The mortgage crisis in America is a political hot topic that has taken a front seat to many other topics of national importance. Even the upcoming presidential election has the potential of having this very topic at the center of each candidate’s agenda. However, with a matter of such national significance it would appear as though all most Americans seem to know is that the economy is bad and that about covers it. Many Americans are unaware of this economic crisis occurring and are even less aware of how it could affect them. Therefore, the apathetic and ignorant attitude towards such a dilemma could be explained. In order to assist in the eradication of this issue, one must examine the meaning of a mortgage and that will improve the understanding as to why foreclosures are occurring throughout the country. Furthermore, with this base understanding of this market we might better understand why Congressional and state legislators wish to place a moratorium, or temporary freeze, to the current foreclosure emergency.
What is a Mortgage?First, let’s examine what a mortgage is. According to the Freddie Mac lending agency a mortgage is, “… a lien on a property/house that secures a loan and is paid in installments over a set period of time. The mortgage secures your promise that you’ll repay the money you’ve borrowed to buy your home.”[i] There are also several types of mortgages available through lending agencies as well. Some of the following are the primary options available: fixed rate, adjustable rate, balloon/reset, reverse, and the hottest one that is being talked about the subprime mortgage.
This is the one that should be hit on most heavily because this is the reason for the foreclosure crisis occurring right now.The problem with subprime mortgage lending is the fact that a subprime lender is predatory in nature, much like a loan shark. These companies prey on those who cannot receive a mortgage through mainstream companies as a result of poor credit or and/or a number of other factors. These companies then charge very high interest rates on the mortgages they extend to consumers. These interest rates are placed on the principle of the loan and essentially the individual paying on the loan will have to pay on the interest in lieu of the principle for a very long period of time. According to Reuters, “The crisis surrounding subprime mortgages extended to borrowers with spotty credit [can] unnerve financial markets and could deepen a slump in the U.
S. housing market that some economists fear could put the economy close to a recession.” [ii] What is a Foreclosure?Second, Foreclosures occur when an borrower or owner of a parcel of property or home defaults on a loan payment, such as a mortgage payment, and the lender files a default notice, whereby a bank or mortgage company repossesses they property in question and the owner/borrower looses whatever rights he/she might have had prior to the default. The problem with foreclosing on individual’s property today is that there are a plethora of people in America that are defaulting on their mortgage payments as a result of the slowing economy, predatory lending, credit card debt; the list is endless.
If the mortgage companies foreclosed on all those defaulting, there would be more homeless Americans than in U.S. history.What Is the Proposed Solution?Finally, let’s examine what has been proposed as a solution to the problem of foreclosures as a result of extended mortgages to borrowers, as it stands. The U.S. government is attempting to broker a deal with mortgage lenders to assist troubled borrowers with defaulting on their mortgage payments.
However, many lawmakers also would like to see a moratorium occur; freezing all foreclosures so that financially-troubled borrowers can have some time to keep from losing their homes. Lawmakers believe this action will not only assist borrowers, but it will also help to stabilize the economy and the housing market as a result of homeowners having time to accrue equity.[iii] Furthermore, lawmakers have proposed to extend more than five billion dollars to the hardest-hit communities so that homeowners might be able to cope a little easier with the crisis. Florida, Nevada, California, Michigan and Ohio are key state in next year’s elections as well as some of the hardest-hit as a result of the mortgage crisis. With lawmakers steering at the helm for a solution to one of the greatest financial questions since the Great Depression all one can do is waiting to see what the next administration will do to assist with the issue at hand.
[i] What is a Mortgage? Retrieved September 24, 2008, from What is a Mortgage Web site: http://www.freddiemac.com/corporate/buyown/english/mortgages/what_is/[ii] Sen. Clinton proposes moratorium on foreclosures. Retrieved September 24, 2008, from Reuters Web site: http://www.reuters.com[iii] See Endnote ii