Posted tagged ‘mortgage crisis’

Obama’s Housing Bailout

February 22, 2009

President Obama’s $275 billion housing bailout is an exercise in futility at best. It’s wolf in sheep’s clothing at worst.

The Mortgage Bankers Association did a study in 2008 that found 70 percent of foreclosures were on properties either not occupied by owners, involved borrowers who could not be found or did not respond or involved borrowers who had already had a modification and were defaulting again. Of the 30 percent not in those categories must surely be quite a few of the repeat defaulters of tomorrow.

The housing rescue plan is, in part, an attempt to rescue banks, whose balance sheets will be further undermined by drops in house prices and defaults causing many more failures.

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One of the worst things about this housing bailout is that, for some, it would just reset the “exploding A.R.M.” that got them into trouble in the first place.

One brand of these innovative mortgages that have come under special criticism has been so-called “exploding A.R.M.’s” that lured borrowers with unusually low teaser rates that then reset skyward a few years later. These have often been derided as predatory, and lenders who offered them accused of luring homeowners into buying homes they couldn’t afford for the long-term.

Critics of these might want to check out the Homeowner Stabilization Plan put forward by the Obama administration today. The plan would reduce mortgage payments and interest rates for homeowners who have seen their payments rise to more than 38% of their monthly income. But those reductions last just five years, after which they begin to reset to higher rates. In short, Obama is just drawing out the teaser rates a bit longer.

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Another problem that it doesn’t even begin to address is that many homeowners in foreclosure or on the edge of foreclosure are in that situation because of job loss.

Having borrowers continue to pay into a bad loan, even with reduced payments, takes away money they could be using to start over. Redefault rates from existing government-backed loan modification programs indicate that they are often ineffective. And in the case of borrowers facing job losses, staying in one’s home while being saddled with a mortgage can delay the necessary step of moving to an area with more job opportunities.

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 The New York Times last week explained some of the problems with the plan in these terms:

  • Mortgage mod doesn’t work unless the homeowner’s payments and principal are cut significantly…and then, unless the bank gets a property appreciation right, it’s just a giveaway
  • They’re a bureaucratic nightmare
  • People who are deeply underwater will walk away anyway
  • Renters, responsible homeowners, and folks who are underwater but CAN make payments get the shaft.

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It also seems to me that the qualifications are rather narrowly defined. I can’t help but wonder how many people who have been barely avoiding foreclosure while waiting on Obama to “help” them are going to very disappointed to learn they do not qualify for said “help”. How many of them will give up the fight and walk away from a house they couldn’t afford in the first place?

That, Mr. President, is what some of us call “blowback”. Get ready for your share of it. Especially if your friends at ACORN keep teaching people to break into homes they no longer own.

I also have to wonder how long the government is going to keep trying to reinflate this economic bubble. Have you ever tried to blow up a balloon that has a hole in it? That’s what the government is doing now with the economy and I wish they’d either stop or pass out from trying pretty soon.

There will be no housing recovery until home prices decline further. They have been far too high for far too long to think we can avoid the inevitable decline.

Link for a larger version of the above chart and the article it was published in.

Time to Get Real

December 21, 2008

In an excellent article in Pajamas Media today, Hans A. von Spakovsky delves into the real cause of the mortgage crisis and the resulting economic crisis. He hits the nail on the head concerning the causes.

Unfortunately, I don’t have much any  faith that President-elect Obama or the next Congress will be dealing with the reality, however. Look for more of the same and worse out of Washington next year.

It’s Time to Uproot the Real Cause of the Mortgage Crisis
Or else American taxpayers will be called upon to bail out the economy again.

December 20, 2008 – by Hans A. von Spakovsky

As banks, insurance companies, brokerage firms, automobile manufacturers, and God knows who else line up to try and feed at the public trough, the original source of the spreading financial and credit crisis, the mortgage industry, is still in deep trouble. Whether the initial bailout plan passed by Congress will help stem mortgage lenders’ financial problems in the short run is still an open question. But one thing is certain: Nothing in the original legislation or Treasury’s actions and infusion of funds since then have made the legal, regulatory, and enforcement changes required to prevent this problem from happening again in the long run — no matter how many tax dollars the Treasury Department pours into the problem.

Nothing in the mortgage bailout legislation called for Congress to fix the serious problems with the Community Reinvestment Act (CRA) that empower ACORN-style pressure tactics against lenders. Nothing made the Federal Reserve change its lending instructions. Nothing urged the president to change the enforcement policies at the Justice Department and HUD that forced lenders to make risky loans to unqualified applicants.

At its most basic level, this crisis started because of the weakening of mortgage lending standards caused by the Federal Reserve and other federal agencies. Lenders also feared facing discrimination claims and enforcement actions by government law enforcement agencies and organizations such as ACORN.

Consider a faulty study the Boston Fed conducted in the 1990s. It claimed that minority mortgage applicants were rejected at higher rates because of discrimination. Yet a detailed analysis by University of Texas economists Stan Liebowitz and Theodore Day showed that the Boston Fed study was so full of data transcription errors that it was “outrageously unreliable.” When those errors were eliminated, there was no discrimination. Some minority groups do have a higher rejection rate for mortgages on average, but because of weaker credit histories, not discrimination by lenders.

Undaunted, the Boston Fed issued a new manual that called traditional lending standards like creditworthiness and down payment requirements “outdated” and “discriminatory” because they supposedly prevented minorities from getting loans. Other federal agencies joined in. The FDIC still has a compliance manual that discourages banks from requiring an “excellent” credit rating or “adequate” longevity on the job because it may have a “disparate impact” on minority applicants. This despite the current crisis and the fact that in 2007 the Federal Reserve finally admitted in a report to Congress that credit scores are “predictive of credit risk for the populations as a whole and for all major demographic groups.”

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