Thursday, October 22, 2009

Haven't We Learned Anything From the Meltdown?

From the article "Yes, The CRA Is Toxic: So Why is Congress Thinking About Expanding It?" by Edward Pinto, who was the chief credit officer at Fannie Mae in the 1980s.

There is no question that as the government pursued affordable-housing goals—with the Community Reinvestment Act providing approximately half of Fannie’s and Freddie’s affordable-housing purchases—trillions of dollars in high-risk lending flooded the real-estate market, with disastrous consequences. Over the last 20 years, the percentage of conventional home-purchase mortgages made with the borrower putting 5% or less down more than tripled, from 8% in 1990 to 29% in 2007 (see chart above). Adding to the default risk: of these loans with 5% or less down, the average down payment declined from 5% to 3% of the loan’s value.

As for Fannie and Freddie, most of the loans with 5% or less down that they had acquired by 2005 had down payments of 3% or even no down payment at all. From 1992 to 2007, the two entities acquired over $3.1 trillion in low-down-payment or credit-impaired loans and private securities backed by credit-impaired loans—and these are performing horribly: the delinquency rate on Fannie’s and Freddie’s remaining $1.1 trillion in such high-risk loans is 15.5% as of this past June 30, about 6.5 times the rate on the entities’ traditionally underwritten loans. All this risky lending, of course, drove the nation’s homeownership rate up and inflated a housing-price bubble.

Incredibly, the House Financial Services Committee is considering legislation that would broaden the scope of the CRA. Before it takes any action on HR 1479—which would expand the CRA’s mandates from banks to bank subsidiaries, mortgage bankers, credit unions, insurance companies, and other nonbank financial institutions.

If that's not enough to make you wonder what's going on, then check out this story "20 Year Old Buys Home With $183,000 FHA Loan And Just 3.5% Down":

Denise Tejada bought a house last month at the age of 20, thanks in large part to a loan guaranteed by the Federal Housing Authority. This story offers a dramatic demonstration that, despite the housing bubble causing the worst economic downturn in generations, the ideology of home ownership is alive and well in the United States and still being supported by the government.

Without question, Tejada's loan is toxic--to her and to the taxpayers who are backing the loan. Her house cost $155,000. Tejada's loan was apparently made on a micro-down payment of just 3.5%, the minimum down payment to qualify for an FHA loan. On top of this, however, she got an additional government backed loan to make improvements. Her total loans amount to $183,0000. In short, she was immediately underwater on her new house.

The monthly payments on her debt amount to $1,328. Her income is $2,470, leaving her with just $285 a week to live on. She's paying 54% of her income to make the mortgage payments. She earns that income by holding down one full time and two part time jobs. Obviously, this woman has a strong work ethic. But it also means her income is precarious. With unemployment still rising, she obviously should be worried about losing one of her three jobs. A loss of one of them would likely leave her unable to make the debt payments.

Thanks to Gettingrational for the second story.


At 10/22/2009 4:39 PM, Blogger juandos said...

From the same source: The Housing Slide Has Officially Resumed...:-)

At 10/22/2009 5:19 PM, Blogger Bill said...

These loans are nothing more than gifts to the Democrats' favorite low income deadbeat constituents, at the expense of those of us who actually pay our bills. This is yet another tax on the law abiding, hard working, tax paying majority in favor of the parasitic class.

At 10/22/2009 6:46 PM, Blogger Unknown said...

This goes to show the NAR is correct. Housing affordability is pretty damn high. I'll bet the sales statistics are loaded with this type of trash. Can't wait for the next post by MJP on Housing Affordability or that sales are increasing, the recession is over, the obsession with male gender bias. Next we'll have someone finding a way to blame Obama for this since he is not proposing across the board tax cuts?

Life goes on.

At 10/22/2009 10:05 PM, Blogger KO said...

That FHA story wasn't so bad until the part about her getting a second loan to make improvements. $30,000 of repairs on a house like that sounds like overkill. But if she bought a short sale, mid-stage remodel, then she might be right about an increase in value. Can't believe the FHA would make that loan though.

However $100,000 sounds pretty generous even if she and friends or family did much of the work. It's hard to imagine that much value could be added in just a month.

But good luck to her. She might have caught the bottom and if she can rent a room out, maybe she'll make it to the point where prices increase a lot.

At 10/23/2009 12:15 PM, Anonymous Anonymous said...

Er, Chuck housing in most parts of the country IS more affordable. Just what part of that don't you understand? Again just what part of male gender bias don't you understand? Can you buy a stamp to donate to prostate cancer at the post office? Whether are not the recession is over we will have to wait and see, right? My guess is that professor Perry just might be a bit more accurate than Krugman was in predicting the coming recession.

At 12/14/2009 11:39 AM, Anonymous Anonymous said...

I don't think the low downpayment is the problem. Its her debt ratio, and the extra home improvement loan.

I'm in the process of buying a home using a fha loan and 3.5% down payment. But between me and my wife, we make about 88,000. And I bought a home for 120,000 at 4.5% 15 year fixed. My payments will also be about 1,300 but with our income thats very affordable.

I was under the impression you couldn't get a loan that put your debt ratio above about 35% of your monthly income.


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