American Dream or American Nightmare
Expository Essay on Living in America
The American dream is now the American nightmare, as fiscally qualified individuals are being denied the ability to buy or refinance homes; additionally, research shows that owning a home today is not as desirable as in the past.
Homeownership always has been the goal of the American worker, but as the economic momentum, which drove the market dropped dramatically, that goal has become harder to reach. The factors directly responsible for this change in the housing market are numerous and varied, yet can be fit into five major categories ranging from common sense to discriminatory lending practices. These issues in the present market are complex and interconnected, and the answers are only now coming to light. The American dream is now the American nightmare, as fiscally qualified individuals are being denied the ability to buy or refinance homes; additionally, research shows that owning a home today is not as desirable as in the past.
It can be difficult to measure lending discrimination. There are different forms of lending discrimination and many possible scenarios throughout the financial industry in which this type of behavior can occur. Some examples are advertising and pre-approval, and some lenders have the option to approve or deny the loan application based on their own discretion. To understand why this is happening, some research will need to be done focusing on the approval process and why certain people were approved or denied and what were the main factors. Understanding the process, researchers will be able to make an analysis of the problem and what needs to be done to correct it. There needs to be regulations in place that deal with tricky advertising campaigns promising more than any one person could afford. A standard of best practices needs to be in place to safeguard the public against predatory lending practices. “Over the last several years, our nation has made enormous progress in expanding access to capital for previously underserved borrowers. Despite this progress, however, too many families are suffering today because of a growing incidence of abusive practices in a segment of the mortgage lending market. Predatory mortgage lending practices strip borrowers of home equity and threaten families with foreclosure, destabilizing the very communities that are beginning to enjoy the fruits of our nation’s economic success.” Predatory Lending United States Department of Housing and Urban Development, (18 May 2009) (Para. 1)
A standard in underwriting and preapproval is necessary. Many years ago it was suggested that a borrower earn three times the payment, but over the years that went to one and a half times the monthly household income. Advertising techniques used to lure unqualified individuals and give them more than they can afford is something that needs to be done away with.
Giving precedence to late borrowers, over on time accounts is another form of lending discrimination. This is a result of the increase in foreclosures that has banks stating they are too busy working on delinquent accounts to help the on-time borrower refinance their current account. Telling current accounts to wait until others are taken care of is another form of discriminatory lending. If the bank took an example of 100,000 mortgages, and all of them had interest rates ranging from three to fifteen percent, the averages of positive growth based on low and high rates is a slim portion of what would be paid on time. A standard interest rate for all accounts even out the balance sheets to reflect current market rates. Today those rates are around five percent.
Lending institutions will lose profits from current customers who are not developing any problems at their current rate but the reduction would help alleviate the stressed out borrowers who are paying higher rates and are not on time and are reflecting negatively on the lender. A book of 100,000 customers at five percent will beat out the book of 100,000 customers with rates ranging from three to fifteen percent. It may take time but this would seem to be a more lucrative way to do business for the long haul.
Delinquent borrowers need to have more options, not necessarily to be treated better or worse, but shown a way out of the mess to help yield the cleanest separation, therefore the property keeps its value and the customer has a way out. If lenders implemented a department with specific counseling options for their borrowers, people would be less likely to walk away. It seems now that when any situation occurs the lender has nothing to say, or no direction to send the customer, except foreclosure.
Upon finalization of an agreement with a bank, there begins a relationship that should last the duration of the loan; usually twenty to thirty years. Once an issue has arisen, lenders have acted like they have no option but to collect the funds. The reason for this is simply the lenders own practices. Most banks were processing the new loans whereas the big banks were shelving them, so most borrowers calling in to speak with their lenders are speaking to servicers of the loan, and not the original company the borrower closed the loan with. If the servicers were holding the mortgage note they would have more need to implement a counseling department to assist their clients, and not treat the agreement as a one-sided deal.
Home values are plummeting and people are running out of options as to what makes the most sense in moving forward with their mortgages, and mortgage holders and servicing companies are now suffering. Value is hurting ratios, and this in turn is disqualifying borrowers from approval based on loan to value (LTV). Owning a home worth far less than what the customer is paying for it just does not make sense. For example, a customer buys a car and the next day the car company goes out of business. What would they think about making the payments knowing that due to financial instability they are no longer honoring the warranties? People would return the car to the dealership where it was purchased. It does not make sense to pay for something if it is only going to be treated as a one-sided issue of a two-sided contract.
Owing more than the home is worth is another factor involving home values in America. Many financial advisors with experience in the housing market have stated that a new trend for even the wealthiest of people is strategic foreclosure. This simply means it makes more sense to walk away and take a hit on the credit grade than to pay for something that is not worth the value anymore. There are people walking away from their homes that just a few short years ago had built plenty of equity, but who now are back to square one.
A prime example of what being “upside down” means in the housing market, and what many homeowners are using as their main reason to walk away, would be when a home valued at 250,000 in 2007, is currently appraised at 150,000 in 2010, effectively destroying any equity the owner had accrued in the three years of payment. “Though the United States home values have dropped for the 10th consecutive quarter, homeowners in some parts of the nation are seeing prices appreciating.” America’s Best and Worst Housing Markets, Forbes staff (08.11.09)
Taking all accounts to a current rate could eliminate this problem. Ethical rate reduction is imperative; lenders must take care of current borrowers with perfect mortgage history, and eliminate one sided rate distribution. Standardizing interest rates is something that could help Main Street, and would force institutions to treat customers as people, not numbers when dealing with current market rates and existing relationships. Interest rates should be under the control of the Federal Reserve, and there needs to be a standard for primary residences in America. This would give a person the option to cut out the middleman when buying a primary residence, and could be a great option for primary living interest rates in America.
A book of five percent rates is better than a book of seven percent delinquencies. Customer intimacy is missing in the lending system. People feel disgust and distrust with institutions that bear large financial relationships with customers only to treat them with disrespect once they are in the mortgage pool. Institutions should treat these existing relationships with dignity and respect considering some, if not a large handful, have perfect payment history. Lenders are now coming up with new excuses like debt to income (DTI), and with full knowledge that these new factors disqualify current existing customers from a current market rate. For example, if a customer could potentially save 300 dollars a month while paying 250 dollars more into the principal by refinancing, why would this not be a benefit to both the lender and the borrower? The borrower saves money and the lender is paid off faster, yet lenders have the option to make the excuse that the borrower does not qualify. If you have a history and are on time, why would a lender not give an existing customer a current market rate? This seems to be a logical but unforeseen solution that every lender should take into consideration. It could help to make a difference for the very same people who propped them up as taxpayers by treating their customers the same way the Federal Government treats the big banks; with honesty and transparency.
A solution for the homeowner and the nation would be the implementation of a federal reserve bank for primary homeowners in America. This would give primary residence borrowers a chance to play on an even lending field. This would enable a controlled solution to an ungoverned problem. Implementing a federal reserve for American primary borrowers would cut out the middleman and make buying in America more affordable and based on true growth, not inflation from Wall Street.
These issues will affect the dreams of millions, and only their successful resolution can guarantee the market returning to a place where once again homeownership is a realistic goal for the average American. The factors and solutions discussed here are but simplifications of the overarching challenges faced by the nation’s housing market. A modern economy is not a static entity, and therefore must adapt and change in order to guarantee its future. These changes, in the form of regulation, are even today becoming reality.
United States Department of Housing and Urban Development (18 May 2009) (Para. 1)
Americas Best and Worst Housing Markets
Forbes staff (08.11.09) (Para. 1)
From: http://www.forbes.com/2009/08/10/property-values-homes-lifestyle-real-estate- best-worst-cities.html