Banks and borrowers face many issues related to mortgages, but one pervasive problem is little understood by investors.
Prior to the collapse in housing, the mortgage industry had developed many new kinds of residential mortgages that were not a part of the government-sponsored or guaranteed programs but were also not subprime.
These programs offered payment and term schedules that were not part of the standard government programs. Many borrowers opted to use these loan programs, even if they had the credit to qualify for a Fannie Mae, Freddie Mac, FHA or VA loan, because these loans were in many cases less expensive, with lower interest rates and payments and less paperwork than the government programs.
This group also included many borrowers who had what were at the time considered jumbo loans.
When the subprime housing market collapsed, these loans disappeared, because the secondary market for mortgage bonds backed by non-government-supported mortgages disappeared.
Before the housing crash and the effective nationalization of the U.S. mortgage market, the loan limits for FHA, VA and Fannie and Freddie loans were much lower than they are today.
In 2000 the Fannie/Freddie loan limit for single-family dwellings for most of the country was $252,700, and it increased each year by about $23,000, reaching $417,000 in 2006. It stayed at the $417,000 level until 2008, when it was increased dramatically to $729,750.
The FHA/VA loan limits were a bit different but were also much lower than they were during the post-2008 crisis, when they were raised dramatically.
Since 2008, the government has introduced 12 different loan modification programs, and the Fed has dragged mortgage rates down.
The problem for borrowers who used non-government-supported loans is that if they are in a negative equity situation, they are ineligible to modify their loans or to refinance into a government-sponsored mortgage.
A borrower who purchased a home in 2005 for $400,000, put 10% down and borrowed $360,000 on a first trust mortgage would have been ineligible for a government-sponsored or guaranteed loan. The market rates at the time for such a loan were in the 6.5% range.
The value of that home today is probably closer to $300,000, meaning the borrower is in a negative equity situation and ineligible to refinance or modify.
This is not a marginal situation; it represents an enormous portion of the existing pool of mortgagors who have been left with no recourse to access the Fed-managed lower rates or government-sponsored modification programs.
The largest impact of the loan modification programs and lower rates engineered by the Fed has accrued to borrowers who purchased after housing prices began to fall and the non-government loan programs were no longer available for new purchases.
For the most part, though, these are not the mortgagors who were negatively affected by the collapse in housing. Nor are they the ones most in need of assistance.
The people getting the assistance are the ones who purchased a home in 2008 for $800,000 and used a Fannie/Freddie loan with the new higher loan limits and have now serially refinanced probably two or three times.
The bottom line is that the assistance being provided by the federal government and Federal Reserve is largely being allocated to those who are least in need of it.
And yet there is still no discussion of this issue by Congress and no pending legislation to address it.