourself three questions. 1.What is the first thing the Fed does to stimulate the economy? answer: Lower interest rates, this permits people and businesses to refinance their debt at a lower rate of interest, which in turn lowers their monthly payments, freeing up monthly income, which increases their disposable income. 2.Why did it not work this time? answer: Collateral prices were going down; banks or investors cannot refinance people’s loans, until the price of the collateral stabilizes. 3.How do we solve this problem? answer: We have the US Treasury, which is a not for profit organization, borrow the money from the Fed, just like the banks do and fund the refinanced mortgages, at near cost, until the collateral’s price stops decreasing. The Treasury would receive the cash flow and turn around and fund more mortgages, just like the banks do. When the economy is up and running again the Treasury would sell the mortgages to investors. The bank and the other financial institutions would arrange these new loans and mortgages or modification agreements. It has always been the 90% of the population who spend their money and pay their bills that brings the economy out of the recession. More details at www.American Solutions.com Read articles and comments by "happyashell" Sincerely, Leonard C. Tekaat author Inflation the Economy Killer

    News Release

    Economic Committee Petitions U.S. Congress

    The Committee for Economic Reform and a Better Economic Future petitioned the U.S. Congress today to hold open meetings to discuss and debate their Alternative Economic Stimulus Plan. Chairman Leonard C. Tekaat states the economic stimulus plan does not rely on a trillion dollar Jobs Program. In fact Mr.Tekaat

    states the stimulus plan they are proposing will not cost the American people anything over time. He said, “ Their plan relies on a few policy changes to lower mortgage rates by 2 to 3%, which will reduce most people’s monthly mortgage payments by 50% when they refinance their mortgages. There-by increasing their disposal income an average by $700.00 per month! That’s like receiving a stimulus check every month for 30yrs. With safe guards included in the plan the chance of another housing bubble is nil." He said, "Their stimulus plan also includes a policy that will help those homeowners that owe more on their mortgages than what the house will sell for.”

    For more information go to www.American Solutions.com articles and comments by happyashell

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