Monday, September 29th, 2008 at 5:37 AM
Fixed-Rate Loans Would Help
Three different people sent me this link to the pro-McCain video about the mortgage crisis:
http://www.youtube.com/watch?v=H5tZc8oH–o
It describes the timeline of the Community Reinvestment Act, and how Fannie/Freddie’s involvement with CRA helped cause the mortgage meltdown. It also mentions the relationship between Obama and Jim Johnson & Franklin Raines, and how Obama has received 49 times the amount of money from Fannie/Freddie than McCain.
The video says the meltdown is a result of the government mandating that lenders give loans to buyers who couldn’t afford it.
It deserves a rebuttal – and not because of politics.
For starters, do what the video suggests and look up the CRA at this link, and scroll down to ‘Criticism’ for more depth on the discussion:
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
I think the subprime lenders were driven more by the profits from Wall Street, than the CRA.
Secondly, the video mentions that over 90% of the loans that Fannie/Freddie were buying were adjustable-rate mortgages in 2004 and 2005.
The borrowers can usually afford the initial payment – it’s the reset that gets them.
Hardly anyone reads the loan documents!
The borrowers didn’t read them when they signed them, and neither did the investors when they bought them. Or, if they did read them, they didn’t understand that dramatic resetting of the interest rate and payments within 2-3 years would cause massive defaults.
Refinancing was pushed as the answer, but that’s a temporary fix, not a solution.
Let’s help people understand what they are getting.
Income verification isn’t enough. In the future, if banks want to help solve the problem, they should only fund FIXED-RATE loans.
Posted on Monday, September 29th, 2008 at 5:37 AM in Uncategorized | 18 Comments » | 
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I disagree that bank should only fund fixed rate mortgage. Just because it is not for everyone doesn’t mean it shouldn’t exist. Even a Tynenol isn’t for everyone except when you have a headache.
rbresident | September 29th, 2008 at 7:35 amI agree Jim, I guess the theory behind adjustable rates was too complex for my simplistic mind. If someone can’t afford the payment on a fix rate loan now, what makes them think they can afford it in 2 years? Are they expecting a five fold increase in income?
Paul | September 29th, 2008 at 7:39 amBanks shouldn’t be allowed to sell mortgages that they originate. They must keep the loan on their books.
Simply put…
When it’s the banks money being lent out foreclosures WILL NOT exist!
Think about it. When was the last time you used an ATM and extra $$$ came out? When was the last time a bank has made any kind of error in the customers favor and if they did how quickly was is rectified?
The reason all the JUNK mortgages were available is because a government entity Fanny/Freddy was backing them up. Why should Fanny/Freddy care if people default. After all it’s not their money.
If you take a step back and look at the situation we’re in. If government had never gotten involved (other then policing the laws) in the mortgage business we would not be in this situation.
shadash | September 29th, 2008 at 8:15 amI’m really not convinced that most people could afford the initial payments on their ARMs. The sheer number of defaults suggests to me that those individuals probably couldn’t even afford the initial payments but thought that going in the hole for a year or two for quick money was worth it.
These are the same types of people who acquired interest-only loans and the like. They were gamblers and speculators who thought they were getting in on a sure thing.
The government needs to change the American attitude about housing being a quick buck if they want to stabilize the market. Otherwise we’re going to see more rapid fluctuations like this since it will be greed, not ownership, that fuels the market.
bk888 | September 29th, 2008 at 8:17 amone big problem with the youtube spot is the way the housing price increase looked. the author blamed it on the 1995 revision of the bill, yet the graph showed significant uptick in early 2000 without any explaination by the said author.
highly recommend watching “themouthpeace”‘s other works to see just how biased this guy is.
ocrenter | September 29th, 2008 at 8:20 amIf a 10% down payment had been required, there would have not been so many unqualified borrowers.
Some people should not be home buyers. The percentage had been around 66%. It then went up to 69.2. About 3 million people to high.
In some countries, the only home loan you can get is adjustable.
worm | September 29th, 2008 at 9:24 amJim, not fixed RATE but fixed TERMS. No intro rates, no options. Any straight ARM written 2004-2007 looks almost exactly like any traditional fixed written at the same time.
That and of course at the absolute minimum 10% skin, 20% better.
Rob Dawg | September 29th, 2008 at 10:17 amI did not watch the clip but just a few thoughts.
1.Adjustable rate versus PAY Option for (IO) ARMs needs to be clarified, many ARMs (Amortizing 3/1 and 5/1) have not had rates increased dramtically or affected affordability
2.The government did set out stated policies of increasing home ownership. One belief, and there are position papers on this from the Federal Reserve, was that down payments and closing costs should never be an obstacle to home ownership. I would also add when you realize how Fannie and Freddie jumped into the stated income market this was a fully endorsed move by most legislators.
3. In short the government believed home ownership was cure all ills including poverty, bad neighborhoods, and perceived domgraphic imbalances. Wall Street helped but the government did all it could to keep the home price appreciation train growing.
HOME OWNERSHIP AND PRICE GAINS WERE STATED GOVERNMENT POLICIES
LV Renter | September 29th, 2008 at 10:27 amFor the McCain camp to say Obama’s campaign is more closely linked to Freddie and Fannie is absurd. Rick Davis is the head of the McCain campaign and his lobbying firm (which he took a leave from but is still a major equity holder) was still being paid by Freddie and Fannie just one month ago! They didn’t mention that on Fox News? Switch the channel. What were they being paid for? Access to McCain.
Let’s face it. These institions were a bad idea (letting them operate as private companies with a government charter and tax breaks to boot) and they eagerly gave donations to both the GOP and the Dems. They were equal opportunists.
The Clinton administration created OFHEO in 1993 to provide oversight for Fannie and Freddie and that is a Presidential appointment. Bush has had the ability to beef up oversight or reign it in over the last 8 years and he choose the latter. That’s a fact. They neutered OFHEO and basically told them to get out of the way and let Fannie and Freddie grow recklessly until it hit the fan. The Bush administration was for deregulation and that is what McCain has been about for the last 25 years up until 2 weeks ago. If you want more proof see McCains role in the Keating 5 and see his close relationship and support of Phil Gramm the godfather of credit default swaps which are more a part of this meltdown than everyone knows. McCain would probably have Gramm as his Treasury Secretary.
JimH | September 29th, 2008 at 11:26 amMaking an adjustable-rate loan to someone who can’t afford the highest rate the loan can climb to IS giving a loan to someone who can’t afford it.
GeneK | September 29th, 2008 at 12:16 pmYes ARMs to people that cannot afford the adjustment are bad loans.
However, I think we need to separate Prime ARMs (3/1, 5/1, 7/1) versus crackpot products 6 month teaser rates and Pay Option ARMs.
The rate 5 years from now could be 200 basis points more than it is today, but is that change the cause for the foreclosures in the market. I think not.
LV Renter | September 29th, 2008 at 1:00 pmI don’t think prime vs crackpot makes that much of a difference. Whether you default on a mortgage because the adjusted rate rises to 1.5X what you can afford or 5X what you can afford.
No, the existence of these loans is not necessarily the cause, because with prudent qualification requirements and evaluation of applicants any of them could potentially be a good idea for someone. The cause is forgetting that you can’t depend on people who make their living on commissions from selling properties and loans to apply prudent qualification requirements and perform prudent evaluations of applicants; it’s like putting the foxes in charge of managing the chicken coop.
GeneK | September 29th, 2008 at 1:13 pmI disagree with you, Jim… I don’t think banks should be restricted from offering adjustable rate or other creative mortgages. However, I don’t think the government should be backing anything but the safest loans (ie: fixed rate full doc 20+% down loans), either through the GSE’s or the FHA. Moreover, I think requiring the banks to hold a certain percentage of any loan they originate which is not “safest” per the above standards on their books to maturity, say 50%, would do wonders for reducing the amount of reckless lending from the private sector.
That’s my opinion, anyway.
Nick | September 29th, 2008 at 3:54 pmNick,
You’re totally correct. I’m for deregulation, but at the same time the Central Bank should not be lending banks money to make loans. If a bank was lending out its own money, then it would be making prudent decisions and would not need regulation.
Likewise, because these banks borrow $ from the govt to make these loans, we do need govt regulation. The govt should be reviewing these loans as well for approval or not giving these banks the cash to begin with.
Every participant in the housing bubble is responsible for this mess, from the risky knife catchers, to banks, to the central bank. I’m just mad that the responsible citizens have to pay for it all.
garbler | September 29th, 2008 at 11:12 pmLenders should be able to offer whatever kind of loans they want, but they should be required to qualify the borrower based on the worst possible scenario.
For example, if the borrower wants a neg-am mortgage and the mortgage caps at 125% LTV and max rate for the life of the loan is 11% and the loan doesn’t amortize until after five years, then the borrower needs to be qualified at 125% of the original loan amount at 11% over a 25-year amortization period. There should be a 40% max, back-end DTI ratio on **proven** gross income (DTI ratios should actually be calculated on a sliding scale, as 40% of a $3MM income is actually more affordable than 40% of a $50K income).
If borrowers were properly qualified based on the worst-case scenario for the exising loan, we would not have a “foreclosure crisis.” Falling housing prices have nothing to do with the glut of foreclosures; a failure to qualify borrowers is 99.5% of the problem.
CA renter | September 29th, 2008 at 11:18 pmThe reason for insisting on fixed-rate products only is to penalize the lenders for creating exotic ARMs that jeopardize the borrower unfairly.
Packing a 2-3% prepayment penalty on a 2-year fixed subprime loan, then resetting it after 24 months causing an increase of $1,000 to $1,500/mo. to the payment is criminal.
If lenders are going to fleece both the borrowers and the investors, then they should have to go back to square one until they can prove that they’ll treat people right.
Jim the Realtor | September 30th, 2008 at 7:05 amJim, if you look at a straight ARM v. Fixed for the last 4 plus years the ARM actually comes out slightly ahead. That’s changed as the banks are now charging as much for ARMs as for fixed. But the point is ARMs are not by their nature toxic. They put a little more risk on the borrower in exchange for slightly lower payments. In 1990 that was a great bet. In 2004 an even bet. Today, a poor bet. Some countries like Australia only offer ARMs. THere’s nothing wrong with the product. The failure is in the qualification.
Rob Dawg | September 30th, 2008 at 9:12 amJim, I agree… People have no clue what they are getting into. And people will change VERY little even in light of this current meltdown. Fixed rates for the majority- anything else needs a smart consumer!
Donna | September 30th, 2008 at 3:20 pm