In the Wall Street Journal editorial on the new housing bill is this ominous paragraph:
Likewise, the bill's $300 billion to refinance and insure distressed loans through the Federal Housing Administration will supposedly cost just a few billion dollars. That assumes few homeowners and lenders will sign up for the program because lenders will have to take a 10% haircut to be eligible. If no one needs this program, why is it there? If lenders do take advantage, they're bound to dump their worst loans on the feds. So as with the Fan and Fred bailout, the FHA guarantee will be either superfluous or much more expensive than we're led to believe.
From this account, I can’t tell exactly what the bill provides. Perhaps a knowledgeable VC reader can decipher the exceedingly complex statute.
Could this bill really allow banks to get the FHA to guarantee all its worst loans at 90% of their original value, even loans worth only a half or a third of their original value? Then if the homeowner defaults, the bank gets paid and the homeowner still loses his or her home. I doubt that the bill could be that silly.
$300 billion is a lot of money, representing over a quarter of all US income tax receipts in 2005.
Next, the borrower can't just flip the house -- you have to live in it, and when you sell, you owe the FHA a portion of the proceeds, pro-rated based on the time you're in the house. I think you can retain no profit if you sell in the first year, or something along those lines.
Finally, the rules on the mortgage qualification are pretty strict -- along the lines of 35% debt to income on a fixed 30 year mortgage.
So, 300bn represents the exposure if every single house the government backed using 85% of today's value ended up worth nothing at foreclosure.
There are many variables here in terms of total loss. If you think that the real estate market is due for greater than 15% collapse from today's appraised values, then the government might lose money. No one can really predict, though, since you're looking into the future. You're also dealing with more reasonable borrowers -- no dead people, no NINJA, only full documentation, strict DTI.
Overall, this doesn't seem like it will a) cost the government much if anything and b) actually help people or the economy out at all. I think it's a wash, and might not even help banks much (these are the customers with the best shot of not defaulting anyway).
It seems it would only be attractive to the lender if he thinks the costs of forclosing and selling the home, and additional market risk would exceed 15% of the assessed value of the home. Which it very well could. But the FHA doesn't seem overly exposed as long as it is a clean reassessment process.
Since Congress knows no limits to its spend and borrow powers, such bills are always doomed to failure because it will require redistribution of wealth from local communities to pay for additional unauthorized congressional created debt and interest on a far greater scale then would been created locally.
This is Congress, after all....
(If "pro" is the opposite of "con" ....)
This statute may (or may not) be a bad one, but it's not silly.
Sorry, but that ship sailed a long, long time ago.
To use someone elses example:
Example
Home bought in 2005 for $200,000 — now worth $150,000. Loan is $200,000.
FHA plan
Borrower: Shows that he or she can afford a loan for 90 percent of the home’s value: $135,000.
Lender: Agrees to lower the principal of the loan by 15 percent of the reassessed value: $127,500 (a 36 percent loss).
Borrower: Monthly payment of $1,470 at 8 percent balloon rate falls to $875 at 6.75 percent fixed rate.
Or alternately, the lender sends the borrower a note saying "we think your house is worth $190k, sign this paper conveniently pre-filled-in with some assertions about your ability to pay, and your interest rate and principal will drop, significantly lowering your monthly payment, plus the loan will now be insured by the federal government so we won't need to forclose even if you do default! Since the bank is now dropping the principal by a lot less, and is getting the shiny federal guarantee, it's delighed to find an assesor willing to give the highest possible value. Given that a condition of the deal is that the house not get sold for a while, it'll be awfully hard to show that the assessor exagerated... So, the bank is happy and the assessor is happy to get a big pile of business from the bank; the homeowner just got their payments lowered noticeably, so they aren't going to complain; the FHA official whose job depends on maximizing the number of these loan deals that happen is happy...
Basically, we're establishing a system where every participant has an incentive to game the system in the direction that will shaft the taxpayer. And relying on the complete honesty of these participants, as demonstrated by the entirely ethical behavior of banks, assessors, and borrowers in setting up the very loans that led to this situation.
What could possibly go wrong?
It was written by our finest and most famous politicians in Washington, the very best money can buy.
Want to reconsider your statement ? :-(
The fact is, a system was allowed to perpetuate wherein people who couldn't REALLY afford to buy a house at all, were assisted in moving into $ 150,000 houses that were sold to them for $ 600,000, with no money down, ridiculously low payments, etc. This could only and obviously lead to failure.
Now, the taxpayers are being asked to bail out China, Japan, etc, who invested most of the money that Fanny and Freddy control. And to leave people in houses that they can't possibly afford, and to pay their mortgages for them.
Basically, it's the liberal version of part of the American dream - instead of 'everyone has the OPPORTUNITY for home ownership ( if they work hard, save, earn, improve their value and thus their income, etc ), it's 'The government will GIVE you one'.
Ignoring a wrong doesn't make it a right.
From my totally selfish perspective, I hate this bill. I'm a young person who would love to buy property sometime in the next few years. This bill artificially inflates the housing market by keeping people in houses who are unable to afford them. Then it does so... by taxing me. Double ouch!
Just asking.
Nick
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