Friday, September 4, 2009

Common Sense and Home Ownership

Or more appropriately, making loans to provide home ownership.

Via Stacy McCain, Ready for the Mother of All Bailouts?

The FHA is on the hook for lots of "underwater" loans, taken out by low-income homeowners who got special low down-payment deals and -- in case you didn't notice -- unemployment hit a 26-year high in August, with no prospect the 9.7% jobless rate will go down any time this year. Dave Hogberg of Investors Business Daily reports:

FHA-insured loans have more than tripled from 530,000 in fiscal year 2007 to 1.7 million thus far in 2009. The Government National Mortgage Association, which securitizes FHA loans, has boosted its mortgage-related issuance to $287 billion from $85 billion. Yet during that same period, the FHA's loan delinquency rate has climbed to 14.4% in Q2 from 12.6% two years earlier.OK, so guess what the consequences are now?

As job losses continue to mount, why would someone facing economic difficulties try to keep a home that is worth less than the money owed on it?

More at the Hot Air Green Room.

As someone who did loans for the first twenty years of my life straight out of college the current "housing situation" makes me crazy. Let me explain how this whole mortgage problem came to pass as a former lender.

Once upon a time, if you did a mortgage loan the chances were pretty darn good that the loan was golden. It had to be because as a lender you were putting money out there at a relatively low rate of return for a relatively long period of time. You could do that based on some assumptions.

First, the prospective homeowner was investing too much in to securing the loan to walk away from it. Back in the day, and we are only talking about a decade and a half ago, the buyer had to put a pretty good chunk of change down on the purchase of a home PLUS pay closing costs out of pocket. As a result, people worked and sacrificed in order to save up enough of their own money before they had any kind of shot at getting a home. By the time a couple had the money to secure a loan, they were both financially and emotionally invested in the home.

Second, prospective buyers had to prove that come hell or high water, they paid their obligations. A single "30 day notice" on a credit report could end any hope of receiving a mortgage. On top of that, the buyer had to have at least three months of income, over and above the down payment and closing costs, sitting in a liquid account to show that they could make their payments in the event they had an unforeseen event.

Third, it was assumed that the value of the home would increase over time and therefore, the owner's risk of loss would increase as the lender's risk of loss would decrease. Foreclosure might have been a pain in the lender's tailpipe but it didn't result in a loss. For the homeowner, it was a huge loss and the consequences were unthinkable.

Boom! Everything changed. The powers that be be declared that home ownership was a God given right not a privilege and the push was on. If lenders didn't make enough home loans there was government enforced hell to pay. HMDA, CRA, loan, loan, loan. No money? No credit? No job? NO WORRIES! No money down. No income verification. Don't worry lenders. Throw everything out the window because we (the government) may be forcing you to make these loans but we are also letting you off the hook via Fannie and Freddie and FHA, so knock yourselves out. Guess what happened.

Lenders, under enormous pressure to lend, and with the ability to sell off their risk, created programs that put people who should never been put in to homes in to homes. Were lenders greedy? You bet your backside. Lenders figured out that they could make money by doing exactly what the government demanded that they do. Predatory? Was the government predatory?

So, almost full circle back to Stacy, "As job losses continue to mount, why would someone facing economic difficulties try to keep a home that is worth less than the money owed on it?" They wouldn't. Unintended consequences. The homeowner hasn't got so much invested, financially or emotionally, to stay and fight for a home whose value holds no value. And on the bright side, with the changes in the bankruptcy laws, they can be back in another home, no money down, in three years or less. The biggest loser, as always, is the taxpayer. Now the circle is complete.

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