Saturday, September 7, 2013

Did We Learn Anything from the Mortgage Debacle?


Some Are Raising Alarm Bells Again as Mortgage Rules Soften

The Charlotte Observer claims to be one of the first to raise a yellow flag regarding the housing meltdown in 2008.  In an article titled "Remember the Reason for the Mortgage Rules,"  associate editor, Peter St. Onge, cites an article he participated in for the Observer in 2005:

Back then, in 2005, we were among the first newspapers in the country to report on the depth of foreclosures. We knew why it was happening - for years, homebuyers were putting their signatures on loans that shouldn’t have happened. Many were victims of predatory builders and real estate companies taking advantage of a reckless lending environment. Regulators were clueless, intentionally so or not.
We also knew the root of it all. Both the Clinton and Bush administrations had made increased homeownership a policy goal. To that end, the feds loosened requirements for FHA loans. Homeowners no longer needed a down payment, and they could borrow more against their income. And because the FHA guaranteed repayment of those loans, lenders could take more chances, too.
The inevitable result: More bad loans, which banks packaged into toxic investments, and we all know the rest. 
 He goes on to sound an alarm about recent softening of Dodd Frank rules regarding zero down loans:

Last month, federal regulators announced that a key part of the Dodd-Frank financial reform law was getting a severe watering down. Two years ago, regulators had proposed a 20 percent down payment to qualify for home loans. The reasoning was simple: Home loan defaulters tended to be people who didn’t have a lot of equity to begin with. But now, a revised rule requires no down payment at all.
This retreat came after relentless pressure from housing industry lobbyists, as well as supporters of low-income housing, who argued that a 20 percent threshold would eliminate homebuyers and snuff out the housing recovery. They also argued that other new rules did enough by placing tough debt-to-income thresholds on loans and discouraging dangerous loan gimmicks that fooled consumers into thinking they could afford a home.
On that, the lobbyists are right. The new rules will stop the worst of the loans. But the loss of a down payment requirement – even 5 to 10 percent – opens a door for lenders to work the edges and homebuyers to take risks they shouldn’t. 

While Onge is evenhanded in this piece regarding who was at fault, including politicians, regulators, financial industry, lenders, brokers, and consumers as all taking advantage of the situation in order to meet their goals, he fails to address the reality of the but for argument.  Greedy lenders and borrowers alone could not create this horrific result.  But for pressure from the government to make bad loans, and regulators completely missing on valuations, the crisis would have merely been a normal swing.

Dodd Frank assumes that the government can make rules to keep things in check.  But it was government who provided the but for in 2008.  While it is unlikely that we will ever again see the perfect storm that created the collapse of the real estate bubble, we can certainly expect that government will overstep, mismanage, and act precipitously based on the current mood of constituents. 

Bill Rayman Home Mortgage

12121 Wilshire Blvd
Suite 350
LA CA 90025


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