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 expectations and more skin within the game.
Hoping for subprime lending redux
Edward Pinto at Bloomberg explains that even though it is shown that weak financing expectations made the economy the way it is, the federal government is not catching on. Pinto writes that the Dodd-Frank bill signed into law last July makes it clear that Congress and the Obama administration don’t intend to fix broken underwriting. The amendment wasn’t added to the financial reform bill that should have been. This amendment made it so there was a definition of a “prudent underwriting” standard when also adding a minimum down-payment with consideration to credit history. This made it possible for low income borrowers with low credit scores to have homes accessible to them. Pinto thinks that it is riskier to follow all the brand new policies than it was bailing out Fannie Mae and Freddie Mac with taxpayer dollars.
Fixing the problem
The current government response to the housing crisis will extend today’s problems into the future, according to Bill Bonner at the Christian Science Monitor. Bonner writes the government continues to extend credit and money too those that don’t deserve it and pretends there is no more problem. The U.S. financial system holds billions in mortgage debt. None of it will even be repaid again. The Federal Reserve is saying the mortgage debt it’s holding on to is an “asset..” Bonner thinks that market correction is the real solution. The government is just trying to stay away from that. The government finances more mistakes, keeps paying for the old mistakes and pretends that every little thing will be fine–until it finally runs out of cash.
Additional reading
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
