Subprime Loan Mess Cannot Be Easily Fixed
It seems getting relief from subprime loans needs a lot of effort. One probable solution might be to restructure high risk subprime loans. In a Congressional hearing, several legislators, activists, lawmakers and real estate professionals have advocated for providing relief to borrowers by modifying these loans. These modifications involve negation of late payment penalties, removing adjustable rate interest and adding late payments towards the end of loan term.
Since subprime loans are securitized and then sold into the financial markets, implementation of any type of modifications is a difficult task. According to Sheila Bair, who is the chairman of Federal Deposit Insurance Corporation, almost 75 percent of subprime loans that have been extended during 2004-05 have been sold into secondary market. In these situations, mortgage service companies can offer very little help whenever any borrower fails to make his payments.
Apart from the above, there are various other problems that are involved. Often service providers would not have any information about the organization that has given the loan. Usually foreign investors buy these securitized loans from the mortgage company. The terms involved in the contract between the investor and the service provider proves to be the biggest hurdle in providing any help to the borrower. According to Marietta Rodriguez, who is the director of Homeowners Initiatives for NeighborWorks, the contracts permit any changes or discussions only if the borrower has made his current payment.
According to George Miller, who is the executive director of the American Securitization Forum, foreclosing a loan is an expensive transaction that can cost an investor around $60,000. He believes that the agreements between the service provider and the investor must be flexible so that the borrower and the investor can benefit.
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