Tuesday, December 11, 2007

Fed Cuts - It's Only a Band-Aid

Many people believe that the government shouldn't get too involved in bailing out the mortgage loan industry. After all, they sort of brought it on themselves. Some want promises of further rate cuts or infusions of cash from the Fed. Increasing, more experts are pointing to alternative options to the way that we Americans generally view mortgage lending. One item of interest is shared-appreciation mortgages. According to Boston.com:

These mortgages, which are relatively rare in the United States but more common in the United Kingdom, offer lower interest rates in exchange for some of the upside potential on the house. For example, a lender might offer a 6 percent interest rate instead of an 8 percent rate, in exchange for 50 percent of the increase in the value of the house at the time of eventual sale.

This will be very "out of the box" to the typical American home mortgage borrowers. After all, it's all about ownership. But there are definite advantages. The main advantage is that you might be able to get a second mortgage home loan (which are getting more and more difficult to come by) to refinance out of the awful loan that put you in danger of foreclosure. And you still get part of the increase in the value. It's not as thought the mortgage lender gets 50% of the total value; only a portion of the increase is at stake.

A change in the lending industry is definitely needed. Government intervention will only work for so long. If fundamental changes aren't made, then we'll be back here again in another 10-15 years.

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