Thoughts on the Housing Bill

The best thing about the housing bill is that they're going to eliminate the down payment assistance programs that have default rates almost as high as that for subprime arm mortgages. Admittedly there are people who do receive assistance via this program who enter a sustainable home ownership situation, have no problems paying their mortgages, etc, etc. However a default rate of greater than 15% in the first two years is just unacceptable, especially when its on the taxpayer's dime.

The worse thing about the housing bill is the blank check that Congress just gave to the mortgage GSEs, a blank check that doesn't come with conditions related to reigning in their investment activities, breaking the companies up into smaller and less risky entities, etc, etc. In effect Congress has elected to use tax payer money to back stop the old model, instead of saying:

"Look, we understand that we have to prop you guys up, but if we're going to do that we're demanding some serious changes so we can make sure that the tax payer never has to do this again."

Instead of choosing to do the right thing and ensuring we have a healthy, sustainable economy by removing key threats to it Congress has decided to go for the short-term fix. Ironic that these folks are now going to get on the campaign trail and tout their ability to help the economy, when they just signed a bill that could conceivably do the opposite.

The final irony here is that the mortgage GSEs are receiving funds on terms no borrower would ever receive, how many tax payers running arguably insolvent businesses can run to a bank and get a capital infusion on sweetheart terms?

As for aspect of the housing bill that is supposed to help struggling home owners, I'm sticking with what I said several months ago: the key issue isn't one of interest rates, access to credit or housing prices, it's one of people buying houses they can't afford. The FHA having greater capacity to help refinance loans may help people on the bubble, and/or those who can make prime rate payments on their homes but not their ARMs adjusted rate, but it won't be able to help those who can only afford their home at their ARM (or other exotic mortgage's) teaser rate.

Unfortunately that's the situation a lot of the people facing foreclosure are in. Additionally who is going to refinance a mortgage that's severely underwater, especially in hard hit areas like Las Vegas, California, Florida and Arizona?

A lot of the people facing foreclosure are just in unsustainable situations that can't be fixed with refinancing. You can't legislate away the mathematics of severely underwater homes/mortgages and affordability.

Those who truly want to help struggling homeowners need to look beyond loan restructuring packages and refinancing programs that help those least in trouble, and consider what they need to do in order to assist those hurting the most. Instead of thinking only in terms of: "how do we enable this person to keep their home?", they should think in terms of:

"How do we enable this person to get into sustainable, affordable housing situation, whether that's renting now, owning something cheaper, or owning in the future?"

Until politicians (and activists for that matter) confront the realities of the foreclosure problem, of the role a buyer's own decisions played in it, etc., etc., they're not going to make much progress towards helping homeowners in trouble. You can't legislate or protest way the mathematic realities of the situation.

Finally, financial education should be mandatory requirement for anyone to receive assistance of any kind, because an educated home buyer can taught to avoid these kinds of situations. More important than solving the problems of the present, is putting things in place in order to ensure that we don't have these problems in the future.

Disclosure: At the time of publication, the author didn't own a position in any of the companies mentioned in this article.

Comments

[jackh:]

The way I understand it is that the lender has to write down the value of the loan (take a loss) and set up a deal that the borrower can afford.

So.... you have a house which may still be valued at more then or near fair market and a borrower who has committed every cent he has and is likely to earn to hold onto it........

Recession, rising unemployment, why do I feel the next wave of defaults has just been delayed a few weeks.....

2008 Aug 04 08:36 AM

[User 237841:]

It isn't so much that people have bought houses they can't afford, it's that houses have become unaffordable. Prices need to come down from their current nose-bleed bubble high of 10x-median-salary level. 40-year mortgages? Give me a break. It's not as if new construction nowadays is going to be standing long enough for the kids to inherit it, and finish paying it off anyway.

2008 Aug 04 09:11 AM

[drew303:]

I can only hope that the powers that be learn from their greedy ways. Its common knowledge that if you give the people a tool they will use it, and in ways you may not have intended they use it. And if that tool is of inferior quality eventually it is going to break!
I have been hearing people on wall street complain a lot more lately and blame the "home owner" for the problems we are facing. The truth is, that wall street got too greedy and put their own interests before the "fiduciary" responsibilities of their clients and they did so on such a grandiose level that they managed to effect the entire worlds economy.
There are many parties to blame in this blunder, yes including the homeowners who bought the dream of financial security and affordable home ownership, and the loan officers who helped sell it, and the weak politicians for not properly supervising you. But living in a capitalistic highly self regulated society we must point the finger where it belongs, not at the dealers or users, but at the ones who make the products and push it on the street with greater marketing spin than any corner drug pusher could ever dream. People look to their leaders to lead, and trust that they have put enough thought into their leadership that they wont get blindsided.

2008 Aug 04 12:00 PM

[JasonC:]

The second comment is the correct one. Houses they couldn't afford describes the entire country, because of the amount of play money thrown at housing over the last 6 years. Run the numbers and you will find less than 20% of the income distribution can afford the median house. Um, you can't put 20% of the population in half of the houses.

The bank's current tighter terms aren't going to save them, because they amount to saying "the only person qualified to buy a house is someone selling a more overpriced one". OK, who are they going to sell to? Crickets chirp. Prices simply have to fall, and when that happens loans will take losses.

But spare me the comments about greedy wall street supposedly being to blame for it all. Who paid the crazy prices? Who signed the pieces of paper with monthly payments they couldn't pay? Who is walking away and stiffing the banks? The supposedly put upon innocent homeowners are the reckless deadbeats of the affair. But you won't find a pol attacking them for it, because they vote. So everyone beats up on the lender instead, at the very moment he is being stiffed for the whole nut.

The whole thing is morally obscene.

2008 Aug 04 01:38 PM

[Tom Lindmark:]

I agree that the end of DAPs was welcome. Unfortunately, I believe that it is premature to celebrate their death. Here's an article I wrote a couple of days ago on the beginnings of their resurrection. blog.metro-real-estate.... You might also want to check out D R Horton's CEO's comments this morning on MarketWatch. www.marketwatch.com/ne.... They will be back.

2008 Aug 05 04:18 PM