Saturday, January 9

Emperor starts new program to set up Mortgage Meltdown 2.0

Summary of article in Investor's Business Daily, Jan 7, 2016:

Remember the Great Housing Meltdown (a.k.a. collapse of the mortgage markets)?   If you're under 30 you don't, but in any case I'll explain:  One of the ideas aggressively pushed by Bill Clinton to help his re-election was to force banks to make mortgage loans to people who normally wouldn't have qualified for one.

Clinton and the Democrats did this by passing laws and making rules that promised mortgage lenders that they could sell these "risky" mortgages--loans the borrowers were unlikely to repay--to two "quasi"-federal mortgage agencies--cutely named Fannie Mae and Freddie Mac.  Such loans were called "sub-prime."

Combined this with the Dems' instructions to aggressively prosecute banks and other lenders who wouldn't go along with the program, and it had the totally predictable effect of producing an avalanche of bad mortgage loans--ones which were highly likely to end in default. 

These eventually became known in the mortgage and banking industry as "ninja" loans: applicants would qualify for a mortgage even if they had "no income, no job and no assets."  And the flood of new buyers pushed the price of housing in "hot" cities through the roof.

When the wave of defaults from previously-unqualified home buyers started rolling in, the government agencies first tried to deny, deflect and hope for the best.  This worked about as well as you'd expect.  When the agencies were finally forced to start foreclosing on the defaulted loans, that pushed a huge wave of homes onto the market--depressing all home prices.  Because the price of ALL homes dropped, many borrowers who had made all their payments but had to sell due to a new job now found themselves "upside down" in the mortgage:  They couldn't sell for as much as they owed on their home loan--they had to bring money to the table to sell.

With that as background, your emperor is rolling out what might be called "Sub-prime 2.0"--a new mortgage program that lets low-income borrowers count income from nonborrowers living in the household.

Hey, what could go wrong?

But the emperor and his lackeys are cunning:  One assumes they know what caused the last housing meltdown, so they didn't want to call it "sub-prime."  Instead they call it the "HomeReady program." (The last sub-prime program was called MyCommunityMortgage.)  They describe it as "an alternative mortgage program."

But it might was well be called DefaultReady, because it is just as risky as the subprime junk Fannie peddled to cause the last crisis.

So under the new program a renter can get a conventional home loan backed by Fannie by claiming a roommate's paycheck to augment your qualifying income.  You can even claim the earnings of people who won't be living in the property.

Best of all, borrowers can pay as little as 3% down.  And borrowers who have defaulted before are eligible. 

Fannie and its regulators say this new program won't introduce any undue risk into the mortgage-finance system.
Gee, where have we heard that before?

One of Fannie Mae's tactics to reduce the default rate is to ensure that high-risk borrowers understand the importance of making their monthly mortgage payments.  And how does the government propose to accomplish this?  Hold onto your hats here:  It'll require lenders to ask applicants to take a four-hour online course on home ownership.

Well there ya go.  Gosh, wonder why no lender ever thought of that before? 

We've seen this movie before, and it does not end well.  Like earlier no-standards mortgage programs, this one will simply expand into lower and lower income markets while slashing requirements and burning lending standards even more.
Eventually it will become a no-income, no-job, nothing-down giveaway.

Return of NINJA loans.


Post a Comment

Subscribe to Post Comments [Atom]

<< Home