Vanilla Loans Expected To Help Borrowers

Subprime lending activities triggered the ongoing recession. The liquidity crunch has left consumers in a financial frenzy. The Obama Administration came to the rescue of several homeowners when the mortgage market was in doldrums. However, the stringent criteria for qualifying for the mortgage prevented many from availing the mortgage bailout program also referred to as the Making Home Affordable Plan. It was expected that the program would help as many as 4 million to 5 million homeowners from losing their homes. Reports suggest that as of June, only 50,000 homeowners had been offered the loan modification program. There is another snag too. It is at the discretion of the lenders to join the loan modification program. So, not all lenders are willing to modify the terms of the mortgages. Several homeowners have fallen behind on payments owing to irregularities in subprime lending.

The lenders have become exceedingly cautious thereafter. To simplify the process of taking out mortgages, the government has introduced the “Vanilla loans”. Vanilla loans are the traditional 30 year fixed mortgage loans that will be offered to the homeowners by “default” unless they want to opt for the riskier ones. In case borrowers prefer to go with the riskier loans, the same will be made available to them. However, the borrowers will also be informed about the risks that are associated with the same.

The main aim of offering these vanilla loans is to protect borrowers from high risk loans that often have very complex terms and conditions that the borrowers are not aware of. It is also observed that due to the ignorant nature of borrowers, many of have them are unable to continue with their monthly mortgage payments, which eventually leads to delinquencies and foreclosures.

Obama’s proposal of vanilla loans was not accepted “unanimously”. Many are of the opinion that this kind of action is very “Un-American”. Financial experts are of the opinion that this will eventually regulate the mortgage markets as in Germany and France where consumers have very little options to avail in the mortgage market.

Obama’s vanilla loan proposal is being strongly opposed by several mortgage brokers who were enjoying more commission for selling adjustable-rate mortgages.