Thursday, November 19, 2009

NYT: Easy Loans in Expensive Areas

FHA was designed for low income borrowers and has been rushed into "saving" the overheated housing market by giving a loan to much higher incomes and house prices than the underwriting was ever designed for. There is also an issue of the obvious lack of internal controls at the FHA to stop fraud and abuse by the lenders which is magnified by more loans and more loans at higher limits.

The NYT has an article about FHA loans in expensive areas. Here are some quotes:
In 2007, the government did not insure a single mortgage in this city, one of the most expensive in the country. Buyers here, as well as in Manhattan, Santa Monica and every other wealthy area, were presumed to be able to handle the steep prices and correspondingly hefty down payments on their own.
Policy changes such as the shift in insurance, while often introduced on a temporary basis, are becoming so popular that they could prove difficult to undo.

Like most government programs, once they start they are almost impossible to stop. The special interests will insure they keep going. As will be shown later, The politicians simply can't help themselves.
Kenneth Donohue, inspector general for the Department of Housing and Urban
Development, the parent agency of the F.H.A., said the higher loan limits were increasing the potential risk to the F.H.A. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.

“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Mr. Donohue said. “You have to ask yourself, was the F.H.A. ever intended to address these markets?”

He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.

This is their own Inspector General saying these things. I'm sure he will be replaced soon with someone who will be more of a "team player".

And I often say that Barney Frank is always good for a blood boiler.. He certainly doesn't disappoint this time.
A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by another $100,000, to $839,750.

His bill would make the new limits permanent.

They simply can't help themselves. Housing is unfortunately seen as sacred by one side of the aisle and that view is easily exploited by the special interest and/or gives an fig leaf to cover the massive subsidies to the market. We had this housing crisis because housing was viewed as sacred by one side and the free market was viewed as sacred by the other.. the confluence of those two views culminated into a massive unregulated credit bubble with housing as it's engine of growth.

Also remember that Fannie Mae and Freddie Mac jumped in to "save the housing market" as more and more lenders abandoned the market.. Look how well that has ended up for the American taxpayer. It is clear policy that everything will be done to "save" housing, and by save I mean to keep asset prices as high as possible. This will require a massive amount of money from the taxpayer much of which should be borne by bondholders and equity holders instead. The end game was clearly revealed by Mr. Stevens last week when he said that the FHA doesn't have to go to Congress to get a bailout. It already has an unlimited blank check for funding straight from the Treasury provisioned. This dogmatic belief that housing must be "saved" combined with no checks and balances (one party effectively controls the legislative and executive branch) will prove to be very expensive for the all of us.

No comments: