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.
| 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.
