A Letter to John McCain in Regards to the Current Mortgage Crisis

Dear Mr. McCain,

I cannot help but express my deepest sympathies to you regarding your loss of touch with the average American. But then again, you are a republican.

For a long time, I have considered myself republican, as the belief of people taking care of themselves and protecting our country have always been a top concern. People who make a career out of being on welfare and illegal immigrants (sorry, undocumented aliens) having driver’s licenses drive me to the point of insanity. The environment, while on everyone’s mind for the future, just isn’t as high on my list as Al Gore would like it to be. If we’re being bombed with nukes via Iran, the environment won’t be worth a dime on anyone’s watch.

But I must say that I’ve absolutely had it with the republican stance on “big business”- Corporate America, if you would. Why is it that you would be more than willing to bail out the banking and mortgage industries when they fall, but refuse to help the average homeowner for making a mortgage “bad decision”?

Let me tell you something you may not realize. To the average American citizen, $8,000 is a lot of money.

Why am I telling you this? Because that’s the average pre-payment penalty if a mortgage is paid off (typically by refinancing with another lender or winning the lottery) too soon. Adjustable rate mortgages can initially save a family a few hundred dollars a month (again, that’s a lot of money to the average American). Unfortunately, a pre-payment penalty is usually part of the bargain, whether the loan has an ARM or not. This ensures that the lender makes a specific amount of money off of its customers, because the “lender fee” isn’t enough. In most cases, the pre-payment penalty is simply added to the refinanced mortgage balance, thus increasing the financed amount. A select few states, like Massachusetts, have law against such penalties.

Here are two of the problems. Many homeowners were mislead into thinking that either:
a) Their credit would improve by the time the ARM adjusted, thus allowing them to refinance into a better rate mortgage down the line. Or
b) When the ARM adjusted, their property value would increase to a level that would allow them to get into a better loan program.

Now remember, if a homeowner refinances too early, they get stuck with paying a prepayment penalty that currently averages $8,000. Again, $8,000 is a lot of money.

Homeowners are now “trapped” in a mortgage- stuck between the proverbial rock and hard place. If they don’t refinance, their property value will drop, thus making it impossible for them to get a loan for more than their property is worth. If they do refinance their current mortgage (and are lucky enough to NOT have their property value drop below their mortgage balance), they have to add (or pay straight out) to their new note an average of $8,000 in prepayment penalties to their new mortgage note.

I don’t know if you know this, but $8,000 is a lot of money.
So, instead of helping those homeowners that are currently (or about to be in) dire straits, you choose to not. Let’s see where this goes, shall we?

Let’s say that there are 25 homes (not houses, as real people live in their homes) in a given neighborhood with an average value of $250,000 in 2006. All but one of these homeowners is intelligent, hard-working average Americans that have a mortgage balance of $180,000. These folks each have home equity of $70,000. (By the way, $70,000 is a wicked lot of money to the average American.) One of these homeowners got in a bit over their head and has a mortgage balance of $245,000.

Now, only 2 of the above homes have adjustable rate mortgages, one of which is set to expire in two months, and the other is the family with the $245,000 note, not expiring for a year. This average family with the $245,000 loan will never be able to refinance their home due to the prepayment penalty- as the $8,000 prepayment penalty and average $6,000 in closing costs will set their refinancing needs to $259,000. Getting a home loan for that amount of money on a home not worth is exceeds the majority of LTV (Loan-to-Value) standards of most lenders. This home, most likely, will be foreclosed on in a year if not sooner, as the family sees the declining housing market and gives up hope.

The second family (with the $180,000 note) has miraculously paid all of their bills on time, even with the rising prices of automotive fuel, home heating oil, food, clothing and everything else that goes along with the “Average American Family” within the past two years. But three years ago, the man of the family lost his job and the couples credit had taken a jolt. When they refinanced their home two years ago, they were informed by the mortgage lender that as long as their bills were paid on time, their credit scores would increase, thus qualifying them for a lower rate and monthly payment.

Let’s also say that both of these families tried to do the right thing and sell their homes, but due to the tumbling housing market, were unsuccessful in their attempts.

As this family begins the long, tedious refinancing process, they realize that their home’s value has dropped from $250,000 to $215,000. Their mortgage payment, currently $1500 per month, will increase to $2200 per month when their ARM resets in two months. They are looking to acquire a loan for $186,000 (to include the closing costs) on a $215,000 home, leaving just $20,000 in equity. Their unfavorable credit from 2 years ago is still showing up on their reports and reflecting on their credit score and they are now a “credit risk” for potential lenders. What do you think will happen?

So now, this average American neighborhood has 2 foreclosed homes. All of the neighbors begin a slight panic, as they are concerned about the values of their homes becoming non-existent. 2 more homes go up for sale to alleviate a bit of panic and to attempt to relocate from the need for costly home heating fuel.

The lenders now own the foreclosed homes, and there is no one living in them. The lender’s want to sell these homes quickly, as they already spent a lot of corporate funds on the foreclosure, never mind the maintenance and upkeep of said properties.

Now here’s where it gets tricky. You are backing a program that helps those who are looking to buy a home, whether it’s to actually live in or to turn around and sell at a profit, if they choose a foreclosed upon home instead of one on the market privately. $50,000 is the latest buzz.

My question to you Mr. McCain is this: Whom would this $50,000 incentive help? It won’t help the people who had their homes foreclosed upon. It won’t help the other 2 families in the neighborhood to sell their homes- I know I’d choose a home that I could get $50,000 to buy over one that has no incentive. How are the homeowners who are simply trying to sell their homes supposed to compete with this? Are they supposed to drop the price of their home $50,000? Mr. McCain, $50,000 is really a lot of money to the Average American.

I can tell you right now whom the $50,000 incentive would help. It would help the banking and mortgage industries that are losing money because they have to sit on these properties. Corporate America- that’s who you want to help.

Besides all of the above being the absolute truth and going on right now in my small-town (5,200 residents), New Hampshire neighborhood, I myself am feeling the squeeze of the mortgage crisis. Property values are plummeting, Mr. McCain.

Its been said time and time again that the majority of one’s wealth is obtained in their home. People rely on their home equity to help them in the event of a financial emergency or need, like college tuition for their children. With your backing of this program instead of Senator Chris Dodd’s (D-CT) proposal to fund a national housing program that would actually generate a profit and finance itself in just a few years, you’ve obviously showed us where your true heart lies- with Corporate America.

Mr. McCain, you have lost my vote. Obviously you have no idea what it’s like to be an average American in which $8,000 is a lot of money.

Lisa M. Laprade

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