The federal government backs a program creating moral hazards and encouraging risky home loans. Why am I not suprprised? The WSJ reports:
Mortgages that allow consumers to put little if any money down when buying a home have largely disappeared as a financing option available from private lenders. But they are still available -- and growing more popular -- through a government-backed program.
That's raising concerns among critics who blame no-money-down mortgages for many of today's housing market woes. And while federal housing officials are moving to end the practice, for now home builders are promoting the programs to move unsold inventory. . . .
The offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.
Supporters of the down-payment programs say they help the FHA fulfill its goal of assisting first-time home buyers. But critics say the programs will burden the government agency, and taxpayers, with bad loans. The FHA, which essentially is filling the void left by the collapse of the subprime market, renewed a push to eliminate the programs this month, after warning that above-average default rates for seller-assisted down-payment programs will force the agency to request a government subsidy for the first time in its 74-year history. The agency says it will need $1.4 billion next year.
Did you even read the article? The federal government opposes the programs. In fact, the FHA is trying to eliminate them:The FHA prohibits sellers from providing down payment assistance to buyers directly, but home builders are using a loophole that allows third-party nonprofits to provide down payment assistance. The FHA is trying to close that loophole. So the federal government is actually trying to eliminate the moral hazard and discourage risky home loans.
Before smugly condemning the federal government for not being as smart as you, you should make sure you're not saying something incredibly stupid.
Oddly enough, the guy who proposed the bailout through the FHA, Senator Dodd, took $780,000 in loans from Countrywide Mortgage under the "Friends of Angelo" program. He denies any improper benefit, but the deal he got was worth $75,000 in savings over the course of his loans. Coincidentally, Countrywide (BofA) has the largest exposure to these exotic loans, and stand to gain Billions from Dodd's bailout bill.
I'm sure there's nothing to it, though. Probably just me being paranoid.
The idea that everybody should own a home is foolish and dangerous and the billions of dollars that banks and mortgage lenders have lost to-date and the substantial incremental increase in foreclosures in the past 12 months compared to the previous 8-10 years prove that.
The idea that everybody should own a home is foolish and dangerous and the billions of dollars that banks and mortgage lenders have lost to-date and the substantial incremental increase in foreclosures in the past 12 months compared to the previous 8-10 years prove that.
I'm settling on a 3% down private mortgage next week, so there are still private lenders out there offering low money down financing.
autolykos, so long as the borrower doesn't misrepresent the source of the down payment, how is it fraud? Of course, if they represent the down-payment as their own money, that is genuine fraud.
I'm not sure to which of those two scenarios you are referring.
Because it sounds like what's happening is that buyers who normally could not qualify in this way are being allowed to qualify when desperate sellers put that money up just so that they can unload a property, without concern for whether the FHA turns to the taxpayers to foot the bill when buyers default.
That's no reason to condemn the practice of allowing low down payments, in general. The problem is sellers trying to foist their problems in the current market onto the FHA and, by extension, the taxpayer.
Fraud includes both misstatements and omissions that are required to make statements made not misleading.
Here's how the scam works. FHA requires all homeowners to have at least 3% skin in the game so that they have an interest in keeping their house. Assume seller and buyer agree to a transaction involving a house worth $100,000, but buyer doesn't have the 3% needed to put down. Buyer (or more likely the broker) brings in a third party to front the 3%. Buyer and seller agree to knock the price of the house up to a little over $103,000 (to cover the 3% + the commission for the third party). The third party makes the 3% payment at closing and is immediately repaid the same payment plus their commission. Seller doesn't care because they still netted $100,000 (+ whatever the commission was). Buyer's happy because they got the house they wanted with FHA financing with no money down. The third party's happy because they got their commission. The only party that isn't happy is FHA, because the 3% downpayment requirement they instituted to encourage buyers to do the right thing was just obviated by a transaction without any economic rationale.
Now if the 3% requirement isn't necessary, it isn't necessary and should be eliminated. But if FHA is going to have a 3% downpayment requirement, it should be an actual requirement and people shouldn't be getting around it by engaging in sham transactions.
I assume the FHA has some way of tracking/estimating this and that they're not just pulling numbers out of thin air.
At most, you ability to pay the down payment is a flag as to whether you can afford to make the monthly payment as someone who has $10k in the bank is likely in a better financial situation than someone without such savings. That being said, you can measure risk in ways other than looking at whether a person can pay a lump sum upfront and this flag is not even all that reliable (would you rather lend money to someone working at McDonalds who just inherited $10k from a dead uncle or someone who has just graduated law school and is buying a house to provide a residence while he is making $150k per year at a job at a white shoe law firm that he just got?)
Not only that, but not having someone pay a down payment can actually help prevent foreclosure, as you will be leaving the person with more savings to cover a situation where they do run into financial trouble.
The only real drawback that I can see is in a situation such as California where all mortgages are non-recourse. A substantial down payment does a good job of getting the person invested in the house. If you go out and buy a $500,000 house with no down payment, and next year the housing market drops, leaving you with a $500k mortgage on a $200k house, you have a strong incentive to just walk away if the mortgage is non-recourse. If you paid a $50k down payment on the same house, your incentive to just walk away (and lose your down payment) decreases. This only really becomes a problem in very special circumstances though.
The Loan Originator will presumeable sell the secuitized loans as loans that complied with FHA standards, and therfore presumably have somewhat smaller risk than a no-skin-in-the-game loan. The originator, then, is preparing to commit further fraud on the purchaser of that package of loans....
"The down payment I placed is my/our money (in case of joint mortgages or whatnot) and was not provided by any third party"
Seeing as how the California real estate market is so large and one of the major (now deflating) bubble markets fueled by this sort of exotic financing, the moral hazard becomes nontrivial.
If you're reading my posts to suggest that the sellers and loan originators are somehow free from fault, then you're misreading them. Frankly, the question of who is more culpable is irrelevant. The FHA needs to close this loophole and the people in government who are working to keep them open (such as the congressional black caucus) need to stop it.
Yes, I understand the difference between the FHA and "the government." Do you? The FHA isn't a GSE, you know.
Down-payment assistance programs are run by private nonprofit organizations, not the government. They were created specifically for the purpose of circumventing FHA regulations prohibiting sellers from providing down-payment assistance to buyers directly. That doesn't make them "government-backed." Calling them "government-backed program[s]" is like calling mortgage servicers government agencies.
Professor Adler goes even further, calling it a "fed program," which clearly shows that he has no idea what he's talking about.
1) The federal government didn't create the mortage crisis we are in now ... greedy investors did by trying to charge people 9-20% for a home loan. That's the sort of greed that nobody can afford. So, naturally, people defaulted on such loans.
2) Even that didn't cause the crisis. The crisis was caused by an inability of the market to price the equities backing these loans. This, in turn, was caused by the fact that legally, the people who own these equties don't even really own the loans backing them. To put it another way, they can't prove in a court of law that they own them. That's what makes them worthless.
The government could do a LOT that it isn't doing to help homeowners, but the Democrats on the Senate Banking Committee are too busy stuffing their pockets with thinly-veiled bribes from Mozillo and Co and Citibank. And they're just the tip of the corruption iceberg. Actual real bribes are occurring that you haven't read about.
The government could insure deeds, for example, and end the monopoly pricing on virtually worthless title insurance that every purchaser must pay THOUSANDS OF DOLLARS for. Every. Single. Home. Loan. Why is this insurance required? Because the government keeps crappy records.
Will the government do this? Why no, they won't. And why not? Well, have any of you intrepid reporters asked who's getting money from the title insurers?
"It [the FHA] makes sure that loan-to-value ratios make sense, that appraisals are honest, and that the borrower can indeed afford the loan given his income and other debt."
As an FHA borrower, I can assure you that *none of the above* was a factor in my home loan. None. I sincerely doubt I was the only borrower in FHA history to experience this. Your emperor has no clothes.
And in a free market with perfect information, that would work. The crisis happened because the loans were made in a mostly free market with very imperfect information. When the information was revealed to be pretty much totally incorrect, it became clear that nobody was being compensated for risk and the whole thing collapsed.
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The home ownership debacle seems to me to be an instance of the fallacy of composition: For an individual person, it's better to own a home than to rent (except in the presence of a housing bubble). But for all of society, it is not better for everyone to be a homeowner.
I would suggest that if the Bear Stearns of the world knew that failure meant exactly that there might have been some self constraint to not be so willy nilly with investments.
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