Posted on 09/02/2009 8:50:36 AM PDT by FromLori
I thought I had seen it all when it comes to dumb. I was wrong.
video at site
This is idiotic. Let's count the ways:
A "strong regulator" eh? You mean like the FHFA? Fannie and Freddie had a so-called "strong regulator" that nonetheless allowed them to lever up at 80:1 (or 200:1 depending on how you looked at their books) which was clearly outrageous on its face and led to their demise. That same "strong regulatory framework" had Fannie and Freddie buying other-than-actual-prime paper. It detonated. Any questions? Fannie and Freddie turned into revolving-door agencies with the government, winding up as political tools on both sides of the aisle. If the MBA wants "sound underwriting" there are simple ways to guarantee it and no government backstop is required.
Simply put, credit risk is controlled by imposing leverage limits on buyers. This is done by requiring down payments. A 20% down payment requirement limits leverage to 5:1, and unlike a political process it requires no regulation - you simply make it unlawful to give out mortgage money without 20% in cash on the barrel. Presto: credit risk problem solved.
This also prevents speculative asset bubbles in housing since as soon as house prices start to outstrip incomes the market gets shut down immediately by the down payment requirement. The feedback mechanism is immediate, it requires no regulation and it is self-policing.
Every time we claim to have a "strong regulator" they get bought off and we have a disaster. Banks, S&Ls, mortgages, credit cards, you name it, it happens. Why? Because its cheaper to bribe a Congressperson with a big campaign contribution than it is to earn your money honestly - the returns on lobbying "investments" and campaign "contributions" are often 1000:1 or more, while actually earning money requires work. With lotto-style payoffs you can and will get this sort of speculative game-playing and should expect nothing less.
I have continued to maintain that there is exactly one way to prevent asset bubbles in real property and there is one way to make sound mortgage loans, which not-incidentally require one another: strict leverage limits and proved capacity to pay.
That is, the 100-year-old set of standards:
20% down payments, in cash, are required 28% "front end" (all housing expenses) maximum ratio 36% "back end" (all debt service including housing) maximum ratio Do those three things and even in severe recessions you don't have a major problem with defaults. You also don't get speculative property bubbles because as soon as prices try to rise above affordable maximums for the income in a given area the supply of buyers who can meet the ratios disappear.
Enact this into the law with a provision that any loan found to be funded outside of these ratios is deemed predatory and subject to rescission and the problem is solved.
Anything else is subject to being gamed and is simply an attempt to steal - again - from the taxpayers.
These lobbying and "trade" organizations need to be recognized as what they are - a blatant device to game regulatory processes for the purpose of foisting off risk to the taxpayer while pocketing as much money as is possible for private interests.
STOP THE LOOTING.
Govt was the total reason for the bubble and the bad lending practices. The prices in CA and Fl were allowed to rise beyond economic reason by raising limits on conforming loans to unsustainable levels. In order to finance at those levels they needed to eliminate downpayments and allow payment ratio’s to get wildly out of proportion.
All of that was done by the Govt regulators. They are still in charge and telling the Zombie banks what to do.
100 or more loans, bad ratios, high conforming loan limits etc. They are now doing it to prevent further DEFLATION of home values. Will they succeed? I kinda doubt it.
Yes another form of Fascism privatize the profits for the mortgage bankers and socialize the losses to the taxpayers.
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