DCM

The Government's Moral Hazard with Fannie and Freddie

"The moral hazard of the government's actions will be felt by future generations." How many voters agree with this statement? What will you do about it this November? Trickle down economics and encouraging spending (through easier credit) hasn't worked - is not ever going to work. The fact that half the country thinks it will and will probably vote for politicians that will continue those policies tells me this country is doomed to fail.

For the record, I agree with the statement and the premise set forth in this article. I for one am not going to pay another tax dollar to a government that takes my money to protect and bailout the wealthy elite. Make no mistake - the wealthy pay billions to Washington politicians (primarily Republicans) to protect and grow their wealth into the trillons. Wake Up America! I was going to say before its too late but I think it already is.

Did We Learn Anything Over the Past Two Years?

Thank you for the article. These are the thoughts that stirred in my mind after reading it. Maybe we should look at home lending underwriting in an entirely new light. To begin with, consider credit card debt or car loans. Are the credit card companies curtailing credit limits or reducing the number of new credit cards issued? Are lenders changing how they make auto loans in any substantive way? No, but they are finding ways to increase per borrower yields. Despite a historically high percentage of defaults and unprecedented level of consumer debt, lenders/banks are taking on increased risk exposure in order to make more money. In other words the risk reward ratio is sustainable.

So now I have to wonder, why wouldn’t a bank want to make a mortgage loan if at all reasonably possible on an appreciating asset (vs. a depreciating asset) selling at a heavy discount? Why would a bank foreclose on a property only to have to turn around and sell it at a bigger discount and with additional costs (carrying costs, repair and maintenance) when they could go to their customer and say bring me a warm body with a possibility of making payments at a very competitive fixed interest rate? The worst case scenario is that sometime in the future they have to take the property back or find a new borrower.

The banks are getting smarter about how they handle risk loss with credit card and auto loan customers. The irony is that there is no security on one and depreciating security on the other. If I was a lender, I would much rather hold a portfolio of loans on assets that have the potential to appreciate. Right now is an excellent time for banks to increase their risk reward ratio. What I am suggesting is that banks/lenders look at the real estate market like a savvy investor looks at the stock market. The savvy investor buys when others are selling and sells when others are buying. Like investors who invested in stocks in 2000 and 2006, borrowers continued to increase mortgage amounts when housing prices were skyrocketing to finally an unsustainable level. Banks acted like greedy unprofessional investors and made loans when the reward risk ratio was extremely low. Now, when the reward risk ratio is high, lenders are not lending and borrowers can’t borrow. It makes no sense! Lenders supported by government backed securitization should be aggressively expanding their portfolios by loosening credit underwriting standards (property and borrower.) What better way to get REO’s off the books and liquefy the housing market.

Banks and borrowers need to approach home ownership and lending from a different perspective. Borrowers need to stop looking at home purchases as an investment or potential retirement nest egg. Owning versus renting should be strictly a lifestyle choice. The lenders need to approach home lending from a macro investment approach. They need to lend money at times when the risk reward ratio will support lending. This approach will eliminate the chance of making loans based on rising home prices versus lending to borrowers only when their income and net worth can justify higher home prices. This approach would in effect act like a governor controlling the speed of a train.

These are just some thoughts - comments welcomed.