Posted on 06/10/2011 7:24:42 AM PDT by Kaslin
And you thought things couldn't get worse on the housing front. The U.S. housing market is in the worst shape since the Great Depression, and now the Obama administration's solution is to impose new rules that would banish 60 percent of current homebuyers from the market.
The proposed Mortgage Qualification Rules are the result of legislation passed in the wake of the financial meltdown to ensure that mortgage-backed securities are based on high-quality loans. But the effect will be to disqualify millions of potential homebuyers.
Earlier this year, the six federal agencies tasked with drafting the rules added a requirement that homebuyers make a 20 percent down payment to qualify for low-interest mortgages. In addition, the new proposals announced this week would cap the amount of income that borrowers could devote to mortgage payments to no more than 28 percent of gross income. Worse, it would disqualify any borrower whose combined debt payments amounted to more than 36 percent of monthly gross income.
What does this mean in practical terms? In 2009 (the last year for which we have accurate data), median household income was just under $50,000. Under the proposed new mortgage rules, an average family would be ineligible for a low-interest mortgage if they owed more than $1,500 a month in payments for all their financed debt: mortgage, cars, credit cards, student loans, and anything else bought over time. And the mortgage payment alone could not be higher than $1,166, including escrow for taxes and insurance.
The proposed rules would put an end to the American Dream for much of the middle class. As Urban League president Marc Morial said, "Homeownership, as we know it, could be a thing of the past" if the proposed rules take effect.
But the damage extends beyond depriving individuals of the opportunity to buy a home -- it will ripple throughout the economy. There is no question that the depression in the housing market is costing jobs, and not just the obvious ones in construction. Part of what has made the American economy more resilient than other countries' over the years is the willingness of Americans to pick up and move when jobs in one area disappeared but were available in other places. But the inability of many people to sell homes has reduced American geographic mobility to historic lows.
The consequence is to keep those people who have lost their jobs, but own their homes, from moving to states where jobs are more plentiful. If they can't find a buyer because the government has made it so difficult to qualify for loans, they're better off staying put and collecting unemployment insurance.
There is no question that many Americans have become addicted to debt and live way beyond their means. But one of the best ways of determining whether or not someone can really afford his or her lifestyle is to examine credit history-not simply the level of debt. But these new rules would punish even those borrowers who have never missed a payment and have exemplary credit ratings.
It also treats income as if it is fixed over a borrower's lifetime. A relatively young college graduate may have significant debt from earning that degree, but his or her income is likely to increase substantially over the 30 years of a mortgage, and restricting access to a loan on that basis makes little sense.
And, of course, the obverse is also possible. Incomes fall as well as rise. Just because someone is earning a lot today doesn't mean he or she will be making the same amount next year or the following.
But the real problem with these rules is what they will do to the overall housing market. Without buyers, home prices will continue to plummet. There are already too many unsold houses on the market, about twice the number you'd expect in a healthy environment. And the administration's solution is to drive millions of credit-worthy buyers from being able to purchase them?
These Obama administration rules could turn what increasingly appears to be a double-dip economic recession into a full-scale depression. The president will pay politically for this disastrous policy -- but Americans will pay out of their actual pockets for his folly.
This is a good idea and long overdue.
In addition, the new proposals announced this week would cap the amount of income that borrowers could devote to mortgage payments to no more than 28 percent of gross income.
This is a good idea and long overdue.
Worse, it would disqualify any borrower whose combined debt payments amounted to more than 36 percent of monthly gross income.
This is a good idea and long overdue.
Why is it a good idea for individuals to go into debt up to their eyeballs just like the government.
The housing bubble was created because it vastly increased demand by lowering lending standards. Now that those folks can’t pay, the bubble pops.
There is nothing preventing private lenders from holding loans to doctors, lawyers etc who have high income upside, they just can’t sell them to the government and leave the tax payers holding the bag if things go bad with the loan.
If we don't keep these programs, how will people who can't afford housing by a home?
Good grief, I'm surprised he can fog a mirror by himself.
“The housing bubble was created because it vastly increased demand by lowering lending standards.”
Which then fed on itself as people could bid up the price of houses with money they were never going to pay back, forcing financially responsible people to pay an artificially high price. For those responsible people, it was like they had to use their own real money to bid against someone using Monopoly money.
Terrible idea. The lender gets huge profit and no risk. You think home sales are slow now? Institute these changes and nothing will sell. Longer term loans are a better idea than this.
It's not just 'home ownership', it is a question of where a society wishes to invest it's wealth. McMansions for the masses with those lovely 9 foot ceilings requiring all that extra heating and cooling, or factories to create wealth for current and future generations. Are we talking home ownership for those who can afford it or palace ownership for everyone?
Aren’t these the rules that used to be pretty standard for most banks naturally? I don’t have any problem with it. I would just say that for every 10% additional down payment beyond 20%, there should be some flexibility in the debt to income ratios. If someone has serious “skin” in the game they are a much better risk and the loan to asset ratio is much safer.
Financially, yes, but should the government (who was largely responsible for the problem to begin with) force it?
Also, it would destroy what little equity remains since it would essentially take 70% of potential buyers out of the market for two reasons:
1. Fewer have the 20% down
2. Those that have enough equity to sell and “buy up” no longer will after their values plummet even more.
It will basically snowball a decline in home values to far UNDER their likely intrinsic value for a good decade.
Probably something ultimately good would result, but, there will be a LOT of people, probably 40% of the population, who are so far underwater in their homes that the value of their home will likely be less than 50% of their mortgage balance.
I’m not even getting into the income requirements, but analyzing that it seems to be pretty on-target with what most requirements are anyway.
If a private lender without a government guarantee wants to lend at less than 20% down though, why should the government stop them?
Here in the south, I find my 9 foot ceilings more comfortable in the summer than my previous 8 foot ceilings. My next house will have 12 foot ceilings.
I think these standards swing the pendulum too far in the opposite direction. The domino effect from taking that many buyers out of the market will be disasterous, at least in the short term.
Aristocracy!
A solid recovery can only happen when home buyers “have skin in the game”.
Has the cause of this disaster already been forgotten?
Like so much else that damages America, the federal government precipitated this recession/depression with their foolish racist demands that lenders finance homes for people who do not have the ability to pay back the loans.
Of course, lending institutions ran amok with the policy once they found the profitable loopholes, but the root cause is social engineering by a leftist, racist government.
Yes, all good ideas. But the government has no business being in the reale estate market and the financial markets at all. The market should determine whether the person is at risk or not. This is more regulation from central planners...
Ladder futures are rising as we speak. ;^)
I agree with all these rules, however the US Gov is why there is a mess right now, subprimes loans in addition to Fannie/Freddie owning in incredible amounts of loans. I just found out they own our loan, a normal over 20% down down coventional 15 year. Why are they buying loans like mine?? The gov needs to get out of the loan business.
I agree with all these rules, however the US Gov is why there is a mess right now, subprimes loans in addition to Fannie/Freddie owning in incredible amounts of loans. I just found out they own our loan, a normal over 20% down down coventional 15 year. Why are they buying loans like mine?? The gov needs to get out of the loan business.
Central planning got us into this mess. So their solution is more central planning.
Returning the housing industry to normal is going to take at least five years, so why not get it right?
Financially, the biggest problem our nation has is Leverage, i.e. we're over-leveraged: Wall Street, the federal debt, credit cards, student loans...need I go on?
I don't know where the bottom is on housing prices, but it's obvious we aren't there yet.
20% too steep? What's wrong with 15% combined with a credit score of 720+ and verifiable income for the past 3 years?
Beats the heck out of someone with a credit score of 550 and no verifiable income getting a home loan for $600K.
I am against micro-management of the economy by government prescription. Very often, so called consumer protection regulations have just the opposite effect. They hurt more than they help. This is just another manifestation of the nanny state in action.
Intervention by the government created the housing market bubble in the first place. Relaxing market based qualifications by government coercion was the main culprit. Such a regulation would swing the pendulum back in the opposite direction way too far. The market had it right and the government had it wrong all along. The government should butt out and let the market place do what it does best.
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