“The most terrifying words in the English language are: I’m from the government and I’m here to help.”- Ronald Reagan
H.R. 5830 emerged from the Barny Frank led House Financial Services Committee last week, and I couldn’t be any less surprised. The latest variant can be found at OpenCongress, but here are the Cliff Notes.
FHA will insure new loans for borrowers at 90% of present value.
Lenders must consider the loan paid in full.
They actually only get 85%, once a 3% FHA financing fee is paid along with 2% in closing costs.
Participation by the lenders is voluntary.
If the buyers sells or refinances the loan, they must pay a prorated portion of the equity to FHA.
Oh, and there’s hundreds of millions of dollars in appropriations that have little to do with the program itself.
There’s a lot more details, but I’m not going to bore you with them The bill is just out of committee in the house and still faces markup committees, amendments from the full House, and a Harry Reid led Senate. The details are not yet important.
What’s the point of this bill?
Brian Brady seems to think we are saving ourselves from the moral hazard of, “the willingness of home buyers to walk away from a mortgage because they don’t like the fact that prices dropped” I understand the logic, but isn’t letting them skip out on 20% of the debt they owe the same moral dilemma? Admittedly, on a smaller scale. The truth is, I don’t care about the morality of it all.
Housing Bubble fanatics will call the bill a lender bail out. I’m not sure how. It’s hardly a good deal for them. In fact, that’s the problem. The program is voluntary, and I don’t see to many lenders who’ll be all that voluntary in their participation. I think Barney Frank is counting on that.
Yesterday, in his speech at a MBS meeting in Boston, Congressman Frank reveals his intentions,
“If this program, this set of inducements, for people to avoid foreclosure doesn’t make much difference, what you will face next year … will be much tougher rules about the home mortgage industry in general”
Can you see the future? I can.
What’s lost in the debate over H.R. 5830 are the appropriations to grow the FHA, fund legal aid programs across the nation, and even to pump money into the FBI to hire more agents. H.R. 5830’s goal is to grow the government, create the illusion that the politicians are doing something to help the average Joe, and setting the stage to take an even greater role once it doesn’t work.
Just wait until the Senate gets a hold of it.
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18 responses so far ↓
1 Alex in San Diego // May 6, 2008 at 12:29 am
Very interesting way to break down this bill. Why doesn’t it surprise me. It’s incredible how disappointed I feel with the government these days, it just doesn’t seem to be getting any better! Congress has time to prosecute baseball players for taking steroids but they can’t do anything about inflation, gas prices and people losing their homes!
2 Gina Gardner // May 6, 2008 at 9:17 am
As Barney said, he wants to help the “least undeserving.” There are no good guys here. I still think a system that punishes greed and poor decision making isn’t broken. It’s this kind of intervention that perpetuates the behavior.
arggg. }:()
3 va purchase loan // May 6, 2008 at 10:51 am
It seems it will allow people to think they can continue to be loose and not pay the price later. I wish like Alex they would focus their efforts on the things killing us, gas prices and inflation.
4 Robert D. Ashby // May 6, 2008 at 11:33 am
This bill is yet another in the long list of stupid moves by the government. All their efforts will ensure one thing as long as history repeats itself, and that is the prolonging of the industry (and the economy) to correct itself.
5 Bob Wilson // May 6, 2008 at 1:26 pm
Robert, I don’t see the industry correcting itself. It lives by the mantra of “easier to ask for forgiveness than permission”.
We saw a Fed bailout of the savings and loan industry and Wall Street. The banks know this and will simply wash rinse and repeat.
6 Len R. // May 6, 2008 at 1:59 pm
Not having stricter rules for homebuyers and allowing lenders to clench Adam Smith’s invisible hand and sucker punch unwitting home buyers was the problem. It was all about greed. Lenders led buyers down the garden path. The type of loans approved should never have been allowed in the industry. We know the government saw the writing on the wall because they quickly changed the bankruptcy laws in 2005. Havining the program as voluntary is weak. More political smoke and mirrors that will likely do little to help.
7 Austin Real Estate Blog - Ki // May 7, 2008 at 3:42 am
I might be missing something so someone tell me if I am wrong. You have a house worth 100k. You can get a loan for 90k. Can’t you immediately then sell the home and walk away with 10k. Even if you consider fees you are still walking away with some cash. I want to help people facing foreclosure but it seems our takes our paying not only to make up for bad decisions but giving them some extra cash once they walk away.
8 Todd Carpenter // May 7, 2008 at 8:56 am
>>>Can’t you immediately then sell the home and walk away with 10k?
No, they thought of that. You have to give the equity to FHA. (not the old lender, but FHA). There’s a pro-rated schedule for splitting it over five years. First year is 100% to FHA.
9 Gina Gardner // May 7, 2008 at 12:12 pm
“Not having stricter rules for homebuyers and allowing lenders to clench Adam Smith’s invisible hand and sucker punch unwitting home buyers was the problem. It was all about greed. ”
It’s about greed, all right, but if you check the FBI web site you’ll see that far and away the most mortgage fraud was perpetrated by BORROWERS against lenders. There’s been more than enough greed and blame to go around. And rewarding greedy people or institutions by bailing them out might score political points in the short run but sets up another disaster in the long run.
10 Len R. // May 7, 2008 at 1:59 pm
I am not so sure the average home buyer was out to commit mortgage fraud. There are criminals in every industry. It is easy enough to classify people into criminals and unwitting home buyers.
Let’s face it: there are clever criminals committing mortgage fraud and their are lending agencies taking advantage of anyone willing to make the mistake. Not enough was done to educate home buyers or to prevent the problem. It was foreseeable and nothing was done.
So can you blame somebody for reacting to the issue and trying to address it or do you blame those who 3 years ago stood by and let it happen? What is trhe answer?
Same thing is happening in the credit card industry.
11 Robert D. Ashby // May 7, 2008 at 2:50 pm
Bob - That is a huge part of the problem and why the government’s interventions don’t work. The “easier to ask for forgiveness than permission” mentality is fueled by the knowledge that the government is there to bail out (forgive) whenever things go wrong. No one is being held accountable and the government’s moves will only exacerbate
the problems.
The industry has already taken steps to correct itself, tightening lending standards and requiring more documentation, etc. They are somewhat overdoing it right now, but they will relax standards as things improve.
Can more be done? Probably. But the point is that the industry can regulate itself in most cases. If the government feels the need to do something, they should focus on creating greater penalties to make people want to avoid their mistakes next time.
12 Gina Gardner // May 7, 2008 at 3:05 pm
Things are a little nuts these days actually. A client of my husband’s, approved for a $1.1 million loan (Full doc, 50% LTV and 740+ credit scores), was “unapproved” when the lender put a 40% limit on back end ratios. Looking forward to a return to sanity and make sense lending.
13 Milan // May 7, 2008 at 6:05 pm
This is classic big government mentality. Why do we need this and what good does it do? The government should be focused on discouraging completely irrational lending to consumers who could never afford or in many cases even understand what they were signing up for. I think we need to let the banks and investors feel the pain, and put stricter lending standards in place. That is the only way to prevent this from happening all over again.
14 Carl Pruitt // May 8, 2008 at 2:41 am
Todd - Awesome insight. 99% of the time government attempts to help anybody in any way with any problem are just that - power grabs. Even the most well intentioned and honorable politicians simply believe deep down that they know more than everyone else and people can’t manage their own lives without help from the smart people in government who know better. If they didn’t believe that, they’d be in business, not government.
@Len R - It was the government that “clenched Adam Smith’s invisible hand” in the first place and the rest of the gang was just piling on after the fact to throw their punches.
The savings and loan bailout is Exhibit 87 of thousands of pieces of evidence for that. Government created the atmosphere that led to that situation, then made it worse, and to top it off lost many millions (billions?) more than necessary when the RTC dumped properties at unnecessarily low prices to investors who had inside contacts. Greed for power and influence from government is a worse problem than greed for money among businessmen.
People need to understand that neither the government nor the market can create utopia. There will always be mistakes made by the actors in a free market. The difference is that when the government makes mistakes, those mistakes are far more difficult to correct because politics and power become the motivations. When the market makes mistakes, economic pressures create incentives to solve the problems more quickly. Just incentives, not some imaginary utopia.
Case in point - the lending market has already over corrected this underwriting problem (although I think a 40% back ratio of gross income is VERY reasonable for someone who needs to borrow $1.1M at any LTV) while Congress was talking about it. And all these foreclosures, as painful as they are, are just medicine that MUST be swallowed to fix the problem. There was/is a massive artificial bubble in home prices caused by loose credit. There is no other way to fix it.
Also, as a general rule borrowers who didn’t intend to commit fraud don’t end up listed on the FBI’s website. There’s plenty of blame for the fraud problem all around. I think house flippers trying to unload properties got left off most of the above lists. More FBI agents to investigate fraud might be the only good thing about this bill.
@Milan - In an ideal world, Congress would be at home focusing on their own personal business 10 or 11 months out of the year. Not gathered in Washington 24 hours a day, 7 days a week, 12 months a year with politics as their job and massive staffs looking for more ways to show they know more about running your life than you do. With government, less is more. Congress doesn’t need to be focusing on discouraging irrational lending standards. They need to be focusing on not encouraging bad lending standards in the first place. Everyone keeps focusing in the wrong place for a solution here. It doesn’t make sense to pressure wash the house and call it fixing the problem, when the foundation is cracked and sinking.
15 Ling // May 8, 2008 at 5:48 am
You know, sometime back, Bernanke asked lenders to writedown Principals, in a speech he gave in Florida. I can’t remember exactly where or when, but I’m pretty sure he did. If the Federal Reserve Chairman can ask lenders to forget about money owed to them, then politicians are of course going to go one better.
16 Diane Cipa // May 8, 2008 at 12:16 pm
Truth in black and white and gray runs all through this post and comments.
We are not living is a fully free marketplace or society. We’ve given up much in exchange for perceived and real security.
If not for government intervention, I suspect we would now be living in an absolute collapse of the credit markets and all be out of business.
I am thankful that our government did react and provided support when needed and though the medicine may be strong and overdone, I am thankful for the intervention and enforced standards in mortgage lending.
If we are unable to maintain a self policing leadership umbrella over our respective industries, we have to expect government to step in and fill the void. It may not seem fair but in our cultural rejection of the old caveat emptor concept in favor of the media and government as quasi parents of all, what are the alternatives?
17 Carl Pruitt // May 8, 2008 at 1:06 pm
Personally, my answer is to fight tooth and nail against the cultural acceptance of the nanny state. That’s a whole different discussion.
You are right. It has been a long time since we have had a real free market system. Yet people still blame every problem on a lack of regulation.
The Fed tripled the amount of dollars and credit in circulation between 1990 and 2007 and the absolutely predictable result of that was easy credit and a real estate bubble. Now we are supposed to thank them for creating more credit to give us a very temporary reprieve from the problem they caused? Sorry, I don’t. I think they just increased the chances of a real financial collapse along the lines of the 1930s.There’s a looming credit card debt crisis right behind it for the same reasons.
The problem never has been a lack of self regulation in one of the most highly government regulated industries there is. The problem is that politically connected businesses helped rig the system to make use of all that loose credit. (Don’t confuse support of free markets for blind support of business) Now people crack down on mortgage brokers as if they caused the problem, and politicians use the problem to expand their power.
18 Diane Cipa // May 8, 2008 at 1:25 pm
True. It’s a bigger problem than my brain can handle. Glad I’m not in charge.
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