While the Bush administration is talking up its mortgage rescue operations for delinquent borrowers, a New York Times article implies that the cash-strapped agency may not be able to pony up. For the first time in its history the Federal Housing Authority faces a deficit, primarily due to defaults on loans featuring seller-financed down payments.
These loans comprised about 35% of all FHA mortgages and are going sideways at a rate of 2 to 3 times that of other FHA mortgages. Either those with no stake of their own in the property are more willing to walk away from their obligations or the kind of people who can’t come up with any down payment at all are the same people who aren’t capable of repaying a mortgage.
Late-comers to the party include homeowners as much as 3 months’ behind on their mortgage payments — and FHA (another way of saying “taxpayers”) will be expected to bail them out. Even borrowers with negative equity may be eligible. Now, if buyers with no stake in their homes are repaying at such poor rates, what are those with negative equity going to do? And who should step up and pay for this mess? Apparently homeowners whose real estate investments went sour or those who blew their money on expensive cars and fun trips don’t mind asking fellow taxpayers (and their neighbors) to absorb the consequences of their decisions. Yuck.
So who deserves help, and who should be asked to provide it? Representative Ed Royce from California feels this bailout is a mistake. “We risk transferring this default risk right onto the backs of taxpayers,” he claims. Unpalatable, but what else can be done? Sometimes the best solution for the greatest number of people is not the one that stakes out the moral high ground. As US Representative Barney Frank says, “I want to help the least undeserving people around.”
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8 responses so far ↓
1 jeff // Apr 11, 2008 at 2:36 pm
another great article gina, it’s about time people are held responsible for their own reckless decisions and actions. why should we all have to pay?
2 Miranda // Apr 11, 2008 at 2:51 pm
Why indeed? But where is the outrage concerning putting the taxpayers on the hook for the whole Bear Stearns thing?
After all, if we are going to bailout one set of people who should have known better (investors), shouldn’t we help the rest of the people who should have known better (borrowers)?
Perhaps we should force investment banks and investors to reap the rewards of their own reckless behavior as well.
3 Gina Gardner // Apr 11, 2008 at 3:17 pm
Good point, but the consensus is that the mortgage-backed securities investors were NOT in fact well-informed due to loopholes in rating agency oversight (about as tight as the FHA scrutiny of airline maintenence requirements apparently). I don’t like the idea of bailing out Bear either but again sometimes you have to be pragmatic and suck it up — it costs more not to bail them out in a market where self-fulfilling prophesy is a constant danger and confidence is everything. My main problem with all this is that the guys who should be accepting responsibility (and in other countries would be slitting their throats and dying of shame) parachute out with full pay and bonuses and give the rest of us the finger. There should be a point at which negligence and incompetence steps into the criminal realm and can be punished.
4 Austin Real Estate Blog - Ki // Apr 11, 2008 at 8:28 pm
I understand that if Bear Stearns had collapsed there would have been a nasty fallout. The problem I have is that i think the Bear Stearns bailout should have been in the form of a loan that will be paid back when the economy recovers.
5 wabisabi // Apr 12, 2008 at 5:57 pm
Ginnie Mae securities were the last Government insured, somewhat desirable instruments left in which to invest and still get some kind of yield. Now, with this new bailout twist, it looks like the chances of losing principal will be too great.
6 Wine Dog // Apr 12, 2008 at 6:26 pm
Good points. I was just having a discussion about this very subject. Personally, I really don’t think the government should be involved at all. No body stepped in when the dot com bombed. No one need step in now. Just because someone made a bad business decision affecting their home doesn’t mean the rest of us should foot the bill. If they were hoodwinked by the broker, then the broker should be held accountable. (I saw a lot of this so no offense to current company) Let it settle out, let the market pull back. At the end of the day, people still need to live in houses. It’ll adjust and recover.
7 va interest rate // Apr 13, 2008 at 1:23 pm
People who save up a downpayment are more invested in the transaction. They also are more gratefull for what they have. I do feel bad about the tax payers bailing out many who may not be deserving of the act. I feel things will calm down and the cycle will begin again in the next year.
8 Current FHA APR // Jul 4, 2008 at 4:32 pm
I believe FHA Commissioner Brian Montgomery is after the seller funded DPA once again.
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