Nov152012

The FHA gave loans to Ponzis to reenter the housing market

Do we really want to let Ponzis back into the housing market? There is a large group of people who’ve proven to be completely irresponsible with mortgage debt as evidenced by my daily debtor debacles. I wrote yesterday that Pent-up demand from boomerang buyers may not materialize, but isn’t stopping the FHA from trying. I have no problem with peak buyers whose only mistake was poor timing from reentering the housing market, but do we really want to let the irresponsible Ponzis back in? And do we as taxpayers want to be on the hook when they resume their old habits? That’s where the FHA is headed.

It shouldn’t be surprising that Ponzis want to own another cash cow. They were handsomely rewarded for owning last time. There is certainly no other asset class that provides such hefty returns in immediate spending money on such a small investment, so Ponzis will eagerly sign up for a chance at more free money. And if lenders want to risk their own money on these deadbeats, it’s their money to lose, assuming they hold these loans on their own books and don’t petition for another bailout. However, I can’t see the value in providing taxpayer-backed loans to a group of people with a proven track record of Ponzi borrowing. We know these people will default the moment the Ponzi money dries up. This is foolish.

FHA gives those who defaulted on homes another chance

The FHA is a major source of cash for so-called rebound buyers, but the bankrolling of borrowers who contributed to the last housing bubble is raising concerns.
By Alejandro Lazo and Walter Hamilton, Los Angeles Times –November 14, 2012, 5:00 a.m.

After two foreclosures and two bankruptcies, Hermes Maldonado is as surprised as anyone that he’s getting a third shot at homeownership.

The 61-year-old machine operator at a plastics factory bought a $170,000 house in Moreno Valley this summer that boasts laminate-wood floors and squeaky clean appliances. He got the four-bedroom, two-story house despite a pockmarked credit history.

So we have a 61-year old Ponzi, undoubtedly nearing retirement age, taking on a 30-year mortgage to buy a home. What could go wrong?

The last time he owned a home, Maldonado refinanced four times and took on a second mortgage. He put a Cadillac and Mercedes-Benz C300W in the driveway and racked up about $45,000 in credit card bills and other debts. His debt-fueled lifestyle ended only when he was forced into bankruptcy.

Is this the new model buyer? The US taxpayer should be insuring a loan to a borrower with this past history. He’s 61 years old. Do you think he will suddenly become responsible and dutifully pay down his 30-year FHA-insured mortgage?

His reentry into homeownership three years later came courtesy of the Federal Housing Administration. The agency has become a major source of cash for so-called rebound buyers — a burgeoning crop of homeowners with past defaults who otherwise would be shut out of the market.

Based on the statistics only about 10% of Ponzis reenter the housing market. Let’s hope the numbers remain that low or future bailouts will be enormous.

“After everything that happened, thank God I was able to buy another house,” Maldonado said in Spanish.

Don’t thank God. Thank us. We are the ones who will end up paying off your Ponzi-borrowing bills.

“Now, it’s good because the interest rates are low and there are lots of homes.”

The FHA, which backs nearly 8 million loans, is helping rebound buyers recapture the American dream, boosting the housing market in the process.

Oh, yeah, the American Dream…

But that’s touched off a fierce debate about the financial and ethical wisdom of bankrolling borrowers who contributed to the last housing bubble — and the potential cost to taxpayers.

You think?

The agency has suffered deepening losses in the last three years that have put it under enormous scrutiny. …

Critics worry that the FHA is foolishly allowing marginal buyers to get loans just three years after foreclosure with as little as 3.5% down. What’s more, the agency doesn’t even track how many rebound borrowers it backs. …

This is lunacy. I understand the government’s desire to prop up the housing market to save the banks and make loanowners happy, but this is just wrong. We should not be giving government-backed loans to known Ponzis. They will cause huge losses for taxpayers in the future.

At a minimum, the experiences of Maldonado and other rebound borrowers illustrate how fast the financial errors of the boom are being wiped clean by government policy that is eager to give the housing market a boost.”If somebody goes through foreclosure or bankruptcy, or whatever, you don’t allow them to jump back into the housing market as quickly as three years,” said Guy Cecala, publisher of Inside Mortgage Finance. “Aren’t you setting yourself up for future losses … if you make those loans to the same high-risk borrowers?

Yes. We are.

Proponents say rebound lending is essential to the economy. This group has emerged as an unexpected source of strength for housing this year, particularly in badly scarred areas such as the Inland Empire.

Besides, advocates argue, giving people a second chance — or even a third chance — is as deeply ingrained in American culture as buying a home itself.

I’m all in favor of giving second chances. I have made my share of mistakes and sought redemption. And as I stated, I don’t have a problem with the policy if it screens out the Ponzis. However, the current policy makes no distinction between those who Ponzi borrowed themselves into oblivion and those who merely bought at the wrong tiime.

“It’s happening quite a bit,” said Doug Shepherd, owner of Shepherd Realty Group in Riverside. “It is something that is an important part of the coming market.”

Home builders and real estate agents are capitalizing on this market.

Some even keep files on former homeowners who will become eligible to apply for new loans once past transgressions are cleared from their credit reports.

Greg McGuff, the Inland Empire division president for home builder Lennar Corp., said roughly 1 in 5 buyers in his region had either a previous short sale or a foreclosure.

I have heard this anecdotally from others in the industry. The homebuilders often time their closings to be three years and one day after the bankruptcy was discharged. The bright spot in this behavior is that it rewards those who cleaned up their act, and it will cause delinquent mortgage squatters to miss the recovery rally.

Many of them are eager to own again and often recognize the opportunity that declining prices and low-interest mortgage rates provide.

No. They are eager for another opportunity to Ponzi borrow and spend free money.

“They know to the day when the event clears from their credit history,” McGuff said. “Buyers are working diligently to improve their credit scores through the use of credit repair companies, not only to meet the minimum requirements, but also to ensure the best interest rate pricing.”

The FHA is trying to straddle the line between financial caution and doing what it can to aid the economic recovery.

Housing and Urban Development Secretary Shaun Donovan said the FHA has tightened its standards significantly but must still lend to those who wouldn’t otherwise qualify for a mortgage. It’s crucial for families to “show that they are responsible, that they have worked hard to reestablish their credit,” he said.

Raising their credit scores up above 580 hardly seems an onerous challenge.

Rebound buyers say they simply ran into bad luck during the crisis, and FHA loans have helped them get back on their feet.

Amy Novak, a real estate agent, bought a home in Riverside in 2006 and borrowed extra money to pay for needed repairs. She and her husband fell behind on payments when they lost work. They couldn’t get a loan modification and walked away in 2008, she said. …

Does a speculating realtor who strategically defaulted seem a particularly sypathetic borrower deserving of another chance?

Betty Buenrostro and her husband, Eduardo, took on a risky loan to buy their first home in La Puente in 2005. They expected to refinance out of the loan, but Eduardo lost his job when the economy soured, Betty said. …

This couples mistake was to believe their mortgage broker when they were told they could always refi. Losing their original purchase was probably enough of a consequence to make them more cautious with such claims in the future. I don’t have a problem with them getting another loan.

Shortly after buying their first Moreno Valley home in 1996, Maldonado and his wife began a years-long process of home refinancing to fund an expanding lifestyle, according to a review of the family’s property and bankruptcy records by the Los Angeles Times.Even after defaulting on their first home and declaring bankruptcy, the serial refinancing increased significantly after they bought a second home with a high-interest, adjustable-rate loan from a subprime lender. …

This is not a borrower who should be given a second chance after only three years. Are the consequences of thier behavior enough to deter them from doing it again in the future. I rather doubt it.

Maldonado readily admits his past mistakes but says he has learned his lesson.

“Yes, yes,” he said. “Leave behind the credit cards, don’t take out a second mortgage. Live with what you can, and don’t spend more than you earn.”

For the sake of the US taxpayer, let’s hope he means what he says. Such lessons can be easily unlearned when the lure of HELOC riches is presented again in the future.