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Thursday, February 19, 2009

President Obama's Bubble Mentality

In the mortgage subset of FHA, there is a loan called FHA streamline. With this loan, if a borrower is currently in an FHA loan, and never late, they can qualify with little documentation and no new appraisal. All the borrower needs to do is maintain a loan amount no more than the original and receive a lower rate and monthly payment than the original. (they could theoretically get the exact same rate and monthly payment though there would be no reason to do the loan then) Then, all they would need to prove is they are gainfully employed and they qualify. As such, someone in an FHA loan that has had its value drop, can still refinance into a lower rate. In yesterday's mortgage bailout plan, President Obama made a similar pronouncement for Fannie Mae loans. If someone has a mortgage with a loan to value of above 80%, the President will now direct Fannie/Freddie to dismiss their rules for any loans above 80% LTV and give them rates as though they are below.

There are two major differences between FHA streamline and President Obama's plan. With FHA, a borrower pays an upfront fee of 1.5% that goes to FHA to pool to cover and default and foreclosed loans. Second, the monthly mortgage insurance on FHA loans is the same no matter your LTV.

What is troubling about this new rule is two things. First, of all of President Obama's ideas this is the one that has been most universally applauded. Second, it is part and parcel of President Obama's myopic determination of giving anyone he can better mortgage terms. Let's put something into perspective. Most everyone agrees that Fannie/Freddie contributed to the crisis by loosening their own term and buying far too many aggressive mortgages. Yet, throughout this period 2003-2007, never once did either suspend their rules for mortgages above 80%. Any such mortgage required mortgage insurance. In other words, even these two companies, which knew no limits to their irresponsibile behavior, knew to draw the line at waiving mortgage insurance for loans above 80%. President Obama has no such qualms. He says, glowingly, that even though the rules specifically bar such mortgages from being refinanced, all those rules must be suspended because current mortgage rates are very low. In President Obama's world, making sure that everyone possible gets a better deal is much more important than such "trivial" things as being qualified for a new loan. It's as though he missed that a lack of qualification for loans is what got us here.

Besides this scheme to dismiss long standing Fannie/Freddie rules for loans above 80%, President Obama's mortgage bailout reads like a laundry list of programs to get most any borrower a better deal. Those that currently owe more than the home is worth will be eligible to reduce their mortgage payment to as low as 31% of their income. Never mind for one second whether any of these folks are actually qualified to receive these new loans. In fact, they aren't. Their only qualification appears to be that they currently have mortgages who's payments make their debt to income higher than 31%. Borrowers on the brink of foreclosure will also be eligible to receive loans that drop their debt to income to 31%. The rates, according to the Obama administration, can be no lower than 2%. That's right, if you took out a mortgage that is unaffordable, you will now be eligible for a new more affordable mortgage and that right can be as low as 2%. The only eligibility we know of so far is that your mortgage is currently not affordable. Whether or not you had anything to do with creating this situation appears to be of little consequence. Sure he pays lip service to only providing these deals to borrowers that "played by the rules". Yet, he hasn't defined how he will determine if did play by the rules. He has however defined that anyone with a mortgage that is more than 31% of their income is now eligible. For the first time in the history of credit, eligibility will be determined by having too much debt rather than too little.

Frankly, I say that if President Obama simply wants to give as many people as possible an affordable mortgage we should skip all of these formalities. Just announce that the Treasury will refinance everyone's loan at 4%. Tell people to form a line immediately and the President himself can help the borrower's sign the closing documents. That way he can insure that everyone knows what they are signing.

During the real estate boom, the industry suffered through a bubble mentality. We all believed that real estate could and would go up forever. We all became myopic in this view and thus everyone was determined to simply constantly bring in new people into the real estate market. As such, guidelines continued to loosen until it all became ridiculous. Now, President Obama is suffering from his own bubble mentality. He believes that he needs to do everything possible to get as many people as possible more affordable mortgages. He pays no attention to such trivial things as credit worthiness and other qualifications (like that nasty thing called loan to value). It's exactly this sort of myopic determination that got us here, and it appears that President Obama is determined to repeat it.

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