Friday, August 31, 2007

Bush on the subprime market

If you haven't read/heard Bush's recent address on the subprime mortgage market, I suggest you take a look. While I'm not a Bush fan, I do like his general plan better than, say, Hilliary Clinton's. At least he doesn't just come out and say that he's going to funnel our tax money to pay people's mortgages.

Here are what I think are the highlights:

This market has seen tremendous innovation in recent years, as new lending products make credit available to more people. For the most part, this has been a positive development, and the reason why is millions of families have taken out mortgages to buy their homes
Hmm, but isn't that also why we've got this problem in the first place? There are really only 3 things that make a home (and the loan for it) more affordable and thus increasing homeownership overall.
  • 1) Home prices drop
  • 2) The loan price drops (lower interest rates)
  • 3) The median income increases
None of these happened. The only thing left to do, then, is to extend the repayment period. That means funky loan products. The same products you, Bush, are so happy about created this problem.
This has led some homeowners to take out loans larger than they could afford based on overly-optimistic assumptions about the future performance of the housing market. Others may have been confused by the terms of their loan, or misled by irresponsible lenders. Whatever the reason they chose this kind of mortgage, some borrowers are now unable to make their monthly payments
Well, duh. The whole point of the ARM is to extend the loan period. Same with interest only. You get a low monthly payment for a period, then when you have sufficient equity to lower your LTV ratio and qualify you for a standard fixed. This is of course a nightmarish trap if you can't refinance, because your interest rate hikes to something more reflective of your risk to the lender and suddenly you can't pay the monthly dues. I'm no expert, but that's how I see it. Now instead of a 30 year loan you have a 35 year loan with a 5/25 ARM, thus allowing you to buy a house you can't afford.

You simply can't get more people into homes without either increasing their income or lowering the cost of the house. The math doesn't work. Instead you just encourage people who can't really afford homes to go into perpetual debt just to get one.
the government has got a role to play -- but it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford. Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders, or a little help from their government
I agree, but that is the root of the problem: people bought more house than they could logistically afford by using all these stupid loan products. They can negotiate with their lender but it all comes down to this: you owe X dollars, how are you going to pay it back? If you owe more than you can realistically pay back in, say, 30 years with some interest tacked on, you can't afford to stay in your house. Period. There is no room for negotiation, the only thing a lender can do is forgive some of the debt or extend the payback period.

Neither of these looks like a good solution. The first one means we're giving money to people who bought more house than they could afford. How is that fair to everyone else paying their mortgages in full? The second one means that they will be paying even MORE for the house AND will probably NEVER own the thing. Changing the tax code to help them even more sounds like welfare.
This administration will soon issue regulations that require mortgage brokers to fully disclose their fees and closing costs. We're pursuing wrongdoing and fraud in the mortgage industry through the Department of Housing and Urban Development, the Department of Justice, the Federal Trade Commission, and other agencies.
Well good! But the disclosures are already there on the mortgage contract. People who don't understand the terms or the contracts they are signing should hire a lawyer to explain it to them. If they can't afford a lawyer (who would probably charge a few hundred bucks for such a task) how can they afford a home?

So here's a glimpse into his plan, apparently.
Sixteen months ago I sent Congress an FHA modernization bill that would help more homeowners qualify for this insurance by lowering down-payment requirements, by increasing loan limits and providing more flexibility in pricing. These reforms would allow the FHA to reach families that need help, those with low incomes and less-than-perfect credit records or little savings...Congress hasn't acted this year. It would be a good task for Congress to come and get FHA modernization done so that we can help these people refinance their homes, so more people can stay in their homes
Am I reading this right? You made a bunch of reforms that sunk people into loans they can't afford so the solution is to make more reforms to keep them in those homes? If they have bad credit, low incomes, and no savings, they should rent! Build up savings, improve your credit, make more money, then buy a house you can afford. Don't game the system just so someone can have a house without putting in any actual effort to get it.

Homeownership is a splendid goal...when you've earned it.

1 comment:

Mike, Nicki, and Josh said...

Hey hey,
Great blog. Excellent post and commentary on the Bush speech. You're right, bailing out delinquent home owners is unfair to those who have paid their mortgages in full and on time.
Also, there's another affected group (that I happen to fall into). It's the group that recognized the inflated market, chose to continue renting and saving, and waited for the bubble burst and a chance to buy in when speculators lost their shirts. Now, us savers may have to use some of our tax dollars (which otherwise could add to our own nest eggs) to help bail out the greedy speculators.