Subprime Mortgages and the Dilemma of Renegotiation - Essay Example

Section/# Subprime Mortgages and the Dilemma of Renegotiation The recent collapse of the real e bubble has caused many homeowners/borrowers to find themselves in exceedingly unfavorable situations with respect to their homes, how much they are valued at, how much they still owe towards their mortgage, and the high interest rates they have locked themselves into when agreeing to purchase the home. The issue is further compounded by the fact that during the lead up to the housing collapse a host of legislation, not the least of which was Dodd-Frank, was forced upon lenders as a means to ensure free and fair access to homebuyer credit to nearly all prospective homebuyers, regardless of the financial ability or income level. These compound problems have worked to create a situation in which many homeowners have found themselves holding on to high interest rate mortgages for homes that are worth less than they owe to pay off their mortgage. Such a situation is known as an “underwater” mortgage. Due to the fact that different political parties have sought to take advantage of this misfortune by seeking to capitalize on the rhetoric surrounding the issues as a way to drum up support for a given candidate, the problem has been exacerbated as the federal government has furtively toyed with different types of interventions only to do little if anything to ameliorate the root problem. Thus, this brief essay will consider whether homeowners with subprime mortgages should be allowed to force their lenders to renegotiate their terms. The answer to the question is somewhat more complex than a simple ‘yes’ or ‘no’. From a purely economic point of view, the individuals who agreed on the home loans at the bank’s terms and conditions have entered into a legally binding contract that they had every opportunity to review and seek to understand prior to signing on the dotted line. In this way, a degree of culpability must be accepted by those mortgage holders that initially accepted the terms and conditions, regardless of whether they were too lazy to take the time to read and fully understand them (Richardson 87). From the bank’s point of view, much of the problems associated with the high number of subprime mortgages that had to be completed were a result of the unnatural legislation (Dodd-Frank) that was forced upon the banks as a means to fulfill a certain type of quota with reference to those within society that would otherwise never be able to afford or quality to purchase/borrow a house of their own (LaCour-Little et al. 88). In this way, it is impossible to blame the entire situation on the financial institutions themselves as the government had a heavy role in creating such a crisis in the first place. From the individual borrower’s point of view, the banks instituted extraordinarily high interest rates due to the fact that they considered these subprime borrowers to be of an extreme default risk (Hill 49). In a way, these extremely high rates were nearly self-fulfilling prophecies due to the fact that as soon as the economy began to cool, the first individuals that were going to feel the crunch were necessarily those that had borrowed to the max and were going to have hardship making sure that their high interest rate mortgage is paid every month. One might rightly question why it should be incumbent upon the financial institution to renegotiate a signed and legally binding contract that has already been agreed upon with a terms of either 15-30 years. The answer to such a question can actually be found outside of forcing the financial institution to renegotiate the loan terms (An et al. 546). As such, a litany of refinancing offers exists for qualified individuals. Those rates that were common during the early 2000’s have dropped to record lows within the past several years. The issue with such refinancing offers is that they invariably require a large amount of start up costs associated with actually changing the loan from one lender to another. Similarly, if the borrower was a high risk in the first place, it is doubtful how much of a strategic advantage a borrower could achieve by merely flipping the loan originator from one financial institution to another in such a case. It should of course be said that the loan originator and/or the financial institution should be responsible for any illegalities that may have been experienced in seeking to qualify an otherwise unqualified person for a home mortgage. Although Dodd-Frank and other bills were at least partly responsible, it was also incumbent upon the financial institution to ensure that they followed all rules that have been set forth by the financial oversight bodies with relation to such a policy (Amromin and Paulson 19). It has been noted in several instances concerning the financial institutions making an effort to meet quotas and fulfill the requirements of the law. Similarly, it is the view of the author that due to the extenuating circumstances that help to define the real estate bubble and the causations that helped to bring it about, it is summarily unfair to require financial institutions to renegotiate legal/binding contracts merely due to the inability of the contract holders to abide by their terms. In this way, one can quickly extrapolate such a situation to extend far beyond home loans and even into car loans or personal loans where the borrower could then by right of precedent demand that all such contracts be re-negotiated based on the ability of the contract holder to pay. Furthermore, such a system necessarily removes the incentive of the lender to provide such a contract. Both parties understand what is being taken and what is being given in a situation in which a home loan is taken. Furthermore, if it is necessary to renege on such a loan, the penalties are expressly noted to the borrower in that their collateral or property will become property of the financial institution in the event that they are not able to live up to the terms of the initial agreement. Likewise, seeking to radically redefine the methods by which mortgage holders would be allowed to re-engage with their lender in order to force them to provide a change to the original terms that both parites have agreed upon would only serve to introduce a level of disruption and confusion into the process. Rather, it is the belief of this author that although many wrongdoings have been made on nearly every level of what has led to the sub-prime mortgage bubble, undoing the way in which contract law currently binds the participants to holding up their respective side of the agreement would only serve to further weaken a system that already has been severely weakened. Furthermore, understanding the way in which the lending markets seek to define the economic growth and development of the nation can only further help to prove to the observer that such a fundamental change would have unwarranted/secondary effects to an already weakened and ailing economic system as is currently exhibited. In this way, it is the belief of this author that the best way to correct to the injustices that have been wrought is to ensure that no laws have been broken. Naturally, if it is determined that they have been then prior and existing contract law is adequate to release the borrowers from an obligation they may have to the lenders. In this way, the situation can be resolved without categorically weakending the financial system to a further degree or allowing individuals to profit from prior foolish mistakes that have been made on their part. Works Cited Amromin, Gene, and Anna L. Paulson. "Comparing Patterns Of Default Among Prime And Subprime Mortgages." Economic Perspectives 33.2 (2009): 18-37. Business Source Premier. Web. 16 Nov. 2012. An, Xudong,  Deng, Yongheng,  Rosenblatt, Eric and Vincent Yao. "Model Stability And The Subprime Mortgage Crisis." Journal Of Real Estate Finance & Economics 45.3 (2012): 545-568. Business Source Premier. Web. 16 Nov. 2012. Hill, Claire A. "Why Didn't Subprime Investors Demand A (Much Larger) Lemons Premium?" Law & Contemporary Problems 74.2 (2011): 47-62. Academic Search Complete. Web. 16 Nov. 2012. LaCour-Little, Michael, Calhoun, Charles A., and Wei Yu. "What Role Did Piggyback Lending Play In The Housing Bubble And Mortgage Collapse?" Journal Of Housing Economics 20.2 (2011): 81-100. Business Source Premier. Web. 16 Nov. 2012. Richardson, Matthew. "Regulating Wall Street: The Dodd-Frank Act." Economic Perspectives 3 (2012): 85-97. Business Source Premier. Web. 16 Nov. 2012. Read More