Three Ways to Fix the Housing Crisis

Yesterday, we touched on the current housing market woes as the National Association of Realtors proclaimed that its index of
signed purchase agreements dropped to the lowest level on
record.

And today, we’re looking for a side of hope to go with that gloom and doom. No one’s arguing that the market is bad — and probably about to get worse — but good news: Some people and programs are trying to turn it around.

• Help with lending. Homeowners finding their bank isn’t giving them a decent rate due to the bank’s problems or imperfect credit might benefit from trying one of the country’s smaller banks, which are offering more flexibility in some cases than larger lending institutions can. Small banks aren’t guaranteed to grant all homeowners a loan, of course, but because their loans are funded with customer deposits, rather than capital markets, they have more security — and more freedom.

Take, for example, the Annapolis Community Bank, which has closed $9 million in loans since February and assumed loans from
mortgage companies whose lines of credit were taken away.

Annapolis says it will take on a degree of risk with some new loans — which is bringing in a lot of business. "We’re
so busy it’s not even funny," Eric Edstrom, president of Annapolis Community Bank, told The Capital.  "We’ve stepped up and helped out. It
wasn’t something that we anticipated, but there are people out there we
thought we could certainly help."

Will small banks save the entire residential funding system? Not likely — because they’re financially self-sufficient, their reserves are clearly limited. But redirecting some in-trouble homeowners to community banks could help prevent some foreclosures.

• At-risk homeowner help. The White House is trying to help homeowners with a tax break — but whether or not it will be a permanent one remains to be seen. The Mortgage Forgiveness Debt Relief Act, approved last month by the House Ways and Means Committee, would allow borrowers to avoid counting cancelled mortgage debt as taxable income as long as the debt is from a primary residence.

However, the Bush administration wants the tax relief to be temporary; the House tomorrow is expected to approve the bill and permanently change the tax code, according to AFX News.

• Educate early and often. Washington Mutual this week announced an ambitious program to make sure homeowners understand all aspects of the lending process before they close on a property. The lender will require all brokers it works with to submit evidence that they have disclosed all mortgage fees early in the application process, so there won’t be any surprises. Plus a WaMu representative is going to attempt to call each borrower to go over all
  loan terms.

Foreclosures reached a new high in the second quarter of this year. Teaser loans and programs that lured homeowners to buy with low rates, little or no money down and, in some cases, essentially fund their new home with its projected equity have been widely blamed for contributing to the foreclosure rate.

True, housing was on a contagious high a few years ago, as home values and new construction boomed. Buying real estate was billed as THE investment to make, with a sense of urgency to make it soon, before the unbelievably low rates increased. That prompted many homebuyers with low cash reserves, spotty credit and other problems not conducive to homeownership to jump into the market, however they could.

Yet if these borrowers understood how risky the programs they agreed to in order to buy a home were — and exactly what their loans might reset to in 3 to 5 years when the original terms expired — it’s unlikely all would have agreed to the purchase conditions.

But they did, and now we have to find a way to help them — and everybody else — crawl out of this housing crisis.

Even if you feel the at-risk types made their own bed and need to lie in it (before the bank comes to repossess it), the truth is, they’re greatly adding to the default rate …

… which is hurting the nation’s banks …
… which, in turn, are tightening lending, causing more defaults and bankruptcies…
… which is adding more housing to the already bloated housing supply …
… which is dragging down home prices …
… which is ultimately hurting new construction and home sales — and your wallet.

Agree? Disagree? Have a totally different take on fixing the housing decline? We want to hear it — post below or e-mail us for inclusion in a future post.