After the federal bailout of mortgage giants Fannie Mae and Freddie Mac, the government is planning to buy billions worth of troubled mortgages along with other illiquid assets from banks to avoid a financial meltdown.
According to the government plan, the Treasury Department will buy illiquid assets—assets that cannot be easily converted to cash—from banks to stabilize the financial market. These include toxic mortgages or bad housing loans that caused a cave in in the housing market, which over time, contributed to the collapse of prominent banks.
When banks have a lot of bad loans in their hands, it basically means that they are holding liabilities instead of assets. These ‘assets’ are not worth much because they don’t hold enough value—they can’t be turned to cash (or liquidated) without difficulty. Simply put, these institutions don’t have enough money they can use to make loans. This is the reason why some banks are making it difficult for borrowers to get a mortgage.
The government sees the need to take the financial burden off troubled banks. Once the $700 billion budget gets approved, the government will try to buy bad mortgages at discount prices from banks so that they can resume making more loans and help jumpstart the recovery of the housing market. This would make it easier for you to get more affordable mortgages and buy a house in the future. You could also get help with loan modification and a possible reduction in interest rate on your loan balance.
The federal rescue could also revive investor confidence in the financial market. As a matter of fact, the stock market improved after plans for the government rescue was announced.
Treasury Secretary Henry Paulson is working on getting the plan approved by Congress as soon as possible.
It looks like taxpayers won’t have to worry about shouldering the cost of a federal rescue for Fannie Mae and Freddie Mac, because it may not be necessary.
Shares of both financial institutions rose last week—an indication that they can survive the housing storm without financial assistance from the government. Fannie rose 43 cents while Freddie went up to 68 cents. Both government-sponsored enterprises appear to have enough money to cover billions of losses caused by troubled mortgages. This is also a positive sign that the housing market is slowly stabilizing. Incidentally, homebuyers are starting to show interest in purchasing homes. As a matter of fact, there was an increase in the number of new home sales last July. More home sales are expected in September and October because of low prices.
The Mortgage Bankers Association also reports an increase in mortgage applications last week. The 7.5 percent increase shows that more people are trying to purchase homes. Home purchase applications increased 10.5 percent, while refinance applications jumped 2.1 percent.
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If you are interested in applying for a mortgage loan but feel like your credit history would make it hard for you to get approved, don’t fall prey to brokers and loan officers who claim that they can get you a good deal.
Mortgage fraud has increased rapidly along with the ailing housing crisis. Between the latter part of 2007 and the first three months this year, mortgage scams have climbed 42 percent, according to industry sources. Fraudulent mortgage brokers and loan officers dupe borrowers and lenders into getting mortgage loans approved.
They do this by changing financial information in application forms (employment description, income, financial assets) to make it appear as if the borrower has a very good credit standing. They resort to different schemes to fool lenders by using someone else’s personal information. Some would even go as far as paying someone with good credit history in exchange for his or her financial information.
It’s surprising that despite the stricter lending procedures we have today, there are still those who manage to do this. In hindsight, these measures could’ve contributed to the rise in scams because more people can’t qualify for loans. Brokers and loan officers, who earn by commission each time a client gets approved, do everything they can to land a successful deal, including cheating.
Identity theft is one of the crimes committed by scammers. In fact, it makes up 6 percent of the fraud cases in Illinois, which has third highest number of mortgage frauds in the country.
In order to avoid becoming a scam victim, you must first know how these guys operate. That way, you’ll know when a scam is unfolding right before your very eyes. You must take care not to let anyone have access to your personal and financial information like your Social Security number, credit card and bank account numbers. Don’t disclose information over the phone and avoid clicking on links inside emails sent to you. Most of the times, these links would ask you to “click here” to verify your information. It also helps if you can shred or burn important financial documents to protect yourselves from these scams.
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