U.S. taxpayers bailed out millions of home loans. We backstopped Fannie Mae and Freddie Mac and lent hundreds of billions of dollars to banks that were all but bankrupt. The bad guy in this story is the greedy banker, who would do anything to write another mortgage.
His weapons of choice were loans with lax lending standards (liar’s loans, NINJA loans, etc.) and the targets were consumers with marginal credit.
When it was all over but the crying, Congressmen were outraged. They vowed that taxpayers would never again foot the bill for such a meltdown, that lenders would be held accountable and that consumers would be protected from predatory loans they couldn’t possibly repay.
Apparently, the voice of reason had spoken. Right…
Yes, banks have been penalized with multi-billion dollar fines for their previous lending practices, and yes, lending standards have tightened dramatically. But a funny thing happened on the way to fiscal responsibility — the economy suffered.
Without all the go-go juice of easy credit being extended to marginal buyers who would then bid up the price of homes, the real estate industry has been left to survive on the slow stream of business created by high-quality borrowers who can come up with a 20% down payment and have a low debt-to-income ratio.
It’s been awful! There just aren’t enough of these folks willing to buy homes for the real estate market to recover. At this point, the voice of reason was shouted down.
So, of course, our fearless leaders caved.
Congressmen demanded easier lending standards and Mel Watts, the new Director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, was given his position specifically for him to ease the terms on which these two giants would guarantee loans.
As for banks being on the hook, well, not so much anymore. Lenders have bigger loopholes they can use to cast off any responsibility for lending money.
As the dust settles, loans originated with a 3% to 5% down payment can qualify for a governrnment guarantee and banks have been given a list of characteristics that would make a loan eligible to be put back to the bank. All the banks have to do is dot their “I’s” and cross their “T’s” and they’ll be free of any liability.
Of course, we as a nation will still be making loans to marginal borrowers who don’t have to put up much cash. When the next downturnrn in real estate happens, these borrowers will be faced with the not-so-tough choice of walking away from a home that is 15% to 20% underwater, in which case their modest down payment is long gone.
Just like in the financial crisis, homeowners that are way under water will make their credit card and car payments, but won’t bother to pay for the home anymore. What would be the point? Like last time, they can live in the home rent and mortgage free for many months, because who will kick them out?
And who’s the poor sap that’s on the hook to eat the loss on the mortgage? Once again, it’s the taxpayer.
If this weren’t bad enough, the newest crop of sub-prime borrowers to be targeted by lenders are none other than boomerang borrowers — those who lost their homes in foreclosure or a short sale after the financial crisis but are now back in the market to buy a home.
I would ask: “How is any of this a good idea?” But I know the answer.
When the governrnment can’t manufacture a strong economy through gimmicks like cash for clunkers or outrageous monetary policy such as QE (insert latest number here) programs, they will try anything to move the needle of growth.
If it means putting the taxpayer back on the hook for something that was catastrophic before… well, so be it.
I often wish that Congress and the Administration wouldn’t try so hard to help us. I’m not sure we can afford any more of their assistance.