Let see why and how. Before we get into the discussion of why FED doesn't really care about consumers but the banks, allow me to BRIEFLY explain some issues regarding mortgage loans.
Have you noticed that during the past several months the FED dropped the "Short Term" rate and the rate it lends money to the bank? If you have not, go back and read to the news from September 2007 through the recent rate drop of 3/18/08. First the FED (the central bank-Federal Reserve Bank) dropped its lending rate to the bank. This was done so that the "Banks" will pay less in finance charges to the FED (so that their losses could be reduced). It wasn't designed for the consumers (you and I) to benefit. The banks do NOT and mostly they won't drop rate just because their own borrower rate is reduced. Although, they drop their lending rates to us when they get a break, but the realistic part of FED dropping that rate a couple of times was to benefit the banks. As you know the banks are losing money in billions due to their own "Bad Business Practice methods"(in short-hereinafter "BBP"), which is now called "Subprime rate issues."
Let see what did the banks do to bring themselves to this point (losing billions and having high foreclosure rates).
Banks' BBP arose from the following methods among all others
1.They provided "Stated Income" a.k.a. "No Doc." or "No Income Verifying" loans to every Tom, Dick and Harry who under normal circumstances would have not qualified for a mortgage loan. These are the people who did/do not have the income to pay the monthly mortgage payments under normal circumstances. Meaning that they could not normally pay the principal, interest, monthly portion of the property taxes and insurance (called "Escrow") formulated as (P+I+T+Ins.) for a loan term (30 yrs, 20 yrs, 15 yrs, 5 or 3 Arm). Now, add the recipe for disaster (the job loss, the higher cost of living, the higher cost of gas, fuel, food) to the BBP formula and it will result in foreclosures.
2.BBP also gets into effect when the unethical lenders offer rates that are above the normal rate even to those who have good credit. For example, instead of lenders being fair and offer current mortgage rate, they offer rates that are higher. I.e. if the current rate is 5.5% for a 30 years- Fix mortgage loan, they offered applicant a rate of 6.00% or higher (even if the consumers credit score is above 750). Now, if a consumer's score is lower, the rate goes up. For every bit of increased rate the cost of obtaining that loan also goes up leaving applicants with no or little remedy. As the rate offered goes higher, then the consumer who is paying the monthly payment must take money away from other bills.
3.The BBP continues when the lender/banks tricks borrowers into getting an ARM loan, Interest Only Loan, option arm (worst kind) or reserve equity loan among other bad loans. This is when a mortgage loan applicant is tricked to accept the rate higher than the normal rate with the understanding that he/she can refinance in a year, two years, 3 or 5 years, based upon the type of loan rate and term the consumer is coursed into. The bank representatives do NOT tell you the actual downfall of such loan. Soon you will find yourself in a situation that your monthly payment is increasing and your equity in the HOME (your primary investment is NOT).
4.Another BBP is the fact that some very aggressive lenders/banks lend more than what the property value. I.e. when a property is worth $100,000.00, the bank lends you $110,000.00 or more. This is also known as under secured loan or negative equity. Of course these types of loan only will be a loss for the bank from its inception, but then the Federal agencies claim that the consumer committed "Bank Fraud" under special stipulations. "The Irony".
5.One last BBP is the fact that the banks tell the consumers "we want to see these types of figure on your financial documents." You are told to create (make up) documents that would match what they are demanding so that the bank can issue you the loan. Now, this is definitely "Bank Fraud." However, when a person whom so called committed the crime is investigated by the FBI and IRS, the bank disclaims any wrong doing; because, there is no traceable record to put the bank and its representatives under the spot light of investigation. That's why in my book "Bad things Happen to Good People. Your credit = Your Life, Fix It Now!" I discussed remedies to place people on their track (record keeping...)
However, the consumer suffering, losses and irony continues as the FED doesn't care about you and I (but the banks). Let's see what I am talking about.
During the past few months, the FED dropped the rate several times, and you and I should have had the sigh of "Relief" thinking that "Oh the Government is really wanting to help us..." Really!!??
The rates that were dropped were the short term borrowing rates, credit card rates, car loan rates, Line of Equity rate and few other similar types. None of these have anything to do with your mortgage rate in which you and I are suffering from. Although the banks dropped their long term mortgage rates by about .5% to .75% but believe me, it is all because they are offered so much "sweet deals" from the FED, in which the banks are forced to pass some of their savings to you, so that you would re-fi and give them more immediate cash through "closing cost and buy down points."
The fees that you are charged immediately (closing cost and buy down the interest rate) is the cash that generates immediate revenue for the banks getting them out of the MESS they are in now.
Let's see how much the fed and the government really love you.
As you are in foreclosure, and the short-term rate and LINE of Equity interest rates are dropped, in order for you to get out of foreclosure, you will probably go to the bank and borrow more money to get out-of-debt. What an Irony. The debt that got you into foreclosure and bad credit is going to get you into a deeper debt!?. I love it when the bank representatives sell this idea as a great deal and the government is making you believe, how much it cares for you.
Okay. Now that you have no choice but to lose your home and all the equity that you gained through the years of making monthly mortgage payments, you are given an option to borrow against your equity (line of equity) so that you would pay the primary mortgage bank's arrearage (the back monthly payments, interests, the late fees (several months of nonpayment) and the foreclosure attorney fees.
Of course, it sounds very good for right now, because, now you are out-of-foreclosure until next year or two (2). But you don't realize the fact that you've been having problem not making payments now because of the economy or increasing interest rate. What do you think is going to change next year when and if the economy does not change drastically? Do you think the next president (whoever it may be) can waive a magic wand s and the economy turn around immediately!? If you are a dreamer, keep dreaming.
All the FED has done so far is spread the massive foreclosures that the banks and consumer are facing this year (into the next couple of years). For example. If we are going to have 1.7 million home foreclosures in 2008, now that the door to borrowing against your equity is opened and you took that route, you temporarily come out of foreclosure. BUT, as you will face paying two monthly payments every month and finally can't continue doing so, your foreclosure is dragged for a few more months into 2009 or 2010. So the FED bought a few months of credit and time for the lenders so that they can spread their losses over a longer time frame. I really want to know how would it really benefit you at the end. In my opinion, all it did was to extend your losses and suffering giving you a false hope.
Now let's also see what does the extra Governmental tax-rebate is going to do.
You and I are behind several months in making our monthly payments at minimum $500.00 or much higher. Since we fell behind for several months due to the great economy the government is talking about, the $300.00 or $600.00 is not going to help remedy the number of months of past payments. All it does, it pays for more food, gas or lottery tickets. Meaning, having the consumers put the money (tax-rebate) back to the local economy; instead of, rescuing consumers by lending them a hand...
What really needs to happen is for the government and FED to reduce the long-term rate (mortgage rate) on the existing loans, and freeze it for a few years to help consumers catch up. That's is the best relief consumers can have.
For more information and Q & A please go to the website
I wish to see you succeed.
Best of luck.
Mike Samadi
