Weak financing specifications created the housing bubble; that resulted in the real estate problems, which resulted in the property foreclosure crisis. The government has not learned from the mistake it made yet. This is exactly what the chairman of the Federal Deposit Insurance Corporation (FDIC) thinks. The financial reform debate ended in no requirement of adequate down payments on mortgages. Federal housing agencies are fairly sure that subprime financing will come back. And the crisis is being perpetuated by the Federal Reserve, with policies that prevent a natural correction that is the ultimate solution to the problem.
Is it loan performance or skin in the game?
Home loans in the U.S. need federal regulators to tighten lending rules. Sheila Bair is the chairman of the FDIC who believes this. CNBC showed Bair saying that borrowers need to be able to show they can repay a mortgage loan and make larger down payments on the mortgages as a part of “common sense” rules. She said there was a strong correlation between “skin in the game” and loan performance. A borrower is less likely to just walk from a home when they have lots of cash put into that home. Going forward from the housing crisis, Bair said lending standards need to call for strict income documentation, higher ability to repay specifications and much more skin in the game.
Hoping for subprime lending redux
The federal government is slow at picking up on things says Edward Pinto at Bloomberg. The government still doesn’t realize weak lending criteria are what brought the economy down and will keep it there. Pinto talks about the Dodd-Frank bill that was signed into law last July. He says this law proves that fixing the broken underwriting isn’t something Congress and also the Obama administration is interested in doing. An amendment to the financial reform bill that would have added a minimum down-payment requirement also as consideration of credit history, along with definition of a “prudent underwriting” standard, was defeated. This made it possible for low income borrowers with low credit scores to have homes available to them. Pinto said the brand new policies are riskier than those resulting within the Fannie Mae and Freddie Mac taxpayer bailout.
Don’t go around the issue, face it
The Christian Science Monitor has Bill Bonner saying the housing crisis will likely linger for a while with the reaction the government has taken. The government is just giving money to numerous who don’t need it while pretending no issue exists. This is the opinion of Bonner. The United States financial system is holding hundreds of billions in mortgage debt that probably will not be repaid. The Federal Reserve is saying the mortgage debt it is holding on to is an “asset..” The government is avoiding the real strategy to the problem which, in Bonner’s opinion, is market correction. He thinks that the government will continue to finance much more mistakes while still paying for old mistakes. It does this when all along pretending nothing is going on. But how long will it be until the money runs out?
CNBC
cnbc.com/id/39074467
Bloomberg
bloomberg.com/news/2010-09-08/subprime-2–is-coming-soon-to-suburb-near-you-commentary-by-edward-pinto.html
Christian Science Monitor
csmonitor.com/Business/The-Daily-Reckoning/2010/0909/Extend-and-pretend
