Posted on 06/17/2013 6:20:49 PM PDT by whitedog57
Earlier, I wrote about the various proposals circulating through Washington DC on the future of housing finance in the USA. Virtually every one had a government guarantee in their proposal, as if the mortgage market would collapse without Uncle Sam.
As Nancy Pelosi once famously stated, we need to look at government guarantee “away from the fog of the controversy.”
Several economists at The Federal Reserve produced a nice graphic on prime versus subprime borrowers. Essentially any loan with a down payment of less than 20% is considered subprime and credit scores of 660 are prime if the down payment is more than 20%.
Here is the performance (as measured by delinquency of 90 days) for subprime (white) and prime (red) loans (although not the same definition of prime and subprime as The Fed’s definition, but close).
The point is that with sufficient skin in the game by borrowers (>20% down) and sufficient capital held by lenders, we could have easily survived the financial crisis in much better shape.
And The Fed stands by to provide liquidity, as we know.
So what is the compelling reason for a government guarantee? Everybody loves a guarantee, except taxpayers. And government will likely to continue to insure low down payment loans (FHA), even though we just went through a housing and mortgage crisis.
The only ones who want guarentees are BANKERS !
We wouldn’t have the current economic condition without:
#1 )Government interference in mortgage elligibility
#2) Banks making risky loans which anywhere else would be criminal
#3) Banks leveraging deposits on hand by 40 times availability
Well... yes, bankers DO want mortgage guarantees from tax payers...
But - so do the massive Real Estate Industrial Complex and the new home Construction Industrial Complex, and the huge population of we-want-to-be-subsidized voters who want to buy homes larger than what they can actually afford. Add them - and their votes and campaign contributions together - plus those from the bloated financial industry: and you have a combination that our elected so-called “leaders” cannot avoid pandering to...
When my husband and I were just out of college and getting married, we bought a house with an FHA loan. At the time it was more then we could afford, we even borrowed the down payment! Yes, stupid! We struggled a few years and messed up our credit. The only thing that probably saved us is that we spent much less then we were approved for or we would have lost the house! Fast forward 16 years later and with increased income credit is back on track and the house (we’re still here!) will be paid off in 4 years.
But we never should have been approved for what we were at the time, and like I said we weren’t comfortable borrowing that much which is the only thing that saved us!
Exactly, they want a guaranteed payback and they don’t want to take any risks.
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