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Saturday, December 22, 2007

Bi Partisan Mortgage Nonsense

President Bush unveiled his plan for dealing with the mortgage crisis today, and while it doesn' quite rise to the level of nonsense of Hillary's plan, it is pretty much as "effective" as Obama's, plan,Bush has three main points...

-Urge Congress to pass legislation that would give the Federal Housing Administration more flexibility in assisting mortgage holders with subprime mortgages. — Pledge to work with Congress to reform the tax code to help troubled borrowers rework their loans.— Call for rigorously enforcing predatory lending laws and strengthening lending practices
.Here is what the White House wants to do on point 1

One of the key elements of Bush's plan would allow homeowners with a good credit
history, but who cannot afford their mortgage payments, to refinance into mortgages insured by the Federal Housing Administration to keep from defaulting"
There are several things wrong with this proposal. The first is that FHA loans have currently not been affected by the crisis. Is it really a good idea to take one of the few segments of the mortgage market that continue to be strong and get them involved in the areas that are littered with defaults? I say no. Furthermore, the reason that FHA hasn't been affected is their limits for debt to income is much lower than the limits for other loans. Their limits are 38% (this means if your gross income is say 5K per month that means your total debts can't exceed 1900 per month). What Bush wants is for FHA to increase the limits even though one of the reasons they have such few defaults is that their limits are as low as they are.

The second problem is the one I alluded to. If FHA begins to loan to deadbeats, and that is what almost every person about to default is, they will simply be the ones holding the bags when mortgages go bad. What he will be doing is moving the risk from the individual banks to the government, since FHA is a government agency.

The third problem should be obvious to everyone. If someone has good credit history, then they can afford their mortgage. If they can't how do we measure this? Again, the problem will be that you will be transfering a mortgage to a government agency just at the tipping point of a borrower that has bitten off more than they can chew.

On the second point, I am all for reforming tax codes, however that is not going to save a deadbeat from themselves. I have tried to do mortgages for many of these people. Their true Debt to Income ratios are as high as 100% (yes, that means their entire gross income is taken by debt) There is no saving these people short of intensive classes in money management. These people simply cannot afford their mortgages, and so unless you eliminate federal and state taxes on them entirely (and even then they won't be saved), any tax code reform will be a bandaid to a bullet wound.

The third is non sensical. Here again, he is going after the evil, evil mortgage broker. Again, Bush seems, like all other politicians, to think that fraud is allowed by law. Make no mistake folks, when politicians say that want to end predatory lending what they are saying is that you haven't signed enough paperwork at closing. Nebulus laws like, "rigorously enforcing predatory lending laws and strengthening lending practices." are exactly what Ronald Reagan said in his famous and my favorite quote, "the nine most dangerous words in the English language are 'I'm from the government and I'm here to help'".

Finally, let me end with this. How does everyone feel about subsidizing me for a while? The mortgage business has been real tough since the end of July. It is damn near impossible to get a loan approved and since I work on commission that makes it really hard for me to make money. How about if the government offers every mortgage broker three thousand dollars per month while the market shakes itself out?

We can all think of many reasons why this is a bad idea however the only reason that no one is proposing it is because mortgage brokers are unsympathetic. Hundreds of banks and mortgage companies have closed down and thousands of people were left without work. These people are struggling like anyone else, and unlike most of deadbeats, they put in years into the business and not just months. Yet, not one politician wants to help us out. The reason is that we are unsympathetic.

The root of politics is policy. Sound policy is rooted in reason and logic. It is not sound policy to pick the most sympathetic group, in this case the homeowners, and try and help them out while ignoring the unsympathetic group. Bailing out homeowners by providing a fund, like Hillary Clinton wants, or by restructuring good loans and making them bad, like George Bush wants, is not sound policy. It is responding to pressure and pandering to the obvious group, and it is a recipe for the disaster.

For other perspectives on Bush's plan go here,here, and here.

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