The government needs to get out of housing finance. The losses at the GSEs apporach $150 billion, and the FHA needs its own bailout. These are losses all of us who didn’t participate in the madness get to pay. And as long as the government continues to back 90% or more of loans for residential real estate, the very real possibility of another even larger bailout looms. Given these realities, government policy makers have been and should be focused on reducing the government’s exposure and minimizing taxpayer bailout dollars. However, in a stunningly stupid proposal, some housing
advocates idiots are proposing the government back a new type of subprime loan. Unbelievable!
By E. Scott Reckard, Los Angeles Times — 7:53 p.m. CST, January 28, 2013
With home prices rising, interest rates falling and builders building, some prominent housing advocates are calling for a new kind of loan for buyers with lower incomes or bad credit.
They’d like to call it the Dignity Mortgage, but it has another name — one that’s become more of an epithet since the housing crash: subprime.
Dignity mortgage? They mean Deadbeat mortgage. Some former subprime loan deadbeats could use a little dignity.
The subprime business model failed because it has an endemic flaw that cannot be corrected by changes in the loan terms. The problem is rooted in the default losses associated with loan delinquencies.
Subprime works when house prices are rising because despite the high delinquency rates on subprime mortgages, the losses associated with the resulting foreclosures is generally small because rising prices bails the lenders out. Further, when subprime loans proliferate, they stimulate demand and cause the rising prices that makes the subprime mortgage industry tenable — at least until they run out of new subprime customers or they default in very large numbers.
If the demand created by subprime wanes, or if there is an excessive number of foreclosures, prices stop rising. Once prices stop going up, the default losses escalate dramatically. The additional interest gained on the paying customers no longer offsets the losses from the deadbeats. This outcome is inevitable because eventually the demand stimulus will slow, or an economic recession will cause subprime borrowers to default in large numbers. Once either of these events occurs, it’s game over for subprime — and those who own or insure subprime loans lose billions. There is no way we want taxpayers to back this flawed business model.
Applicants might include people caught in the early stages of the mortgage meltdown who have since rebuilt their finances, said Faith Bautista, who heads the National Asian American Coalition.
“They lost their work, their homes and their credit scores four or five years ago,” Bautista said.
Since then, she said, many have found new jobs and saved up enough for a 10% down payment. But they can’t get a loan because lending standards remain tight — even for the Federal Housing Administration mortgages designed to help lower-income borrowers, Bautista said.
Bullshit. Remember, FHA is the new subprime. FHA standards are not tight. They will permit loans with LTVs higher than 43% and FICO scores under 620. The loose standards are exactly why the FHA delinquency rates are near 10% and the agency is headed for a bailout.
The proposal starts with the classic subprime trade-off: a higher rate for a higher-risk clientele. Borrowers would pay 1.25 percentage points above the going interest rate, maybe 4.75% if more creditworthy borrowers were paying 3.5%.
That sounds reasonable until you consider that a 1.25% higher interest rate is actually 40% higher than standard. Tony Soprano would be proud. Do we really want the government involved with usurious lending?
Also, as I demonstrated in FHA = subprime, 12.4% interest cost of FHA insurance, 50% risk premium, the cost of FHA insurance does add almost the same amount to the effective interest rate.
But the deal would get better if borrowers made timely payments for five years. At that point, the extra money they had paid in interest would be used to reduce the mortgage balance, and their rate would be cut to whatever borrowers with sterling credit and 20% down payments were charged at the time the loan was made.
Explain to me how that’s supposed to work.
The subprime business model, when it does work, survives because the added interest on the 80% to 85% of the good loans offsets the losses on the 15% to 20% of bad loans. If the government gives these profits back to the borrowers, the taxpayer is left with nothing but the losses. That’s an enormous subsidy I don’t want to pay.
Pattie Sibug of San Diego is among those who got caught short by the housing crash. By early 2010, the property improvement company she and her husband had owned for a dozen years had already seen its business fall off. Then a stream of work repairing foreclosed homes for a big bank dried up.
BID Construction wound up owing suppliers about $60,000 it could never fully repay, which ultimately ruined the couple’s personal and business credit scores. “It was 585 the last time I checked,” Sibug said of her score.
Sibug and her husband, Ollie, would like to buy the Scripps Ranch town house they are renting for $1,750 a month, and could come up with a 10% down payment. But they had to decline the owner’s recent offer to sell because they knew they couldn’t get financing.
Wait a minute. How did this couple come up with 10% down when they didn’t repay their creditors?
This is exactly the kind of borrower behavior FICO scores are designed to screen out. If times get tough again, why wouldn’t they stop paying their government-backed mortgage? One of the many issues of moral hazard that will dog the market for years is the belief among borrowers that paying their mortgage is optional. If they don’t pay, they will be coddled with loan modification offers and a slow foreclosure process. While they are skipping payments and enjoying their entitlements, the default losses add up, and the eventually taxpayer bailout which we will pay becomes larger.
In short, the people the Deadbeat Mortgage is designed to assist shouldn’t be helped at all.
“There’s got to be some kind of program to help you reestablish yourself,” Sibug said. “I’d be the first person in line if there was.”
Situations like hers are why Bautista and other activists have been talking to bankers and regulators, proposing the new type of loan. Those activists include Bob Gnaizda, a longtime minority rights attorney who co-founded Berkeley’s Greenlining Institute, and financial literacy activist John Bryant, whose Operation Hope — founded in South Los Angeles after the 1992 riots — now operates nationally and in South Africa and Haiti. …
Financial literacy activist? Perhaps he should actively counsel his clients to pay their bills.
Edward J. Pinto, a former Fannie Mae chief credit officer who argues that lax FHA lending helped feed the foreclosure crisis in low-income neighborhoods, said the Dignity Mortgage proposal “is a stupid and crazy idea — a poison pill.“
“Haven’t we learned anything from the cratering of our housing finance market?” said Pinto, a resident fellow at the American Enterprise Institute, a free-market think tank.
No. Those on the political Left have learned nothing. They continue to pander to their constituents offering a free lunch. Unfortunately, the impotent political Right silently panders to financial interests and says little against stupid ideas like the Deadbeat Mortgage.
Bank officials continue their soul-searching over the mortgage misdeeds of the past and the prospects of the business.
“By being overly aggressive, the entire housing system caused a great deal of damage to the very people we were trying to help attain homeownership,” said Brian T. Moynihan, chief executive of Bank of America Corp. …
This inconvenient fact is completely ignored by the political Left. As I pointed out above, the entire subprime business model is fundamentally flawed, and any return to subprime lending will create market instability destined to flush out the very people the program is designed to benefit.
“How do we make credit available but protect people from taking on too much risk and ending up in a home they can’t afford? And how do we strike the right balance between prudent underwriting, responsible down payments and access to homeownership?” Moynihan asked.
Gnaizda and Bryant say the need for a new mortgage deal is apparent in Federal Reserve home lending statistics. In 2010, the latest year for which data are available, only 1 in 11 mortgages were made to low- to moderate-income families. Just 4% of home loans were made to African Americans, who make up 13% of the population, and 6% to Latinos, who represent 16%.
The Left is always eager to play the race card. The main reason loans to low- to moderate-income families is down is because subprime lending imploded, and many of these borrowers lost homes during the bust.
The rules should provide equal access, not equal attainment.
Their proposed new loan would be structured to avoid features that contributed to the subprime implosion six years ago, setting off a chain reaction that nearly caused the financial universe to melt down and dragged the economy into the worst downturn since the Great Depression.
No one would be allowed to merely state their income instead of providing pay stubs and tax returns. There would be none of the 100% financing that became prevalent during the boom — borrowers would need to put down at least 10% to get a loan, Bautista said. …
The 10% down requirement would help mitigate some of the default losses when these loans go bad, but it also provides a nearly insurmountable barrier that very few low- to moderate-income borrowers will be able to cross. Of course, once the program is in place, the first thing these advocates would do is lobby to get the down payment requirement lowered so more people qualify. Any such lowering would negate the positive effect of mitigating default losses down payments provide.
“We want to encourage you to buy the home you need, not the home you may want,” Gnaizda said. “I’m talking about 1,700-square-foot houses instead of 2,600 square feet.”
The rub is that requiring Fannie and Freddie to purchase the loans may make the proposal truly more of a starting point for debate than a reality any time soon, observers say.
“From a political perspective, this seems like a non-starter,” said Edward Mills, a policy expert at FBR Capital Markets. “No one in D.C. is voting to allow Fannie, Freddie or the FHA to take on more risk.“
Fortunately, he is right. This dumb idea is dead on arrival.
But this won’t be the end of the political pressure from the political left. Despite the obvious failures of government assistance programs of all types in the housing market, politicans will continue to advocate them, and I will continue to point out the indignity of their ways.
$2,000,000 Option ARM
Lenders created a wonderful euphemism called “Legacy Loans.” The word legacy has a regal connotation that sanitizes the toxic loans lumped together in this steaming pile of manure. By creating this sanitized catch-all term for their prior misdeeds they can sweep their bad behavior under the rug. I think it’s important that we look at the details they want to conceal because only in these details do we see the scope and depth of the bank’s misconduct.
The former owner of today’s featured property robbed the bank; however, the bank was eagerly stupid enough to give him the money. The former owner bought the property for $1,062,500 on 2/29/2000. He used a $690,625 first mortgage and a huge down payment. He refinanced out his down payment as prices rose, but in a crescendo of HELOC abuse, he refinanced with a $2,000,000 Option ARM on 4/20/2006. His mortgage equity withdrawal was well over a million dollars. Was this bank robbery?
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Proprietary OC Housing News home purchase analysis
$1,199,000 …….. Asking Price
$1,060,681 ………. Purchase Price
2/29/2000 ………. Purchase Date
$138,319 ………. Gross Gain (Loss)
($95,920) ………… Commissions and Costs at 8%
$42,399 ………. Net Gain (Loss)
13.0% ………. Gross Percent Change
4.0% ………. Net Percent Change
0.9% ………… Annual Appreciation
Cost of Home Ownership
$1,199,000 …….. Asking Price
$239,800 ………… 20% Down Conventional
4.11% …………. Mortgage Interest Rate
30 ……………… Number of Years
$959,200 …….. Mortgage
$238,231 ………. Income Requirement
$4,640 ………… Monthly Mortgage Payment
$1,039 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$300 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$175 ………… Homeowners Association Fees
$6,154 ………. Monthly Cash Outlays
($1,211) ………. Tax Savings
($1,355) ………. Equity Hidden in Payment
$348 ………….. Lost Income to Down Payment
$170 ………….. Maintenance and Replacement Reserves
$4,106 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$13,490 ………… Furnishing and Move In at 1% + $1,500
$13,490 ………… Closing Costs at 1% + $1,500
$9,592 ………… Interest Points
$239,800 ………… Down Payment
$276,372 ………. Total Cash Costs
$62,900 ………. Emergency Cash Reserves
$339,272 ………. Total Savings Needed