Stoking another housing bubble

It seems that, when faced with the reality of costly FAIL, government “logic” dictates that the reason for FAIL is that not enough money was spent. Therefore, the only mitigation is to spend more. When faced with similar circumstances, reasonable and sane individuals invariably close their wallet and walk away – to cut future losses. The government doubles down on FAIL.

This story (from the Washington Independent) is a perfect illustration of government “logic.” After buying up most of the bad mortgage debt and losing $148B (and counting) in the process, Fannie Mae is back in the business of subprime lending. Their new program offers low or no down payment mortgages to people with a minimum credit score of 680 – in other words, anyone with a pulse. This is precisely the insane policy that caused the financial meltdown in the first place.

“Buy new with $1,000 down,” the advertisement says, the words resting atop a trim green clapboard house offset by a bright blue sky. “The time has come. Stop wasting rent check after rent check and start building equity in your own home. And with only $1,000 down, affordable monthly payments and no private mortgage insurance required, the dream is closer than you think.”

It sounds too good to be true. But it is true. This offer does not come from a subprime lender, looking to reel in thousands of unqualified and ill-advised homebuyers, only to slap them with add-ons, fees and variable rates. It is not a teaser or a trick. The advertisement references a program initiated by the National Council of State Housing Agencies and Fannie Mae, the taxpayer-backed, government-sponsored enterprise that buys up mortgages from lending banks.The pilot program is called “Affordable Advantage,” and it has now been adopted by three states — Massachusetts, Wisconsin and Idaho. (Other states, such as Pennsylvania, California and Colorado, have similar state programs.) The initiative is small, reaching just a few hundred people so far. But it is looking to expand. Given the dangers of these types of mortgages and the specter of the housing bubble, where unconventional loans wreaked disaster, it is also raising questions from wary housing experts and legislators.

So the government is back in the business of sponsoring bad mortgages – all for the Holy Grail of home ownership. Apparently it doesn’t occur to these “geniuses” that with the housing market in such a precarious state, these loans could go sour at the drop of a hat.

But there are concerns and problems intrinsic to purchasing a home with almost no money down. First and foremost, if the housing market turns down even a fractional amount, the homeowner will go “underwater” immediately. If the price of the house falls by even a bit, he will owe more on the mortgage than the house is worth. If he needs to sell it, he needs to come up with extra cash to pay the bank back. And the fact that the homeowner only had a thousand dollars to put down in the first place implies that he does not have much financial breathing room and might default.

“That is clearly a worry,” says Barry Zigas, the director of housing policy for the Consumer Federation of America. “But for people who are buying a home first and foremost as a place to live, the fact there might not be much equity, or the equity might go negative — that’s not the most important feature.”

With no personal “skin in the game,” it becomes a simple matter to just walk away from an underwater mortgage. Who’s left holding the bag? Why the taxpayer, of course.

Affordable Advantage raises questions since, at the end of the day, taxpayers are backing its investments — Fannie Mae being under the government’s conservatorship, and Treasury being the main purchaser of bonds from the state HFAs. In recent months, the government has turned away strongly from programs helping encourage mortgages with low down payments.The Federal Housing Administration, for instance, considered a plan to let homebuyers use the Obama administration’s $8,500 first-time homebuyer tax credit to cover the 3.5 percent minimum required down payment. It received such push-back from the Hill, incensed the federal government would pay homeowners to have no skin in the game, and from housing experts, that the Department of Housing and Urban Development pulled the program. Indeed, faced with a 14 percent delinquency rate, the Federal Housing Administration increased the premiums it charges to insure some mortgages this year. And it set down payment requirements at 10 percent for borrowers with low credit scores.

There was a time when you couldn’t get a mortgage without a 10% (minimum) or 20% down payment. If your equity was less than 20%, you had to pay a PMI (mortgage insurance) of at least 7%. It was the government, with its idiotic vision of home ownership for all, that changed everything. By dumping a mass of unqualified buyers into the market, home prices rose to unrealistic levels – setting the stage for the economic meltdown. Now they want to do it all over again.

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One Response to “Stoking another housing bubble”

  1. […] BOHICA goodness that is Fannie Mae and Freddie Mac continues (more here, here and here). As these two giant turds swirl around a flushing financial toilet, their top executives […]

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