Published: Sunday, January 17, 2010
Federal help may be causing more harm
Everybody is charting job growth and foreclosures.
While many analysts say job creation is the primary driver of home sales, the hole that’s been dug by bad loans is too deep to be offset by a modest rise in future employment.
The reality is more foreclosures than ever are looming this year.
What can be done about it?
A decade of cheap money and incredibly flexible loan programs offered by many lenders sparked overbuilding by developers, a flip-and-run mindset for speculators and unrealistic expectations for first-time home buyers blinded by the low payments of a short-term loan.
A consultant to the mortgage-finance industry and former chief credit officer at Fannie Mae, Edward Pinto, said the over-stimulus provided by Fannie, Freddie, FHA and the Community Reinvestment Act created the housing boom that went bust.
The response to the bust has been to provide even more stimuli, which is not helping to clear the market.
Normally, people who can truly qualify to buy a home can produce a down payment and have the income to repay the mortgage, taxes, insurance and other monthly costs.
Pinto believes that the extra cash the government is tossing into the housing market is simply adding fuel to the fire by keeping down home prices while foreclosures continue to flood the housing market.
“All we are doing is kicking the can down the street,” Pinto said. “The loan modification programs that were designed to help people stay in their homes have been abject failures.”
Pinto and others would stop the government’s housing stimulus funds and take some basic steps to curtail foreclosures. They include:
Separating borrowers who would qualify at a lesser mortgage amount from those who shouldn’t qualify for a loan at all. Unqualified lenders now in a mortgage should get help with rental subsidies for a specific time period in exchange for leaving the home in good condition. Lenders should accept deeds to a saleable home instead of pursuing the foreclosure process.
Chopping down the amount of the loan and reducing the mortgage amount for those who qualify. Banks should be encouraged to negotiate affordable rates and terms.
Making the borrower personally responsible for the reduced mortgage by allowing the bank to go after the borrowers’ other assets in the event of a default. Now, most borrowers risk nothing but home equity, which is generally nonexistent, in a foreclosure.
Those steps would leave qualified borrowers in their homes, the homes would cost less and more genuine buyers would surface because the home market has hit a real bottom.
The lending craziness of the 1990s and 2000s was not present in any other decade.
Sixty years ago, the average home price in the United States was approximately $5,000 and the average debt against it was about $2,500. In the early 1950s, the prevailing loan-to-value was 58 percent while many of the loans made between 2004-06 had an value of 97 percent to 100 percent.
Some lenders, blinded by the 10-year run-up in home appreciation, were making 125 percent loans.
It’s time to let the market correct itself. That means putting real homes and real buyers together without government or the banks having to add an artificial stimulus to make things work.
Next week: A lender agrees to take a “haircut” on a senior’s loan.
While many analysts say job creation is the primary driver of home sales, the hole that’s been dug by bad loans is too deep to be offset by a modest rise in future employment.
The reality is more foreclosures than ever are looming this year.
What can be done about it?
A decade of cheap money and incredibly flexible loan programs offered by many lenders sparked overbuilding by developers, a flip-and-run mindset for speculators and unrealistic expectations for first-time home buyers blinded by the low payments of a short-term loan.
A consultant to the mortgage-finance industry and former chief credit officer at Fannie Mae, Edward Pinto, said the over-stimulus provided by Fannie, Freddie, FHA and the Community Reinvestment Act created the housing boom that went bust.
The response to the bust has been to provide even more stimuli, which is not helping to clear the market.
Normally, people who can truly qualify to buy a home can produce a down payment and have the income to repay the mortgage, taxes, insurance and other monthly costs.
Pinto believes that the extra cash the government is tossing into the housing market is simply adding fuel to the fire by keeping down home prices while foreclosures continue to flood the housing market.
“All we are doing is kicking the can down the street,” Pinto said. “The loan modification programs that were designed to help people stay in their homes have been abject failures.”
Pinto and others would stop the government’s housing stimulus funds and take some basic steps to curtail foreclosures. They include:
Chopping down the amount of the loan and reducing the mortgage amount for those who qualify. Banks should be encouraged to negotiate affordable rates and terms.
Making the borrower personally responsible for the reduced mortgage by allowing the bank to go after the borrowers’ other assets in the event of a default. Now, most borrowers risk nothing but home equity, which is generally nonexistent, in a foreclosure.
Those steps would leave qualified borrowers in their homes, the homes would cost less and more genuine buyers would surface because the home market has hit a real bottom.
The lending craziness of the 1990s and 2000s was not present in any other decade.
Sixty years ago, the average home price in the United States was approximately $5,000 and the average debt against it was about $2,500. In the early 1950s, the prevailing loan-to-value was 58 percent while many of the loans made between 2004-06 had an value of 97 percent to 100 percent.
Some lenders, blinded by the 10-year run-up in home appreciation, were making 125 percent loans.
It’s time to let the market correct itself. That means putting real homes and real buyers together without government or the banks having to add an artificial stimulus to make things work.
Next week: A lender agrees to take a “haircut” on a senior’s loan.
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