Countrywide Financial (CFC), the now infamous home mortgage division of Bank of America and at one time the largest lender of home loans in America, may launch the most aggressive plan yet to stem the tide of home mortgage foreclosures. The mortgage modification plan is the result of a multi-state lawsuit that charges that Countrywide duped first time mortgage buyers into taking on loans that were beyond their means.
The details of the plan call for a reduction of interest rates aimed at borrowers of sub prime and adjustable rate mortgages (ARM’s). Interest rates could be cut to as low as 2.5% for some borrowers, although the cuts would be temporary. The idea is to decrease mortgage payments so that the total payment does not exceed 34% of a borrowers income, which is the approximate percentage that reputable lenders use to determine a persons eligibility for a home loan. Had Countrywide and other sleazy lenders used this formula to begin with, the mortgage crisis would have never happened.
In addition to cutting interest rates for distressed home buyers, Countrywide will freeze foreclosures until borrowers mortgages can be evaluated and readjusted. All legal proceedings against Countrywide will be suspended until March 1, 2009 provided they meet the goal of adjusting 50,000 mortgages. The final objective is to reduce 395,000 loans in states hardest hit by the sub prime crisis including California, Illinois, and Florida.
This will be the most aggressive and possibly the most effective plan to address the mortgage crisis to date. Key lawmakers are putting the pressure on other lenders to adopt the program since recent efforts by the Bush administration have done little but reward the irresponsible behavior that created the problems in the first place.
This is a question being asked this week as we witness one of the most dramatic downturns in US economic history. But are we on the verge of another great depression? Economist Robert J. Samuelson says “œnot even close” in his column appearing in the October 13 issue of Newsweek.
Samuelson states that economic downturns hardly ever evolve into national tragedies. In fact, the US has been through 10 recessions since the late 40’s. While they did have a very real effect on the economy and of the people living through them, they actually only lasted for an average of 10 months. The two worst were from 73 to 75 and in 81 to 82. Both lasted 16 months and unemployment rates peaked at nearly 11%, well above the average for the other recessions of 7.5% and of the current rate of 6%.
Coinciding with the number of recessions over the last 60 years are the number of bear markets. Since WWII the number of bear markets has also been 10. A bear market is one in which the S&P Index declines at least 20% from the most recent peak. The average of all post war bears was just over 31% . The .com crash of the nineties witnessed a fall of over 50% and last week the market was down 30% from one year ago.
Compare all of this to the Great Depression, where the market lost a whopping 90% of its value resulting in nearly a decade of hard times. Most economist agree that this is not likely in today’s environment where the Federal Reserve is actively injecting funds into the finance sector, unlike the Federal Reserve of 1929 that did relatively nothing to prevent the collapse of the US economy.