Wednesday, April 03, 2013

Obama Administration Pushes Banks To Make Home Loans To Borrowers With Weaker Credit

The Obama Administration is involved in a major effort to push banks to make home loans to people with weak credit and in the case of purchases, with little or no down payment.

According to the administration, this is going to help 'fuel recovery' and promote 'fairness, because, in the words of the linked WAPO article, "the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession."

So the administration is using the Justice Department and the Inspector General's office of HUD, (who are in charge of investigating claims of fraud and wrongdoing in the mortgage industry) to get lenders to grant home loans to riskier borrowers. They're especially leaning towards the idea of steer borrowers towards FHA, Fannie Mae and similar taxpayer guaranteed programs.

This seems like a good idea. I only wish we had some real life experience on how well it would work.

Oh...wait a minute..

Now that you've stopped laughing, here's a few facts to ponder.

First of all, there is no 'housing recovery', because the demand isn't there. People don't ordinarily take on large debt like a home purchase in uncertain economic times. New home starts are at historic lows, and I can take you to a dozen construction sites locally where someone started to do exactly that, and realized that finishing the construction would involve a new 'take out' loan to the bank and leave them seriously underwater with a property that was in the red.So the job sites are just sitting there, while the owners wait for the market to improve or for a sucker to come along and take the property off their hands.

What you're seeing instead, (because the rental market is strong) is private investors. property management companies and Real Estate Investment Trusts (REIT's)buying up homes at today's low interest rates, putting a little basic maintenance into them and renting them out at a profit.

Needless to say, the Obama Administration doesn't like this vestige of private enterprise. So they're leaning on lenders to make loans to riskier borrowers, promising them that if they go along, they won't be subject to investigation or penalties if the loans default.

I can tell you from personal experience that those guarantees are worthless. It's exactly what lenders were told during the last orgy, when they were pushed to do exactly the same thing.

Well connected Democrats like Fannie Mae and Freddie Mac executives Franklin Raines and Jamie Gorelick, among others, made millions in bonuses for pushing these bogus loans and the derivatives based on them through the system that brought on the last crash in 2008.

They were protected. It was the lenders who were used as political targets and vilified merely for doing what the feds demanded they do.It cost them billions, and in some cases saw profitable companies destroyed, along with thousands of jobs. Anyone remember Washington Mutual?

At this point, the taxpayers are already eating most of these toxic loans. Rather than let the market absorb these properties and gradually recover, the Obama Administration simply raised the dollar amount of the FHA refinance limits to over $800,000 and severely loosened the underwriting requirements to allow the banks to unload them onto the shoulders of the taxpayers.

What the Obama Administration is doing now is exactly what was done before and led to the meltdown. And the banks will go along, because they have little choice.

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