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Government's Poor Judgment Making Things Worse
by Robert Franco | 2008/03/05 |

There is an interesting New York Times article, Bush and Fed Step Toward a Mortgage Rescue, that describes what appears to me to be a series of bad moves that will threaten the viability of Freddie Mac, Fannie Mae, and the FHA. If the question is "What are we going to do with all of the bad mortgages out there?" Well, the governments answer seems to be "We'll take 'em." The private sector got themselves into trouble making bad loans - having the government buy them up seems to be an exercise of incredibly poor judgment.

He (Bernanke) also suggested that the Federal Housing Administration expand its insurance program to let more people switch from expensive subprime mortgages to federally insured loans.

And he urged the two government-sponsored mortgage companies, Fannie Mae and Freddie Mac, to raise more capital so they could buy more mortgages. The companies already guarantee or hold as investments about $1.5 trillion in mortgages.

What is the logic here? These mortgage are the ones that caused this whole mess - making them federally insured isn't likely to make them better loans. All this will do is shift the risk from the private sector to the taxpayers. If that happens, a full government bailout will be inevitable.

Source of Title Blog ::

One month ago, President Bush signed an economic stimulus bill that greatly increased the size of loans the F.H.A. can insure, while allowing Fannie Mae and Freddie Mac to purchase significantly larger mortgages from lenders and guarantee them against default by homeowners.

The move, which administration officials had previously opposed, increases the limits on F.H.A., Freddie Mac and Fannie Mae mortgages from $417,000 to as much as $729,750.

If you can't afford a conventional mortgage with a reasonable down payment on a home that costs more than $417,000 - you shouldn't be buying it! These government programs were supposed to help people with modest means buy a modest home. My home was last appraised at $100,000. Maybe these buyers should be house-hunting in my neighborhood rather than expecting the government to help them buy a home that they probably can't afford.

Last week, the administration went further by removing limits on the volume of mortgages that Fannie Mae and Freddie Mac can hold in their own portfolios. That means the two companies could buy up billions of dollars in mortgages that other investors have been too frightened to touch.

Remember Alan Greenspan? (I'm really starting to miss him) When he spoke at the Conference on Housing, Mortgage Finance, and the Macroeconomy on May 19, 2005, he warned that if Fannie Mae or Freddie Mac were to default on their loans, the resulting chaos could lead to serious threats against the U.S. financial markets. That was at their old levels - now we are letting them take on more liability by buying billions of dollars worth of mortgages that nobody else wants. Whose bright idea was that?

A longstanding bill to modernize the program would lower the down payment needed for F.H.A. loans to 1.5 percent of a home’s value, from 3 percent. The bill would also let the agency price insurance based on each loan’s risks. The F.H.A. now charges everyone the same premium.

We will not back loans that do not make sense and cost taxpayers money,” said D. J. Nordquist, a spokeswoman for the Department of Housing and Urban Development, which runs the F.H.A.

I've got a newsflash for Ms. Nordquist - a loan with only 1.5 percent equity "does not make sense." Home values around here have already dropped by about 3 percent, and I think everyone (with half a brain) expects the slide to continue for at least another year or so. In times like these, they should be considering raising their 3 percent down payment requirement, not lowering it. If people can't afford a reasonable down payment, they need to set their sights a little bit lower and buy a more modest home. Enabling people to buy beyond their means is what got us here - more of the same is not going to solve our problems. At best, it defers them to a later date.

The two companies are now trying to decide how to guarantee the bigger and potentially riskier mortgages. Both want to exclude “no-documentation” loans, but Congress authorized them to buy up big mortgages going back to last July — when a high percentage of such loans were approved without verification of the borrower’s income. As a result, company executives are debating whether to buy up at least some “no-doc” loans made last year.

How 'bout we just decide to exercise a little common sense and stay away from the "bigger and potentially riskier mortgages." That is radical, I know, but we have proven that those loans are a very bad investment. Figuring out a way to take on more of them is just insane!

Created during the Depression to support the mortgage market, the F.H.A. has played a critical role in the housing industry in the past, though in recent years it lost ground to subprime lenders.

Lost ground to subprime lenders?? If we are in a race to see who can go broke the fastest, I suggest letting the subprime lenders win - not trying to catch up to them! I would say that remaining solvent places Fannie and Freddie way ahead of the subprime lenders - they should be content to stay there.

I'm no expert, but apparently there aren't any experts working for our government anymore either. We have seen a prime example of what does not work - we should be learning from it, not trying to emulate it. Let the subprime lenders and their investors take their lumps. We can certainly try to minimize them, but buying their past mistakes is not going to help our economy or our housing market.

I'll stand by my previous posts regarding changing the bankruptcy code to allow the bankruptcy courts to modify the terms of mortgages for borrowers who need help. The borrowers who voluntarily agreed to the terms of their mortgages should be forced into seeking help from the bankruptcy system, and the lenders who made bad loans should be forced to shoulder some of the burden. The investors will also suffer some of the consequences, but those are risks that investors take - ask any broker and he will tell you there is risk in any investment. This just turned out to be more risky than they expected; it happens all the time.

There are plenty of losses to go around, but the government doesn't need to subject taxpayers to them unnecessarily. We as taxpayers all have one thing in common, we didn't voluntarily assume any risk of these bad loans - we shouldn't be paying the price for them now.

Robert A. Franco


Categories: Legislation, Mortgage Industry, Subprime Lending

1563 words | 3326 views | 6 comments | log in or register to post a comment

Robert, your thoughts are well thou...
Robert, your thoughts are well thought out and full of common sense. I do want to point out a couple of issues, that I don't necessarily agree with. First just because a mortgage is bigger doesn't make it a riskier loan. Secondly if the conforming loan limit wasn't raised to $729,750 in my neck of the woods the options for loans would be pretty slim and therefore deepen the economic hardship on everyone in my community. This community relies on the Real Estate Industry in a pretty big way. I am concerned about how deeply the gov't is getting involved, and I hope you are wrong on some of your assumptions. Thanks Robert. 
by Greg Knowles | 2008/03/06 | log in or register to post a reply

Greg: I am inclined to agree with ...
Greg: I am inclined to agree with you that bigger isn't necessarily riskier. But, those are the words used in the article I quoted.

Obviously, the down payment has a lot to do with the risk. A $700,000 mortgage at 80 percent loan to value is less risky than a $100,000 mortgage at 100 percent loan to value. But, most of these mortgages are 97 percent loan to value because FHA only requires a three percent down payment. Now, they want to change that to 1.5 percent down. That seems to be quite a risk to me.

Also, more expensive homes are more difficult to sell because there are fewer buyers who can afford them. Around here, it can take substantially longer to sell a home priced over $350,000. A lender, or federal entity that insures these loans, that has to hold these properties longer after foreclosure are taking more risk.

Granted, you are in California where housing costs are substantially higher than the national averages. Some adjustments are certainly necessary.

Remember, the median cost of home is around $222,000. If a buyer needs public assistance to buy a home, they should be looking for a more modest home. I have no problem with the government helping someone buy a "starter home," but why should they help someone who "wants" more?

Your point about California is well-taken, though. Perhaps in some areas, $700,000 would only get you a modest home. Even if that is the case, it still seems quite risky to loan out that kind of money with as little 1.5 percent down. That would only be a $10,500 down-payment. I put down $15,000 on my home when I bought it for $76,000 and I'm sure I make far less than the median income in your neck of the woods.

Homeownership is not a right - people should work hard to save a meaningful down payment. It really is necessary to protect our economy from times like we are in now.
by Robert Franco | 2008/03/06 | log in or register to post a reply

Sorry, Rob, but I've gotta take you...
Sorry, Rob, but I've gotta take you to task on something you said in your post. On one hand, you say you have no problem with the government helping someone to buy a "starter home", yet in your last paragraph you state (quite correctly, IMHO) that:

"Homeownership is not a right - people should work hard to save a meaningful down payment. It really is necessary to protect our economy from times like we are in now." Seems to me you're contradicting yourself there.

I'm certainly no financial expert, but I AM a thinker, and as far as I'm concerned, the government never should have gotten involved in the mortgage business to begin with. The less they "help", the better.
by Scott Perry | 2008/03/07 | log in or register to post a reply

I don't think that is a contradicti...
I don't think that is a contradiction at all. Encouraging homeownership is important for the country. We are better off when more people are able to own their homes. Some people would not be able to afford a home without the help of FHA. That is what made it such a successful venture.

I said that people should work hard to save a meaningful down payment. For some, that may only be a couple of thousand dollars. If they have worked hard for the down payment - it is meaningful. There is nothing wrong with the government helping out those who need a little help. It's not so much the amount of the down payment... it's about it being substantial enough to the buyer that he feels he has something of his own invested in his home purchase.

What I have a problem with is the government helping those that don't need it. People who make enough to qualify for a $500,000 mortgage but can't manage to put down more than 1.5 percent really shouldn't be getting public assistance.
by Robert Franco | 2008/03/07 | log in or register to post a reply

Then, we'll just have to agree to d...
Then, we'll just have to agree to disagree, because you're making a distinction without a difference. Encouraging home ownership is one thing, but the proper way to do that is to let people keep more of their hard-earned dollars and stop punishing achievement with progressive taxation and redistributionist economic policies.
by Scott Perry | 2008/03/08 | log in or register to post a reply

It appears to me that this is a bai...
It appears to me that this is a bailout of sorts. The investors in the secondary market have been screaming for help, even though, as you said, investments go bad everyday. Fannie and Freddie can save the day, with the full backing of the government (that's us) of course. This also bails out the banks which will go broke and start failing if they can't keep the house of cards going long enough to package their loans and create new schemes. If you remember, in the 80's the government bailed us out of the S&L debacle when the S&L's made bad loans. Why shouldn't they keep up the good work in the name of altruism and good stewardship.

Besides, whoever said the government had good judgement?
by Lynn Hammett | 2008/03/11 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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