PrintMarch 29, 2010
Making the Housing Crisis Worse
The Obama administration has announced a new plan to help homeowners facing foreclosure due to under-employment and unemployment. Instead of having the government create an economic climate which would actually create private-sector permanent jobs and thus lower unemployment, the government wants to require lenders to cut or eliminate monthly mortgage payments for these homeowners.
The U.S. government's housing crisis remedy has been to 1) pour taxpayer money into the financial system, evidently with minimal conditions, hoping that banks will lend this money to homeowners and businesses; 2) give taxpayer money to homeowners who are "upside-down" on their mortgages; and 3) make loans attractive to first-time buyers.
This is wrong because 1) The current banking crisis is due primarily to the housing crash, which exposed weaknesses in the banking system. The government is trying to get the banks to loan money on real estate, a depreciating asset. What is needed is first, stabilization, and then an increase in housing prices. 2) If housing prices don't stabilize, even with refinancing or loan modification, more homes will be "upside-down." 3) The government insists on making loans attractive to first-time buyers? Isn't that what got us into this mess?
Government-guaranteed FHA (3.5% down-payment) loan limits have been increased to $730,000 in many areas of the country, and first-time buyers have been receiving a tax credit when they purchased a home. But first-time buyers are understandably timid, and they're often the last to buy in both rising and falling housing markets.
Instead of risking so much taxpayer money by focusing on first-time buyers, Fannie Mae should make home loans more attractive to investors, both domestic and foreign. Because of low real estate prices, in most areas of the country, investors can now put 20% down and easily have a positive cash flow from rental income. But FNMA has made it more difficult, and in many cases, impossible for investors to get loans. When the housing market tanked, FNMA responded by doing away with "stated income" or "easy-qualifier" loans, where loan applicants with 20% to 30% down-payment and good credit would qualify for a home loan without going through the normal lengthy loan process. But the so-called "irresponsible" investment loans were primarily 2nd and 3rd trust deed loans which were used to allow buyers to get a second or even a third loan to either purchase a house with zero down-payment or to later wring out all the equity in the property. FNMA also raised interest rates and fees for investment property and limited the number of FNMA loans each investor could have to only four.
Federal officials should ask themselves this question: "Given this housing market, if this were your personal money, would you lend your money to a first-time buyer with a 3.5% down-payment (FHA), or would you rather lend your money to someone wealthier, with good, established credit, who is willing to put down 20% or 30% of his own money to purchase a property?" Also, if the housing market goes down an additional 10%, who is more likely to default and become a burden to taxpayers: the FHA buyer or the investor who just made a down-payment of 20% or 30% and is still receiving a positive cash flow?
FNMA should allow stated-income loans, reduce interest rates and fees for investors with good credit and large down-payments, and remove the limits on the number of FNMA loans for investors -- at least for the near future. The minimum goal should be to at least stabilize the housing market. Once the market is obviously stabilized, the more timid buyers will begin buying, and the housing market will experience rising prices, which will lead to less foreclosures, healthier banks, consumer confidence, and increased tax revenue.
Dan Nagasaki is the author of The Beginner's Guide to Conservative Politics and Glenn Doi is a real estate broker in Los Angeles.
