Showing posts with label FHA. Show all posts
Showing posts with label FHA. Show all posts

Saturday, August 20, 2016

Nightmare on Main St.

Title of an Economist editorial.  The Economist thinks America has too much home owner ship, and that the $26 trillion dollars of US mortgages outstanding are at risk of default.  $26 trillion in losses will shake the soundest bank.  They admit that real estate prices have perked up.  Used to be 25% of mortgages were underwater and now that is down to 10%. 
    The real problem in the US mortgage market is all the special favors the real estate industry (realtors, home builders, municipal boosters, appliance makers) are getting from long suffering taxpayers.  It's pressure from this widespread special interest that caused Uncle to create Fannie Mae and Freddie Mac to run the secondary mortgage market.  And FHA to guarantee home mortgages.  And the mortgage interest deduction on federal income tax.  And federal flood insurance.  And a bunch of other expensive things. 
   A good mortgage is a very sound investment.  Good means a borrower who earns enough income to carry the mortgage payments and a property with a market value greater than the amount of the mortgage.  Preferably a borrower who is married, which gives him that much more incentive to avoid foreclosure.  It's hard to explain to the spouse why the family is out in the street.
   A bad mortgage is a default waiting the happen.  The borrower doesn't earn enough to make the payments, he isn't married, he is a house flipper.  The value of the property is way less than the mortgage. It's a sucker's mortgage with an escalator clause that jacks up the payments after a few months.
   Only the officer who originates the loan can tell good from bad.  He needs to interview the borrower, he needs to contact the borrower's employer to verify income, he needs to inspect the property to ascertain it's market value.  He has to know the real estate market in his area to form a valid estimate of value.  He has to be local to do all this.  The officer will be deligent in his duties, if and only if, he has some skin in the game, like his bank is going to hold this mortgage to maturity.  If the bank plans to dump the mortgage on the secondary mortgage market (Fannie Mae), then the officer doesn't care.  In fact, he wants to process as many mortgages as he can to rake in the fees he gets from doing a mortgage.  Dump it on Fannie before it defaults and all is well. 
  A broker on Wall St, or a banker in Germany have no idea how credit worthy any borrower is or what the value of a single family home in Kansas might be.   So the secondary mortgage buyers don't really know what they are buying.  Which caused Great Depression 2.0 in 2007.  The sucker investors wised up to the crud they were being asked to finance and refused to buy any more of it.
   The real answer to the problem is to shut down the secondary mortgage market.  We could do this with a simple law that declares a mortgage non transferable.  The borrower is only obligated to make payments to the guy who originated his mortgage.  He can stop payments, and keep his house, if the mortgage is sold to anyone.        

Monday, February 29, 2016

Uncle wants to revive Mortgage Backed Securities.

Mortgage backed securities used to be a $ trillion dollar a year market, up until 2007 that is.  Since 2007 nobody will touch them.  The Journal shows a bar graph of sales over the years and zero sales in any year after 2007. 
   Many people think that mortgage backed securities caused Great Depression 2.0  In the go-go real estate bubble back in the aughts, banks and mortgage lenders needed more money to do mortgages with.  Someone had the bright idea of creating a security, essentially a company IOU, which was "backed" by mortgages held by the bank. These IOU's were sold to gullible investors, by promises of high yield,  and the proceeds used to write more mortgages.  Trouble was, the "backing" didn't mean anything, the IOU holders did not get the right to repossess the properties when the borrowers stopped paying.  And when the borrowers stopped paying, the investors stopped getting paid too.  Investors wised up in 2007 and no more mortgage backed securities have been sold. 
   So banks can do mortgages using their own money, of which they never have enough, or by getting FHA or Fanny Mae or Freddy Mac or VA to put up the money.  But, these government agencies, still suffering huge losses from 2007, all have pretty stiff rules about what kind of mortgage they will accept.  Unless the borrower has a real clean credit record, no deal, no mortgage.
  Now we have Monique Rollins,  deputy assistant secretary in Obama's Treasury Dept saying "We do believe that a reformed asset class could responsibly broaden access for qualified buyers who are not being served today."   Translation: Let's do mortgage backed securities to give the banks money to do any kind of mortgage they like."   Which is what caused Great Depression 2.0.  Not good.  But the Obama administration is in favor.
  Of course, Monique has not explained what she would do to get investors to touch the new model mortgage backed securities.  
  I wonder what a Trump administration would do?