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FHA

House Financial Services Committee Approves Bill

by Gina Gardner on May 1, 2008

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New legislation that will enable the government to finance $300 billion of troubled mortgages was just approved by the House of Representatives Financial Services Committee. It includes a mandate to FHA to guarantee loans on properties that have declined in value since the mortgage was taken out.

OK, we’re talking about properties with “distressed” mortgages, presumably past due or in default already and insufficiently collateralized. Now, would any individual investor or taxpayer ever willingly finance that kind of debt? Who wants to be the first to whip out his or her checkbook?

Yet collectively that is exactly what we will be expected to do. Pay for someone else’s greed, lapse in judgment, bad luck, or whatever. According to Barney Frank (D-Mass), who supports the bill, it could cost us up to $6 billion. I’m inclined to agree with those who opposed it — we already have adequate means to deal with this problem — laws to punish fraudsters, market forces to drive poor decision-makers from the industry, credit consequenses to those who abuse the trust of their lenders, disclosure laws for investments, and bankruptcy protection for those who need and deserve it. How about spending money to enforce what we already have and shore up weaknesses? The system is not flawed when people and companies have to pay for bad decisions. That’s what provides the incentive to do the right thing in the long run. This legislation is flawed because it punishes the ones who exercised prudence and rewards those who played fast and loose with other people’s money.

Sounds like the old grasshopper and ant story, remember? The grasshopper spent his summer screwing around and having a good time — meanwhile the ant worked his tail off and made sure his savings were stored up and sufficient to keep him sheltered and fed. In the end, Mr. Ant took pity on his short-sighted neighbor and let him move in.

I don’t have a problem with that because Mr. Ant made his own choice. Unfortunately, we taxpayers won’t be allowed to make ours.

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FHA: Here Today….

by Gina Gardner on April 11, 2008

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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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