Periodically, I have blogged concerning the various mortgage types that led to foreclosure problems over the past two years, especially in the USA. As we enter 2010, there will be thousands of "orphaned mortgages" coming out of the wood work in North America and elsewhere where secondary mortgage companies accepted customers with poor credit ratings during the previous boom (or bust!). People who couldn't acquire mortgages through the traditional, regulated financial institutions due to credit scores and/or downpayment resources, were enticed by last resort options from mortgage companies. These transactions were generally handled by aggressive mortgage brokers. To obtain the mortgages consumers had to pay considerably higher rates of interest than those quoted by the primary lenders, plus hefty upfront fees. In the boom period the mortgage companies could securitize any amount of these mortgages at enticing rates for investors and sizeable placement fees to investment bankers.
The people who obtained these mortgages in hopes to have a home before the market was totally out of reach, may have maintained their weekly, bi-weekly or monthly mortgage payments and residential taxes
from the beginning but are now at risk of foreclosure because the mortgage companies do not have the previous sources available to raise the funds on the market or through primary lenders. Also,the home owners will no doubt find that the outstanding balances are similar to the original amount or even higher. The question is simple,"who will now hold these mortgages in their present state and with the borrowers historical credit scores?" Will they all forfeit their homes by the thousands in the months ahead?
Governments and the financial industry have a socioeconomic challenge that must be resolved correctly.
A "Buyer beware" defense holds little reality when brokers and the mortgage companies where aggressively promoting that everyone could have a home regardless of their credit rating and then failed to educate their clients on future financial dangers. We can not hide behind, "we are studying the situation". The conditions have been in inventories for sometime, especially once the ABCP market dried -up. The time to respond is now before it is too late for thousands of hardworking families who did not default on their obligations but could be faced with foreclosures.
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