Lack of Due Diligence in the Housing Market

Creating a solution to the housing problem should not entail a continuation of the actions which placed us in the problem to begin with. That, however, is exactly what the Obama Administration is saying will have to happen under the housing bailout plan.

Obama has repeatedly asserted the housing bailout will help “stabilize the housing market and help responsible homeowners stay in their homes.” It’s what he doesn’t say that is going to continue the problem. Even those who support the president’s plan in Congress admit that some people who gambled and lied to get their loans, will also be helped to keep their ill-advised gains.

It is another example of heading full speed in a dark tunnel without lights, hoping there is an exit somewhere ahead and nothing in the roadway to stop us. Who cares if we hit a few rocks, or sideswipe the walls as long as we make it out. Fed Chairman Ben Bernake says it’s important for the nation to go ahead with the plan even though it means assistance will go to some who should have known better than to get in over their heads.

Why?

Why should we bail out people who bought more than what they could afford to pay for? Why are we rewarding the people who didn’t have the income or couldn’t afford the monthly payment and only paid interest on the loan? Why are we rewarding people who chose ARM’s over fixed rate with the hope that they could lock in a fixed rate in a couple of years and by then, they would be making more anyway and the value of the house would have appreciated and they would have equity!

Shelia Bair, head of the Federal Deposit Insurance Corportion, which is supposed to be insuring deposits in banks claimed that it was “simply impractical” to examine every delinquent loan and weed out those taken by people who overstated their income or assets to get a mortgage they could not afford.

Really?

Isn’t it supposed to be the job of a loan officer at a bank to check to make sure that everything on the loan is “true to the best of my knowledge”? Instead, Shelia Bair is telling us that we can’t even perform due diligence before compounding the problem? What is so hard about being a good steward of taxpayer dollars by checking the background of these problem loans? This is especially true when the taxpayer dollars are in reality deficit dollars that will have to be paid back by our great grandchildren with interest.

And what about the homeowner who is current on his mortgage, or the homeowner who paid off their mortgage early? You know, the responsible ones who bought what they could afford and saved for the down payment. Oh right, responsible people are the ones who were not smart enough to figure out how to game the system so they could benefit twice at taxpayer expense.

Disclosure: Ed Zimmer is a homeowner who paid off his mortgage early in 2008.

Comments

[Douglas Mur...:]

Yes being good and honest is not a virtue in our world (USA) system. GREED is the leader of the pact and we as humans (some, but not all) will continue to erode the value of life for future generations if we don't take heed to the current economical problems. It is not the President who will be the answer for correcting the problem or the government but the people themselves. Bernie Madoff didn't force anyone with a gun to invest their money...if it sounds to good to be true...them we should know the rest but MANY DON'T! We are blind sided by the assumptions of wealth and greed so therefore we can't see pass the smoking fire. Once we hear that we can generate returns of 18 to 30% guaranteed yr and yr out without any negative returns or ups and downs...never has happened and never will. Slavery still exist, doesn't matter about race, color, gender or etc....but the difference is...nobody is forcing us to be slaves but we don't have the knowledge to understand the bondage that is set forth before us and we sticking our hands into the handcuffs and the lenders are throwing away the key and not leaving an address for location at a later date. Wake up people! it doesn't take a rocket scientist to see how the system is set up...knowledge is power and the lack of knowledge institutes the propability of poverty!

Mar 25 10:39 AM

[Russ Wetherill:]

Ed-
I think I have figured out the Obama code - whatever he says his policies will do, the exact opposite will occur. You can apply this to just about anything. For example, he claims to be decreasing in the out years of his budget. You can either read the congressional budget office evaluation showing multi-trillion dollar increases in the deficit, or just assume that reckless spending of a gi-normous budget will occur. The result is the same and you save yourself a lot of effort reading!

Another example is the "savings" we would see in health care by being more efficient. Obama only needs $634B for health care reform to begin. Why do we need to spend hundreds of billions of dollars to create electronic billing and patient records? Scan in the old records and click save! So, when Obama says he's saving you money grab a hold of your wallet.

Last example is housing. Obama claims to want to save the housing market by freeing up lending and keeping mortgage rates low. Isn't that how we got here? Am I going insane?

I thought the problem was that house prices were so high that no one could afford to buy the without taking on a ridiculous amount of debt, that they had no skin in the game in the form of 20% down payment, and that no one bothered to check to see if people made as much as they claimed.

To ameliorate market conditions Obama proposes to keep houses at unaffordable levels by keeping long-term mortgage rates low, and giving first time buyers an $8000 tax credit to effectively lower down payment requirements. Soon they will be forcing Fannie Mae and Freddie Mac to provide a certain percentage of loans to areas of the country that are hardest hit by the financial crisis (regardless of credit score).

What is the definition of insanity? Doing the same thing over and over expecting a different result. This housing "plan" sure sounds crazy to me!

By the way, I don't own my own home. I am one of the patient renters in Southern California who never bought during the boom because the prices were just ridiculous! One house I am currently looking at was purchased in 1995 for $301k and is listed at $825k, after a peak price of $1.1M in '06. A $524k profit for doing essentially nothing except living in a house for 15yrs that was subsidized by the government through the mortgage-interest tax deduction.

Mar 26 01:10 AM

[Smalltownba...:]

The reason they can't go back and check each loan is that the original loan file is the only thing that will give them all of the information needed to identify the fraud and it is does not move forward in the system with the servicing of the loan. Keep in mind that the industry fostered and encouraged this fraud through lax underwriting, ridiculous programs and a total three monkey approach to all of the warning signs.

The process of tracking down the income documentation on these loans, reviewing it and determining whether or not someone lied would require too much manpower and cost which would negate the benefits of the action. The best solution is to look at the current situation of the borrower and detrmine if they can resonably expect that the homeowner can pay the mortgage when modified.

I don't like it any more than you do but it is a better solution than having all of these homes sitting empty and deteriorating. This mess was created by Wall Street and fed by the investors insatiable appetite for higer yields. There is blame at every level of the food chain but the tax payer is the ultimate responsible party and the ultimate victim.

I happen to believe our costs will be less if the occupant stays there and the mortgage after modification can perform. This needs to carry stipulations that at the time of sale or other transfer of title to a relative any proceeds up to the amount of modification will be returned to the Federal Government and deposited into a trust account and disbursed periodically to be applied towards repayment of this debt.

Mar 26 09:04 AM

[rm:]

Water under the bridge alert!

[Isn’t it supposed to be the job of a loan officer at a bank to check to make sure that everything on the loan is “true to the best of my knowledge”?]

It wasn't done, everybody knows that. Too late. The FDIC is not a loan originator.

[Instead, Shelia Bair is telling us that we can’t even perform due diligence before compounding the problem? ]

Everyone in the mortgage industry (regulators included) is striving for "economies of scale." You are right- the best results would be obtained by evaluating these borrowers on a case-by-case basis.

Unfortunately, nobody wants to do the work.

Any case, they wouldn't be evaluating them for fraud... the only thing that matters at this point is... what can they afford, and what's the NPV.

Meanwhile, the investors will pretend that they'll be paid in full at some point.

Hah!

Mar 26 09:29 AM