President Obama Hopes to Create Government Approved Mortgages

June 22nd, 2009 by Reed Allmand

According to an article in the Star-Telegram, President Obama wants to create a package of government approved loans that will present less risk and confusion for borrowers and possibly prevent another foreclosure crisis.

The article said:

“If the Obama plan for simplifying the mortgage process is approved, here’s how it might work:

The government would give its seal of approval to a handful of mortgage types – a standard 30-year fixed-rate mortgage and perhaps a few varieties of adjustable-rate loans. For a loan to get the “vanilla” label, the lender would have to verify borrowers’ income and have them set aside money for property tax and insurance. Borrowers would still be able to get mortgages that don’t pass the government’s vanilla test. But they would be warned about the risks.”

Many mortgage brokers are opposed to government approved mortgages and they aren’t fully convinced that the government approved mortgage plan will prevent a future foreclosure crisis. Some mortgage brokers claim that instead of preventing foreclosures, President Obama’s mortgage plan may make mortgages more difficult to get and more expensive. And of course, mortgage brokers fear that their fees, which is how they make their money, will be negatively impacted by such restrictions on mortgage types.

It’s possible that the new mortgage plan could help to reduce the number of foreclosures in the future. One of the principal causes of the current foreclosure crisis is that many homeowners did not understand their mortgage agreements and were caught by surprise when their mortgage payment increased significantly due to resetting APRs. If homeowners are given safer options and warned that riskier loans could make them vulnerable to foreclosure, we may be able to prevent a future foreclosure crisis.