Posted on 06/10/2011 7:24:42 AM PDT by Kaslin
And you thought things couldn't get worse on the housing front. The U.S. housing market is in the worst shape since the Great Depression, and now the Obama administration's solution is to impose new rules that would banish 60 percent of current homebuyers from the market.
The proposed Mortgage Qualification Rules are the result of legislation passed in the wake of the financial meltdown to ensure that mortgage-backed securities are based on high-quality loans. But the effect will be to disqualify millions of potential homebuyers.
Earlier this year, the six federal agencies tasked with drafting the rules added a requirement that homebuyers make a 20 percent down payment to qualify for low-interest mortgages. In addition, the new proposals announced this week would cap the amount of income that borrowers could devote to mortgage payments to no more than 28 percent of gross income. Worse, it would disqualify any borrower whose combined debt payments amounted to more than 36 percent of monthly gross income.
What does this mean in practical terms? In 2009 (the last year for which we have accurate data), median household income was just under $50,000. Under the proposed new mortgage rules, an average family would be ineligible for a low-interest mortgage if they owed more than $1,500 a month in payments for all their financed debt: mortgage, cars, credit cards, student loans, and anything else bought over time. And the mortgage payment alone could not be higher than $1,166, including escrow for taxes and insurance.
The proposed rules would put an end to the American Dream for much of the middle class. As Urban League president Marc Morial said, "Homeownership, as we know it, could be a thing of the past" if the proposed rules take effect.
But the damage extends beyond depriving individuals of the opportunity to buy a home -- it will ripple throughout the economy. There is no question that the depression in the housing market is costing jobs, and not just the obvious ones in construction. Part of what has made the American economy more resilient than other countries' over the years is the willingness of Americans to pick up and move when jobs in one area disappeared but were available in other places. But the inability of many people to sell homes has reduced American geographic mobility to historic lows.
The consequence is to keep those people who have lost their jobs, but own their homes, from moving to states where jobs are more plentiful. If they can't find a buyer because the government has made it so difficult to qualify for loans, they're better off staying put and collecting unemployment insurance.
There is no question that many Americans have become addicted to debt and live way beyond their means. But one of the best ways of determining whether or not someone can really afford his or her lifestyle is to examine credit history-not simply the level of debt. But these new rules would punish even those borrowers who have never missed a payment and have exemplary credit ratings.
It also treats income as if it is fixed over a borrower's lifetime. A relatively young college graduate may have significant debt from earning that degree, but his or her income is likely to increase substantially over the 30 years of a mortgage, and restricting access to a loan on that basis makes little sense.
And, of course, the obverse is also possible. Incomes fall as well as rise. Just because someone is earning a lot today doesn't mean he or she will be making the same amount next year or the following.
But the real problem with these rules is what they will do to the overall housing market. Without buyers, home prices will continue to plummet. There are already too many unsold houses on the market, about twice the number you'd expect in a healthy environment. And the administration's solution is to drive millions of credit-worthy buyers from being able to purchase them?
These Obama administration rules could turn what increasingly appears to be a double-dip economic recession into a full-scale depression. The president will pay politically for this disastrous policy -- but Americans will pay out of their actual pockets for his folly.
With all this posting, including mine, I don’t beleive these guidelines are in effect. They’ve been talking about this for several years. I do know they’ve instituted the limit on what the seller can “pay” in closing costs. It used to be 5%, or maybe a little more, can’t remember. Now it’s $3,000.
I meant “stated income” when I said “B” paper loans. Many people were buying homes who should not have been buying them. Those people were weeded out about 2 years ago. Up until we got out of the biz in early 2011 a buyer had to have a 680 credit score, minumum 3 1/2% down and ratio no more than 50%.
The guidelines have been moving constantly since 2007. Then you could buy with a 400 credit score with seller paid down payment and seller paid closing costs. Basically no money down if you had a job. Then it moved to 580. Then 620 with 3 1/2% down payment. And now it’s up to 680 (unless it’s gone up again) and a maximum of 3% seller “contribution”.
Personally I see many more people walking away. That means banks crashing and builders going under. There’s no fair and easy way out of this.
Are you sure you are on the right website? Do you want the taxpayers bailing out Fannie Mae indefinitely? Do you want to continue the 'liar loans' indefinitely?
This may not exclude as many people as they think. Making it more difficult to buy a house will lower the value of houses, making them easier to buy. What the net effect would be is hard to figure.
Bottom line is that the government shouldn’t be manipulating the housing market at all.
In my area, there are huge developments full of huge “spec” houses full of tiny families with no furniture or equity. There are also many, many empty brand-new houses. These “modern” houses only have a life expectancy of 40-50 years because of the cheap construction. Their values start dropping immediately upon completion. The housing marking is going down, down, down.
Sucks to be “in” real estate, but I suspect that the cost of living, rather than investing, in homes, will be going down fast.
Big government f’s up again.
Within two years, I expect to have 6 months worth of bills in my emergency fund, with the ability to tap my nascent 401K for a loan if the need arises.
Fortunately, I'm a TX resident with about 30% equity in my home.
Mortgage lenders need to do their due diligence and make a credit decision based on common sense and sound financial data...one size doesn't fit all.
I hate to say this, but instead of all the crap they’ve tried to do to fix the housing market, we’d have been better off, both in overall cost, and effectiveness, to subsidize loan modifications where principal was reduced (to reduce walkaways) in the first place.
Not saying I *like* that idea either, but it would have been more effective.
I know most mods now fail, but that’s based more on how they’re done and for whom (i.e., they’re only done for people who really can’t afford the house no matter what and already have credit issues from the get-go) than anything else.
During the great depression there was a mortgage moratorium. Nobody was foreclosed on. I’m not sure how long it went.
The problem today is not the lack of buyers. It’s the values have dropped so much that people owe much more than they can sell the house for. If they walk away they end up paying rent that’s probably less than their payments. They’ll rent a smaller house from someone else who can’t sell their house.
I can also see the government and banks becoming landlords. Plus there’ll be a lot of crack houses. Have you guys checked the increase of crack houses in every little town in America?
Credit scores do take “installment” loans (car, mortgage, etc) into consideration, but what’s most heavily weighted is having credit cards, paying them on time and keeping the balance-to-limit ratio as low as possible (under 10% is ideal).
The budget matters, but do you pay those on time, that’s more important, really.
Verification of rent should be more focused on too, if you pay rent on time, you’re more likely to pay a mortgage on time.
That was was FNMA and FHLMC used to do, the “regular” loans like that.
Its only thanks to Frank, Dodd, etc that they got weird.
You have my vote to be the next Treasury Secretary. An absolutely brilliant comment.
More brilliant than my voice mail message:
"If you agree with me that true conservatism is the last best hope for this country, feel free to leave your name, number, and a brief message."
"If not, then Good Day and GOOD LUCK!!!"
It will for people that don't already have a house that they'd need to sell first. So again, it's hard to determine the net affect.
The more bills I paid off, the lower my scores went. Got down to a house payment and went to buy a car (used) and my score had dropped from the time I’d bought the house.
In the old days there was not such thing as FICO. A loan processor verified your funds, your job and your bills. Then the underwriter decided if you could get the loan. There was still some fraud but it wasn’t government sanctioned.
Here’s an idea...why let added debt to a refinanced mortgage or an equity loan be included in the foreclosure, or better stated, why can’t the lender obtain a judgement for collection on the amount over the purchase money mortgage amount? Too many people walking away scott free from their personal decisions and obligations...at the rest of our expense.
LOL But I’m not running. A man’s got to know his limitations. Well, a man NEEDS to know his limitations. Unfortunately most politicians don’t.
I think they can in “recourse” states...only in “non-recourse” states can they not do that, if I understand right.
This is truly interesting and I’d be on the fence about this if it weren’t for the fact that “home buying” may not be such a great idea after all. Many of the “youngsters” I talk to are renting. If they’re interested in buying, they’re looking at undeveloped acreage far away from city centers as weekend get-a-ways and places to go to play, often near suitable rivers or lakes for boating and fishing. Just my opinion, but frankly, I think that makes a lot of sense. When I ask why, they’re first concern is that if they lose a job or get a job move notice, they don’t want to be concerned with having a house they can’t sell. Mobility is important in this job market.
They will all sell those mortgages to someone who is TBTF. Win-win-win for everyone but the taxpayer.
The problem is, every idiot out there in his twenties who thinks he is entitled to buy the house his parents worked and saved for years for, without earning enough money to pay for it.
But those consequences are certain anyway, regardless. Anyone who thought we could finesse our way out of this fiasco without paying the price as a country just hasn't been paying attention.
If you want to see credit ratings inflated out of all proportion, just make the whole housing industry dependent on high scores. When everyone has a credit rating of 750, then everyone can buy a house! What a great idea!
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