Congress wants mortgage overhaul

mortgage meltdown

mortgage meltdown

“Many fear any major overhaul of U.S. housing finance will slam a still tottering housing market. If America scraps its current system tomorrow, that’s what will happen. At a minimum, removing the government subsidy should nudge mortgage interest rates higher, potentially knocking home prices down further.” — Adriana Barnes (1)

The treasury department released a report today saying the government should slowly pull back on it’s support for the mortgage market. The report contains three options for troubled mortgage giants Fannie Mae and Freddie Mac. The options are: to end the government’s role in guaranteeing most mortgages, support the mortgage market only in times of stress, and provide a government guarantee for mortgage investments created by private companies. Fannie Mae and Freddie Mac own about one half of mortgages in the United States. The bailouts have cost taxpayers nearly 150 billion dollars.

Federal reserve intentionally given green light for garbage mortgages

The problem is often construed as a right vs. left or a free market vs. government regulation. What in fact caused the most recent bubble and subsequent collapse was poorly thought out regulations with the well intentioned goal of getting everyone into a house. Greedy bankers piled on and pushed things over the top, but they would and should not have been able to do this without deregulation.

The government should be there to regulate the market and yes put the brakes on risky lending practices and turn a deaf ear to the banks that say they should be able to lend more money, with less down to poorly qualified individuals AND have it backed by the government. If you want to lend to risky clients it should be on your own dime.

As for getting everyone into their own home — it’s a nice idea — but prudent economic practices dictate that they have to be able to afford it and afford to put a down payment in as well. If you don’t need a down payment and interest is low of course people are going to pay ridiculous prices because they don’t see the downside until much later (thus a bubble as people bid up houses with easy to obtain cheap debt and not real money).

Obama needs to raise interest rates so the banks can attract real capital moneys, and not the Monopoly stuff DC is printing. He must be a lunatic if he expects people to lend money in a zero interest and bankrupt environment. Lenders need real inflation plus 2.5%, that would be about 6% right now.

Bottom line is people have to pay their bills, and banks need to borrow real money, not the ponzi stuff. Obama, you have to raise interest rates and remove tax incentives to be so highly leveraged on a home. And if you don’t have 10% down, you don’t have what it takes to be a home owner.

Abolish Fannie and Freddie and get government out of this business – it has done nothing but encourage reckless lending (not just subprime but remember the S&L crisis in 1980’s – cost the US taxpayers $160 billion).

Make the banks and lending institutions manage the risks they choose to take on in their business and take the losses of their own bad decisions.

Fannie and Freddie like a lot of government intervention in markets always comes to a bad ending with a lot of people who were financially prudent having to pay for those who were not. And they also end up paying for a lot of fraud, malfeasance, shoddy business practices and outright theft while a lot people get away with a lot of money through these practices and suffer no consequences.

Worst of all these government actions distort the economy and the normal operation of markets – stop stimulating, intervening and interfering in the economy for short term gains that are not sustainable.

The US should also change two other things about their mortgage market – make all mortgages full recourse loans and phase out interest deductibility. The first allows people to overbuy in the housing market and get off very easily if things don’t work out – make people understand the risks they take on when they borrow money not just the loss of their home but their financial well being when they take on too much debt in any form.

The second keeps them for borrowing at their limits to save taxes which leaves them highly exposed to any economic downturn or any other change may of which they have no control over.

References:

(1) A Government Overhaul Could Hurt Mortgage Interest Rates Even More

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