by Gina Gardner on May 22, 2008
No matter how much lipstick you put on it. Why don’t the members of the House Financial Services Committee understand what probably every mortgage broker or banker in this country has figured out? That labeling a mortgage “conforming” does not make it a lower risk conforming deal if the loan amount is in fact higher. And investors don’t willingly take on added risk without added compensation. Yet these public servants are having a hearing (assuming perhaps that someone must be pulling a fast one) to see why the price of the ambiguously named ‘jumbo-conforming’ mortgages didn’t come down as they expected. Um, maybe because they aren’t really conforming mortgages? Since investors didn’t bite (fool me once, etc.) Fannie stopped packaging them for sale and is holding them in its portfolio. This brought pricing down somewhat but investors on the open market have still shown little interest in these loans.
Loans of higher amounts share certain characteristics that make them greater risks and offer lower returns than their conforming counterparts, according to the Mortgage Bankers’ Association. They are more concentrated geographically and many of the highest-priced markets are also the most volatile. Jumbo borrowers tend to refinance, sell their homes, or retire their mortgages much faster than those with conforming loans, making the servicing on jumbo loans less attractive. Lenders deal with risk, return, supply, and demand every day and understand how it works in mortgage lending. It would be nice if our leaders would take the time to learn about our industry before they started meddling with it.
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by Gina Gardner on May 1, 2008
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.
