First of all, what is a mortgage bailout? Well, if you have a mortgage and can no longer afford it or if you have a mortgage from a company that can no longer afford, you could be entitled to help from the government to pay it. It can come in the form of a financial payout to your bank or in the form of rewriting mortgages.
The problem with bailouts is they reward people that have made bad decisions, both lenders and borrowers. People saw it as a bill that rewarded debtors at the expense of savers, who funded the bailout with their tax money. The giant bailout of 2008 occurred when the market lost confidence in mortgage finance major Freddie Mac and sister company Fannie Mae, and all of their investors refused to support them. The government stepped in to avoid worsening the housing market in the US.
The government described the bailout as entirely “necessary” but also as an extremely “expensive action for taxpayers”. It was estimated before the bailout that it would cost $50 billion to supplement the losses of the two companies. However, the final amount was in fact well over $100 billion in excesses, from US taxpayers money, for each company to cover their future losses.
Some Home Owners Were Able to Sell Before The Housing Crisis Peaked
Not all home owners needed a bailout from the Federal government, there were actually many people that had a mortgage that were not underwater, and some of these home owners also didn’t have a long-term lease in place. Sellers in this exact predicament saw housing prices dropping steadily month over month and must have known that anyone looking to sell a house fast, would need to do it quickly before it either went into foreclosure, or they lost equity that they didn’t need to loose…and that’s what many home owners did.
How did this affect the housing market and its renters?
As interest rates on mortgages rose, renters did not get any direct help from the bailout, instead they had to contribute to paying back the bad mortgage debt, deplete their savings, and therefore the possibility of buying their own home.
Renters, who are often on low incomes, therefore received no help and instead paid for the bailout. They were not considered in the bailout bill. Banks benefited – while they have lost money they are in a much better situation now than they would have been without the bailout. Homeowners mostly benefited – despite not being able to afford their loan, most of them were able to stay in their homes. However, houses prices fell and homeowners lost equity on their homes at the beginning.
Renters were not only footing the bill, but the government also come up with a plan to cut a stream of funding dedicated to low-income renters, and use it to fund the bailout. The only positive outcome at the time is if you were a renter facing eviction due to foreclosure of your landlord, the bailout bill ensured you would keep your home and rental agreement.
Mortgages becoming more affordable for Renters
Now in 2015, both Freddie and Fannie have launched new products to give first time buyers mortgages with as little as a 3% deposit. Could this be the turning point for renters in enabling them to finance their own homes? Possibly. As professional real estate investors, we usually buy properties with cash, because when we close transactions with cash, we are not contained by lender requirements and contract contingencies. With that said, we are always motivated to close quicker and move on to the next opportunity, when good financing is available to us. With Freddie and Fannie making the move, it could encourage other lenders to reduce their prices and make mortgages more affordable for renters, thereby enticing them to make the move and actually purchase a home.
A Federal Reserve report confirmed that 45% of renters were unable to afford to buy a home, largely because of the huge down payment required. Since 2008, rental rates have increased at a faster pace than house prices, this is due to the housing crash and federal bailout. However, since the bailout there has been an increased confidence in the market – a sign that economy is recovering and the housing market is much more stable. This is a positive for renters, who, despite paying high rents, may now be able to afford to make a down payment on a mortgage and buy their own property.