Avoiding Another Mortgage Meltdown

It's easy for Democrats to portray America's subprime loan crisis as a massive failure by a Republican led government and now 2 million American families could be about to lose their homes.

Perhaps democrats have a point.  Many borrowers were confused and deceived by the tactics used to sell subprime loans.  Largely unregulated mortgage brokers falsified borrowers' incomes, reaped steep commissions for steering them into unnecessarily costly loans, and misled them about the true cost of borrowing.  Homeowners ignored the risks they were taking; government neglected its duty to warn them.  There was a failure of individual responsibility but, much more than that, a failure of minimalist regulation.

Congressman Barney Frank, Democratic chairman of the powerful House financial services committee, recently introduced a bill that could help prevent a repeat performance.

The bill would eliminate some of the perverse incentives that warped the market for such loans.  Mortgage originators would have a "duty of care" to make only those loans a borrower has a "reasonable ability" to repay.  The bill would ban the bonus fees paid to brokers for putting borrowers in overly expensive loans.

Homeowners would be able to sue over improper loans, but investors who buy securitised mortgages would not be liable.  The bill bars costly class actions and excessive damages, and offers a safe harbour from liability for loans that meet certain criteria.

This is a good first step towards responsible regulation.  Pretending government has no role in the crisis is simply irresponsible.

What role do you think government should take in preventing another mortgage meltdown and foreclosure crisis in the future?  We'd love to hear your opinion.  Use the comment link below to tell us what you think.  Your email address, although needed to send us your comment, will NOT be posted with your comment.  We respect your privacy and do not publish anyone's email address here.  We look forward to hearing your comments.

Making Extra Payments

The concept of debt reduction and making extra payments have been around for quite some time.  Several financial planners and gurus teach this method.  Debt "rolldown" is the idea of using your extra money to paydown your smallest debt first, and then using the money you were spending on that debt to paydown your next biggest debt, etc.

Many disagree with this concept for several reasons.  First, when you begin making extra payments, you never have access to those funds again.  You can’t call the credit card company and say “I need the extra payment back because the transmission just went out on my car!”

Secondly, these plans usually recommend not to use any credit cards.  Credit cards can actually be a tremeandous tool if used correctly.  The problem of course is most poeple use credit cards the wrong way and carry a balance and incur interest charges month after month.  It takes alot of discipline and hard work to follow an extra payment plan.  It’s very important to have an emergency fund!  With extra payment plans you're trying to use every spare penny you have to pay-down your debts.  This doesn't allow any flexibility in case something unexpected comes up. 

When you stop and think about how you manage your money you'll find you're helping the bank but may be hurting yourself.

Have an opinion on making extra payments in regards to this article?  We'd love to hear your comment.  Just click the comment link and tell us what you think.