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Plenty of blame to go around in mortgage crisis

Norwalk Reflector Staff • Oct 29, 2015 at 12:52 PM

It's part of the American dream, owning a home.

Sadly, part of the American reality for many people these days is forfeiting that home.

The number of U.S. homes facing foreclosure almost doubled in July as property owners with adjustable-rate mortgages saw their payments rise and were unable to refinance because of the subprime crisis, according to RealtyTrac Inc. a California-based seller of foreclosure data. And Ohio is among five states that accounted for more than half of the country's total filings.

Lenders sent 179,599 notices of default, scheduled auctions or bank repossessions last month, a 93 percent increase from a year earlier. Despite the hope of some Realtors, there is no indication those numbers will decline any time soon as many brokers believe there is a plethora of bad loans yet to emerge.

For five years, the nation's housing market was booming and mortgage companies grew quickly. But as home values declined and interest rates rose in the past year, rising delinquencies and defaults especially in subprime mortgages targeted at borrowers with bad or incomplete credit histories have caused disaster in the mortgage industry and a full-blown global financial crisis.

"We are estimating that we will see about 2 million foreclosure filings this year," said Rick Sharga, RealtyTrac's executive vice president for marketing. "We honestly don't see it getting much better before it gets a little bit worse."

There is plenty of blame to go around.

Easy credit availability and historically cheap interest rates caused some people to unwisely purchase homes they really couldn't afford. Others were deceived by adjustable-rate loans, whose rates quickly rose above initial teaser rates and led to defaults.

The rise in home prices caused some to opt for aggressive, exotic mortgages such as the so-called subprime, or "non-conforming," ones.

Also to blame is the amount and availability of those subprime mortgages, which comprised 20 percent of the U.S. home-loan market last year. It's not prudent to assign that much debt to people with risky credit.

Not to be overlooked is Wall Street's role.

Freddie Mac and Fannie Mae are publicly quoted companies which buy and sell mortgages issued by other lenders. They operate with a federal government guarantee and under strict controls, with the aim of ensuring there is funding available to mortgage lenders. They have not, however, been allowed to support the sub-prime loans, which have been funded by much more complicated debt instruments invented by and traded on Wall Street. These instruments have fallen suddenly out of favor as a result of rising defaults, causing more than 50 of the sub-prime lenders to go bust.

Mortgage banks and their employees industry job cuts are expected to surpass 38,000 are not the only ones feeling the effects. Those mortgages had been sliced, repackaged and sold on to the likes of hedge funds and pension funds, costing the clients of some investment banks billions of dollars. Mortgage lenders also have tightened up their lending criteria, jacking up rates for all new borrowers and leaving very few sources of funding for the poor.

Economists are debating the impact of this credit squeeze on America's housing market in the future.

We applaud the efforts of Ohio officials who are trying to help, especially in the area of education.

Gov. Ted Strickland organized the Foreclosure Prevention Task Force earlier this year, hoping to find ways to deal with the fallout of foreclosures and prevent future failures.

A hotline has been set up to connect callers with nonprofit counselors who provide telephone-based budget counseling assistance, customer triage and negotiation with lenders. If more assistance is needed, callers will be referred to a local nonprofit organization whose employees are certified to provide intensive financial counseling and direct consumers to local services and resources, including possible assistance through the Ohio Home Rescue Fund. The 24/7 hotline is (888) 995-4673 and managed by the Homeownership Preservation Foundation.

The state treasurer's office is launching a program to educate people about avoiding foreclosure. Huron County Treasurer Kathleen Schaffer is working with the state office to bring seminars called "Rebuilding Your Credit" and "Save Our Homes" to this county.

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