“Sen. Charles Schumer urged federal regulators Wednesday to do more to help certain homeowners struggling to make mortgage payments.”
“The Democratic senator from New York made his plea in a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke -- two men at the forefront of efforts to make sure the credit crunch that has rocked Wall Street doesn't undermine the economy.”
“Schumer asked Paulson and Bernanke to support a plan in Congress to provide $100 million to nonprofit housing groups to help troubled subprime borrowers -- those with blemished credit histories -- refinance their homes.”
“‘I urge you to use your leverage over financial institutions -- whether banks, lenders, servicers or brokerages -- to encourage them to match the federal government's efforts to provide funding to nonprofit group working to prevent foreclosures, and to work with the nonprofits to help borrowers who need loan modifications,’ Schumer wrote.”
“He said he intends to offer legislation when Congress returns next month to boost investment caps on Fannie Mae and Freddie Mac "to increase their flexibility to participate in loan modifications with borrowers and lending institutions." The administration has so far been opposed to raising the caps. The two mortgage giants a few years ago suffered multibillion-dollar accounting scandals.”
The problem with these proposals is the bailout will not help the borrowers – it is purely a bailout for the irresponsible lenders or hedge funds that invested in poorly-structured mortgage-backed securities.
Troubled borrowers got into their position because they bought homes they could not afford. Most were enticed by low-interest, negative-amortization ARMs that have since reset to their normal rates. While restructuring their loans to a fixed-rate mortgage will temporarily lower their monthly payments, in the long run, most of these troubled borrowers can not afford the payments unless they can continue paying the low, negative-amortization payments.
Furthermore, this encourages these troubled borrowers to continue paying monthly for an asset that may be worth hundreds of thousands less than their outstanding loan balance. In many cases, over the long-term, it would be better for these borrowers to simply walk away.
Sure, they will have ruined credit. However, appropriately-managed credit will typically recover partially in three years and fully in seven years – far less than the 30-year sentence that will be imposed by the restructured debt on an asset that may end up being worth 50% of what they borrowed.
On the other hand, the bailout will help those that recklessly loaned money to people who never had a chance of sustaining the payments. It will also help the hedge funds and their investors that fueled this recklessness. Your tax dollars will be used to prop up their irresponsibility.
A second part of Senator Schumer’s proposal is to increase the $417,000 cap on Fannie Mae and Freddie Mac. Under current Fannie Mae and Freddie Mac regulations (for more information on them, see this link), these quasi-government entities are prohibited from buying mortgages beyond the cap. Because of these caps, mortgages that exceed $417,000 are sold on the open market – a market that has recently soured to these Jumbo loans in the wake of a flood of foreclosures. As a result, Jumbo loans have become expensive relative to mortgages under $417,000. Thus, Senator Schumer’s proposal is simply an attempt to reduce the cost of mortgages in excess of $417,000.
Keep in mind the Fannie Mae and Freddie Mac were created by Congress to assist low- and middle-income Americans. They were never designed to help higher-income Americans.
Most financial advisors recommend that homebuyers should not purchase a home in excess of three times their annual income. This means that only those with a household income in excess of $139,000 should consider a Jumbo loan. Hence Senator Schumer proposal to increase the cap ignores the original charter of Fannie Mae and Freddie Mac. Ultimately, Schumer is simply attempting to pass a government welfare program for the rich.
Is this how you want you want Congress to spend your tax dollars? Do you want to fund a bailout of irresponsible lenders and hedge funds – a bailout that could potentially hurt the homeowners Schumer claims to be protecting? Do you want your government to guarantee loans that will only benefit those with incomes in excess of $139,000?
Have you written you Congressional representatives and told them how you feel?
I did. When Senator Schumer first started pushing for a Federal bailout of subprime borrowers, I wrote my representatives, Senator Bill Nelson, Senator Bob Martinez, and Representative Robert Wexler and pleaded with them not to consider any bailout.
Unfortunately, only Senator Martinez replied to my emails and his reply was nothing but a canned reply that didn’t even remotely respond to the email I sent him. This was his response:
Thank you for sharing your views about responsible lending practices. I
appreciate hearing from you and would like to respond to your concerns.
As you know, on March 15, 2005 Representative Bob Ney (R-OH) introduced the Responsible Lending Act (H.R. 1295). This legislation responds to the growing complaints of predatory lending practices, conflicting state laws, and the need to further enhance consumer education and protections. H.R. 1295 was referred to the House Subcommittee on Housing and Community Opportunity in the House Committee on Financial Services.
You may also be interested to know that on March 9, 2005, Representative Brad Miller (D-GA) introduced the Prohibit Predatory Lending Act (H.R. 1182), legislation to amend the Truth in Lending Act to eliminate specific abusive lending practices
and ensure that credit for home ownership is available for consumers with
impaired credit. H.R. 1182 was referred to the House Committee on Financial
Services.
Although no related legislation has been introduced in the Senate, as a member of the Senate Committee on Banking, Housing, and Urban Affairs, I am working closely with Chairman Richard Shelby to develop comprehensive legislation that addresses the need for uniform, responsible lending practices and consumer education. State laws are cumbersome and Congress must update existing federal laws to create a strong national standard with significantly greater protections.
Again, thank you for sharing your concerns with me. If you have any other further questions or comments, please do not hesitate to contact me. In addition, for more information about issues and activities important to Florida, please sign up for my weekly newsletter at http://martinez.senate.gov/.
Sincerely,
Mel Martinez
United States Senator
Obviously, our elected representatives need more input for their constituents. Please take a few minutes to write or email you representatives in Congress, even if it’s just a short paragraph.
You can find your Senators' address and email here and your Representative’s address and email here.
Please take a few minutes to write them and tell them what you think of Senator Schumer's proposal.
Stumble It!
5 comments:
I think we need to know if this will cost the gov less or more than letting it run it's course.
Not in favor of bailing out wrecless lenders.
Re: Fannie and Freddy. I am in favor of raising the loan limits in view of the much higher cost of housing.
The underwriting standards these giants use give a very high level of security, so I do not think it jeopardizes them in any way.
I remember not that many years ago a friend had a $100k house and we all considered him very well off.
Today it's below median.
It's sad that our country is run mostly by morons.
I think taking Econ 101 should be mandatory for all elected officials.
Everyone--please get the word out: Ron Paul is the only candidate who gets it. Vote Ron Paul, d@mnit!!
America is not supposed to be a socialist country. If you think it should be, please get the F out.
To SFHB blog author:
I'd just like to say that you're doing a great job with this blog.
Most of the other bubble blogs simply regurgitate news articles.
You're writing some very intelligent analysis of this whole situation.
I agree with you 100%.
I don't know if these politicians are really this dumb, of if they're playing some political angle, but the bottom line is exactly as you described: people simply can't afford homes at their current prices. That's the heart of the problem.
If we're going to bail out out homeowners so they can make payments on a home they never could afford to begin with, why not extend that to cars, too? I wouldn't mind driving a Lamborghini. Hey, Schumer, I propose you sponsor a bill to have taxpayers fund my Lamborghini purchase. I can't afford the payments on my own. I think the government needs to do something about this.
But seriously: the best way to fix the problem? Do nothing! That's right.. let the bubble pop as it should. Home prices will come tumbling down. Homes will be affordable again. Some people will get hurt in the process, but there's no way around that. Any government attempts to prop up this housing market will result in a Japan-style deflationary spiral.
Look at Japan's mistake and learn from it. Their bubble popped and they tried to fight it, but ended up having 15+ years of home prices going down! They're JUST NOW starting to recoved from the early-90's bubble over there.
Better to get the pain over with quickly than draw it out like Japan did.
"But seriously: the best way to fix the problem? Do nothing!"
Thank you.
And, I agree in general.
The only thing I think the Feds should do is to improve disclosure rules on loans.
Right now, there is basically no standard disclosure rules. This has caused some buyers to purchase homes where they thought the teaser payments were the long-term monthly payments.
Shame on the idiotic buyers who got suckered in, but I still wouldn't mind see the Feds force mortgage lenders to have a simplified, standard discloure sheet similar to the ones you see for credit card offers.
"The only thing I think the Feds should do is to improve disclosure rules on loans."
Sure--that's fine. But I'm sure you'll agree that even if they had those disclosures you're talking about on the loan papers back when people took out these toxic loans, 90% of them still would have taken the loans anyways.
The reason? Simple: they thought that prices would keep going up and up. Thus, before the loans reset, they could simply refi some equity out to make payments or sell the property at a huge profit.
After all, that plan worked great for a number of years. Some flippers who never should have gotten a loan to begin with made some HUGE profits towards the end of the boom. The ones who waited a few months too long to sell are now the ones in this mess. They are the bagholders.
Most of these people knew EXACTLY what they were doing. They simply gambled and lost. I'll agree that there was some dishonesty on the part of lenders here, too. But that has always been the case and will always be the case whenever someone stands to profit on something. A skilled salesman can get around any kind of "disclosure" papers.
People need to take responsibilty for their own actions. One blanket disclosure can be used to cover all transactions in the future:
"ALWAYS READ ANY DOCUMENT YOU ARE SIGNING! And if you don't understand it, don't sign it until you do. NEVER take advice from or trust anyone who has a financial stake in the matter. Real estate DOES NOT always go up in price! Sometimes it goes down. And if it does, you might be f@cked."
That should cover it.
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