Refi Nation: Digging Out of the Mortgage Mess

Wednesday’s Recovery and Reinvestment Act promises $787 billion to American homeowners and home buyers, offering much-needed protection against imminent foreclosure. This news came as a huge relief to many Americans with homes underwater struggling to make their mortgage payments, but the enormity of the situation begs the question, how did we get into such mess in the first place?

The problem really began in 2003, when bad underwriting of mortgages went up, according to Robert Van Order, former Chief Economist of Freddie Mac from 1987 to 2002, and finance professor at the University of Michigan.

“Once mortgage defaults began, it wasn’t long before it spread to the rest of the country, and then bad credit set in,” said Order.

But it’s not the first time in American history that we have seen this type of problem. In the 1980s, mortgage defaults were bad with savings and loan, and during the Great Depression in the 1920s, there was a total credit collapse, according to Order.

“We are in a real mess, but not everyone’s in a mess,” said Randy Johnson, a credit expert with Credit.com. “You have to have perspective on the whole market. Not everyone is in foreclosure but there are a couple of million people either in it or headed towards it.”

Many people got hurt doing things that fed a “speculative bubble,” Johnson said. Individuals who bought homes to flip and sell, and others who bought homes as investments created a false marketplace in many regions of the country including Florida and California.

But it’s not just homeowners that have been hurt. Lenders have also taken a hit, Johnson said. “Now, it’s just a matter of doing what you can to get as many people to stay in their houses. Lenders don’t like foreclosures.”

Recently, Johnson said too many people have been focused on the cause of the mortgage mess, rather than focusing on what needs to happen to restore normalcy in the market. “Instead of focusing on the bad things and what we must to do change them, for a while we were trying to figure out what caused the problem.”

This type of thinking was getting people nowhere, and only further exacerbating the problem, Johnson said. What’s important for the foreseeable future is to take each situation family by family and ask how we can help them become more educated so this situation does not happen again.

But when it comes to education, the average American should not worry about studying changes Fed policy unless they have an adjustable rate mortgage, according to Order. For homeowners that have an ARM, they can be directly affected by month-to-month changes in mortgage rates. Homeowners with a fixed-rate mortgage will not be affected by changes, but should check interest rates annually to see if they can refinance to a lower rate. read more