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.
If we don't keep these programs, how will people who can't afford housing by a home?
Oh, man.....do you have a link to this? That's crazy talk!
You are dead right. We need these reforms yesterday, although I see no reason not to allow a 10% down payment for those with credit scores over 750, but I’m soft on that. 20% works too.
All of this would lead to a later housing bottom and a slower housing recovery, but when it came it would be solid and sustainable.
If the government was serious about getting homes sold, they would lower the barriers to investors purchasing houses. There are a lot of investors out there who are chomping at the bit to buy if the government would sweeten the deal with lower taxes and fees.
I agreed with you before the principal of "too big to fail" destroyed the banks Moral Hazard. When the tax payers are on the hook to the tune of trillions of dollars to bail out foolish banking decisions, then no, the banks don't deserve the right to decide what is responsible.
Now, had we allowed the banks and trading houses to fail per Moral Hazard for their foolish risks blowing up in their faces, then yes I would agree with you 100%. The banks having definitively proven they can't be trusted not to shovel government-backed loans to bad risks, then no, they have to have their hands tied now. We can uncuff them when they behave and when we PROVE that the next time, there will be no "too big to fail". If we can't commit to that, then their hands should never again be untied.
You’re sounding an awful lot like a Democrat.
Let the free market dictate what kinds of homes people want to purchase, not government. I, for one, prefer 9 foot ceilings. You keep to your cramped house and feel all righteous about your decision ...
It is incredibly stupid to make regulations out of rules of thumb. What mechanisms exist to change these regulations when the economics and markets vary over time? (none,..which is why we are in such a socialist malaise at present.)
I could get behind requiring something akin to the “gap insurance” offered on auto loans to cover a shortfall in value. This would be required in addition to PMI on low downpayment loans going forward.
Any such proposal would have to be turned inside out by *business people* without the remotest hint of a conflict before enacting, though.
I’ve long had the sneaking suspicion that certain quasigovernmental agencies knew quite well the potential for fraud and didn’t exactly discourage it. Just another way to redistribute wealth.
“But the effect will be to disqualify millions of potential homebuyers.”
That’s the basic idea, Linda. The 20% downpayment and the 28% ratio of mortgage to income is nothing more than the traditional lending standard that was in effect before the bubble insanity took over the mortgage industry. That’s exactly what I had to meet 40 years ago.
Why it’s a bad idea to return to the numbers that prevented mass default on mortgage loans is something known only to Linda Chavez.
Exactly right. Linda Chavez is advocating the same bad policies that led to the bubble and mass defaults.
How 'bout just drop the floor three feet?
“Financially, yes, but should the government (who was largely responsible for the problem to begin with) force it?”
That’s not an accurate description of the crisis despite the constant repetition of that theme around here.
The bulk of subprime loans and the riskiest were created by non-depository Wall Street firms that were exempt from the CRA and virtually any other regulation. They were mining the subprime market because it was extremely profitable, not because of any government pressure. There was government pressure on retail banks and depository institutions but it didn’t apply to the non-depository firms and pure lenders.
The development of the subprime industry by Argent, Ameriquest, Ownit, Countrywide, and the other major players is the basis of Muolo and Padilla’s ‘Chain of Blame’. It’s well worth reading.
“Why are they buying loans like mine?? “
The loan originator sells loans like yours to Fannie and Freddie to get the loan off of his books. This gets the lender liquid again so that his money isn’t tied up in your paper, and then he can lend again.
This is the whole purpose of Fannie and Freddie, to provide a secondary market for real estate paper. The system worked well for the 60 years that loan originators kept to conforming standards.
I seem to remember even in the 90s, you had conventional conforming, some banks doing loans in their own portfolio (i.e., not securitized or sold), and the only subprimers were the Citifinancial and Household types. And they still required some equity or down payment.
Then you had FHA. That’s about it. Even when FNMA allowed down payments as low as 10%, which I think started in the 90s, it wasn’t too bad.
I do wonder if we need to roll back or modify the Gramm–Leach–Bliley Act...if I’m correct I think that was the catalyst for a lot of this.
P.S. 9 foot ceiling owners seem a bit touchy.
Gramm-Leach-Bliley gutted much of what remained of the Glass-Steagall Act. Glass-Steagall was the Depression era law that separated investment banking from retail banking.
Investment bankers, Wall Street if you will, wanted to get back into making loans to consumers. I don’t think it’s a coincidence that we found ourselves in a major financial crisis less than ten years after gutting Glass-Steagall.
Household Finance and Aames Home Loans were the inspiration for the big subprime houses. Household and Aames made very small consumer loans, charging high interest rates.
The high interest rates fascinated Wall Street but Wall Street needed a product much larger than the small consumer loans Household and Aames dealt in. They needed something bigger, like mortgages. How could you get a loan the size of a mortgage but with the yield of a consumer loan? You loan to people who have bad credit and charge them a high interest rate for the privilege of getting the loan. And that’s how Wall Street got into the business of subprime lending. Unlike retail banks they weren’t pressed into it by the government. They were eager to get into subprime lending because it offered high yield paper.
Oh please, please, no.
I see no reason the government should treat investing in real estate any more preferentially than investing in gold, or oil futures, or stocks, or lottery tickets for that matter.
This is true, and the subprime crisis did not become such until all that bad paper was bought up by the TBTF entities.
Who needs to go to jail here? In my opinion it's the rating agencies who slapped AAA on all that crap, but I'm not holding my breath waiting for that to happen.
And I got it - at 18.25%.
If you don’t mine me asking, when did you get your loans?
I think my loan had been securitized, but it wasn’t until 2010 that we got a letter from Fannie that Bank A, who we never had a loan with, had assigned our loan to Fannie!!!!
The weird part was that we were told to pay servicer A, who we had been told to pay back in 2003 by the originator of our loan.
We also had put down 20%, in 2001. Our last refi was in 2003. I could not find our loan at MERS but we are listed at Fannie.
I was hoping to refi with a credit union was a way to get around this nonsense. Now, I wonder.
Opps!
I was hoping to refi with a credit union AS a way to get around this nonsense. Now, I wonder.
“the subprime crisis did not become such until all that bad paper was bought up by the TBTF entities.”
The non-conforming subprime paper generated by the investment banks and hedge funds were time bombs and were sold all across the globe. Anyone who bought the stuff was going to suffer serious loss. When this paper started blowing up you had a threat to the ability of the credit markets to operate. It was an implosion of this paper that ‘broke the buck’ at one of the premier money market funds, and it was that event that prompted Paulson to tell Dubya that something had to be done to save the credit markets.
The rating agencies led unsuspecting buyers over a cliff. It will be years before anyone trusts their judgement again.
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