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Uncle Sam Addresses One End of Housing Pipeline, Ignores Other End

The Obama administration is close to committing as much as $35 billion to help beleaguered state and local housing agencies continue to provide mortgages to low- and moderate-income families. HFAs, or government-operated housing finance agencies, provide loans to less affluent and first-time home-buyers. HFA’s interest rates are between half and one percentage point below those of commercial lenders. The Treasury Department would give the HFA’s $15 billion to bankroll the financing for these homeowners. It would also stake Fannie Mae and Freddie Mac to the tune of $20 billion in order to purchase housing bonds issued by state agencies.

In order to qualify for an HFA loan, borrowers must have “good credit scores and verifiable income. The criteria differ by state.” That last sentence makes we want to hide under a desk…

I think it’s a good idea for the government to assist homebuyers’ purchases. This effort seems less gimmicky than the $8,000 tax credit for first-time homebuyers. “There are more people in the marketplace, because a fair number of them have this $8,000 tax credit behind them,” says David Crowe, chief economist for the National Association of Home Builders. “The demand will fall off when the credit expires, and that could cause a backslide in house prices.”

The government should ensure that objective borrowing criteria are applied to homebuyers across the board. Homebuyers should put down no less than 20% of the purchase price, free of gimmicks that get the downpayment kicked back at closing. That’s what the Chinese government is doing, to their success. Their income should be confirmed on their W-2s for at least two years. Sorry, fellow 1099′ers. It was too easy to game the system with NINA (No Income, No Assets) and NINJA (No Income, No Job or Assets) loans that helped bring down the system in the first place.

Let us not forget that it wasn’t a few deceptive homebuyers who brought down the system on their own.
Unregulated mortgage brokers manipulated the system in order to generate fat commissions for themselves. They pushed through paperwork with information they knew, or should have known, to be false. Mortgage brokerage is a largely unlicensed business. White collar criminals, and criminals with other colored collars, flock to this business. Real estate is a popular subject among the drug dealers and white-collar criminals doing time in low-security federal prisons – aka Club Feds.

Further along the food chain, bankers turned a blind eye (See Washington Mutual, Option ARMs, and their subsequent implosion). The folks on Wall Street securitized the paper in a thousand different traunches to bury the bad paper, the way PrimeTime Live caught Food Lion grinding up expired raw pork with new meat and bleach. (This posed a dilemma to Jews who rejected their ancestral dietary laws, but couldn’t shake their OCD about germs.)

In order for the system not to collapse again, all fifty states have to impose some regulations and background checks on its mortgage brokers.

Even if this is done, there still is a tsunami of bad mortgage loans coming to roost. If half of all residential mortgages are going to be underwater by 2011, the government has to buy the underwater residential mortgages and refinance them. This will allow borrowers to make smaller, more affordable payments — which will now be recourse — while making a profit for Uncle Sam. If this is not done, then this tsunami is going to hasten the days of negative equity for new homebuyers.

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