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H.R. 5072 Accomplishes Little
On June 10, the House passed H.R. 5072 by a landslide vote of 406-4.
This bill is called the FHA Reform
Act. The legislation was sponsored by Maxine Waters (D-Cal.).
The White House pushed it:
The boss over at HUD, Shaun Donovan loved it:
"I am grateful to the members of Congress who worked
diligently on this bill - specifically, Housing and Community
Opportunity Subcommittee Chair Maxine Waters, Financial Services
Committee Chair Barney Frank and Subcommittee Ranking Member Shelley
Moore Capito. We look forward to quick action by the Senate on this
proposal to encourage responsible home ownership while further
reducing risk to the American taxpayer."
We know the FHA is having problems. The director, David Stevens made
these remarks a month ago:
On the mortgage market in general:
market purely on life support, sustained by the federal government.”
On FHA’s exploding balance sheet:
this much volume is a sign of a very sick system.”
On the status of FHA’s “book”:
program after being left with “terrible portfolios” from 2007 and 2008."
It is high time that Congress started addressing the problems with the
D.C. Mortgage lenders. I think they missed a chance. But given that
Barney Frank was involved it is not surprising.
There is nothing in this legislation that restricts the FHA from
insuring up to 96.5% of a mortgage. The window to buy a home with
government financing with less than 5% down is still open.
While there may be social implications to this that some consider to be
beneficial, it has nothing to do with the soundness of FHA and the
financial risk to the taxpayers. We are the only country in the world
that has a program like this.Why is is the US government continuing to
be the only provider of junk mortgages?
The excesses that followed as a result of the availability of 100%
financing were contributing factors to the blow up of 2008-09. It would
appear that we have learned very little from that experience. That’s too
bad. It cost us $2 trillion so far.
Some of the language in the bill:
Sec. 2)
Amends the National Housing Act to authorize the Secretary of Housing
and Urban Development (HUD) to increase the maximum annual premium
payments for mortgage insurance, and make the charging of them discretionary
instead of mandatory.
Increasing fees would make a difference. It would be a step in the
direction of getting the private sector back involved. But they make the
fees “discretionary”. Read this to mean that we will not see
these higher fees for at least two more years. What a cheap way out.
Pass the buck.
(Sec. 3)
Authorizes the Secretary to require specified mortgagees to indemnify
HUD for payment of a mortgage insurance claim if the mortgage was not
originated or underwritten in accordance with HUD requirements.
Authorizes the Secretary to require a mortgagee to indemnify HUD for
loss regardless of when an insurance claim is paid if fraud or
misrepresentation was involved in connection with the mortgage
origination or underwriting.
(Sec. 4)
Authorizes the Secretary to terminate approval of a mortgagee to
originate or underwrite single-family mortgages if the mortgagee's rate
of early defaults and claims is excessive.
This is nice. Just a question. What did they have before? They had no
ability to go after someone who was generating bad paper? That is not
correct. Go to the press
releases. They have been filing enforcement actions against
mortgage lenders for years.
(Sec. 6)
Establishes within the Federal Housing Administration (FHA) a Deputy
Assistant Secretary for Risk Management and Regulatory Affairs
responsible for all matters relating to managing and mitigating the risk
to HUD mortgage insurance funds and for ensuring the performance of
HUD-insured mortgages. Abolishes the position of the FHA chief risk
officer.
It’s like a joke. They get rid of one risk officer and replace him with a
new one. Someone will get a nice new office. FHA does not need a new
risk officer. It needs a lower risk profile. It is not hard: Charge a
market rate, do not exceed 80% LTV and only insure borrowers who have
the ability to pay. Why should the government take so much risk that we
need new and important risk managers? Just get rid of the risk.
(Sec. 7)
Authorizes the Secretary to use outside sources to:
(1) analyze credit risk models and practices employed by HUD in
connection with mortgages;
(2) evaluate underwriting standards; and
(3) analyze lender compliance with, and HUD enforcement of,
underwriting standards.
Oh boy. I don’t like this one. This means that private vendors will get
fat. But who? This is just an opportunity for “leakage”. We have
Fannie, Freddie, FHLB and FHA with $7 trillion of mortgages that they
“own”. They have 70% of the outstanding mortgages. And we have to buy
outside databases to evaluate it? What are they doing down there?
(Sec. 12)
Prescribes conditions compelling the Secretary to review and reduce certain cash investment
requirements (down payment requirements) binding upon mortgages or
mortgagors.
Reduce down payment requirements? I thought this was about protecting
the taxpayers?
Following the expiration of the housing tax credit last month home sales
in many regions fell by 20-30%. Mortgage rates are at record lows, yet
applications are way off. The housing market has a wall of worries. We
are not out of the woods. A second leg downward is possible. Should that
happen the FHA would need a bailout. It could happen as early as 2011.
H.R. 5072 does little to minimize that risk. If anything, it just kicks
the can down the road a bit longer.
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Bruce - nice article.
You have to be terrified that the FHA has nowhere near the organizational infrastructure to cope with the tremendous growth of their balance sheet.
How will a disaster be avoided?
Buying support continues ...
DOW updated charts:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
The reason to continue FM/FM/FHA is that all local and regional banking is secured by real estate "assets." The FDIC maintains the illusion that "member" bank's liabilities, your deposits, are "safe," but if nobody's propping up the asset value, it's lights out.
The premise that the Government can save tax payer money through direct ownership, or backing of private real estate assets subject to market price volitility, is beyond all reason. The Government should not be in the mortgage backing business.
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It is incredible the efforts to increase tax payer exposure to loss. It is as if the Congressman do not live in the same country as the tax payer.
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So other than corrupt big Government, what is the real reason to continue with the FHA and its ability to take loss. My only guess is through the liquidity edict by the Administration and FED.
But, what is really strange is that the data we have now shows that those initial real estate inflation efforts do not warrent continued focus until real estate price stabilizes down. It seems, for Congress, no loss opportunity will go unrecognized.
Mark Beck
I am sure that the good citizens of Inglewood, CA are proud of their esteemed Congrsswoman, the Honorable Maxine Waters. However, my observations while a resident of southern CA for many years is that she actually has no clue what she is doing, other than furthering the cause of the outlaw gangland she represents.
So when will HONEST accounting take hold and the US Gov places Fred/Fann as part of the national debt? Then again we all expect the US Gov to continue the massive fraud at all costs.... to the taxpayer.
http://www.swarmusa.com/vb4/showthread.php/2333-Debt-Can-Never-Be-Repaid-By-Bankster-Design
Debt Can Never Be Repaid, By Bankster Design
Debt can absolutely be repaid. The problem is with the debt-to-income (qualifying) ratios.
Mortgage debt at 50/50 or 38/48 can never be repaid because ALL of the disposable income in a household gets absorbed in interest/debt service. This is the consumer's problem and a caveat emptor.
When you factor in what a lender will (or used to) permit a borrower to consume in terms of household PITI, car expense, cc debt, student loans, etc there is no provision for error. One lost paycheck, broken boiler, illness and its immediately in foreclosure with no ability to repay the debt.
Proper DTI ratios, when you factor in inflation, repairs, children, health, energy/food costs, income taxes, etc should be 10/15 if you want to have a solvent household. That is 10% for household debt (PITI: Principle, Interest, Property Taxes and Homeowners Insurance) and a total of an additional 5% (15% total back end) of your gross income for EVERYTHING ELSE.
This makes it possible for a homeowner to easily find the extra principle payment every year to pay off his mortgage in 22 years.
If you simply ignore the Government, the IRS and the Federal Reserve you will find yourself utterly and totally free (subject to the vagaries of life of course such as GoM spill, etc).
Operate your life without any dependency on banks, taxation, or entitlements and you will thrive wildly. Organize a community of people to build your own houses in exchange for sweat equity and live Free and Clear on day one. I'm simplifying it but without the deep seated cost of capital and taxation on everything you buy everything you need/want would cost less than 1/2, maybe a 1/4 of its retail price. Deflation will wipe out the bankers through natural selection alone. If banking can't contribute to the survival of mankind the market will (and is) eating ITS lunch.
The only housing that will be left standing in the US are those Free and Clear homes that will never succumb to reverse mortgages that the bankers won't be able to eat and the other 35% underwater that they are free to take and do whatever they want with. The cost of foreclosure is so high it doesn't matter that they will own all the land and all the homes. They can have it at .22 on the dollar.
What matters is tying someone to make eternal interest payments, i.e. forfeiting a portion of his labor forever. The permissible debt ratios is the trap. 10/15 puts the borrower in control and yes, that means if you earn $100,000 per year you can only afford $15,000/yr in debt service or something like $150,000 house/condo. That would be the reality of it.
The new normal is good for everybody, including the bankers.
While SwarmUSA asks a lot of the right questions and no doubt has good intentions, I think their proposed solution, Freedom's Vision, is rather populist in tone and needs some more thinking through. (Two examples: they don't put sufficient controls against corruption in place and they completely ignore how we are supposed to address sovereign debt.)
I am very concerned about what happens when things collapse and we have an angry populace and one or more movements like this competing to implement their "Vision" - especially if they get into power and fail spectacularly. It could set the stage for something truly tragic.
Debt cannot be repaid. Lets time tell.
My bet that US debt will be repaid.
Now is not the time.
Thank you, Bruce. I guess the headline is "Dog bites man". Not so sensational but it needed to be reported upon. This "legislation" changes nothing, and when nothing changes, nothing changes. The fan will have to be inundated by feces before there is any meaningful legislation -- and then it will be too late. As my granny would say, the horse was already out of the barn.
Quick Men, A Distraction!
Cast their Eyes Elsewhere. Divert their Attention, for they Close Near Truth.
But is it not Truly Different this time, for it was written by the Honorable Maxine? Question Poser Unparalleled during Hearings and Testimonies. Mayhaps we should give such time, truly consider its worth. For good may be awarded the patient and kind, eschewing munificence and multiple benefits to Man and His Creator. For if all Practiced Humitlty and Care in His Image, would the World not be a Better Place. Ah, the very Codification of Goodness and Light handed down by the Lawmakers to the People, for which We Should be Eternally Grateful.
Are we there yet?
A distraction, exactly.....aah yes, British Petroleum or BP as we used to know them.
Shouldn't that caption read "shave"?
Q: "Why is is the US government continuing to be the only provider of junk mortgages"?
Campaign contributions from the: home building, buying and selling, renting, and anyone else involved in the RE and ancillary industries, embodied in the National Association of Realtors.
Oh. I knew there had to be 'good' answer..... Tks
We, as a nation, have to figure out how to be economically sustainable without reliance on ever-increasing house prices OR destination 36,000 djia. These two are now centerpieces to our economic recovery, where they should be mere adjuncts to an econonic structure; they should be the ends but have been granted position as the means.
Circling the drain!
Econ-ironic structure?
Bruce,
FM/FM, now under Gv't ownership OWN 96% of all US Mortgages.
Now.............and their dead broke.This, as you know includes all the WALK AWAYS, and foreclosed properties.
These people are on Crack.
+10
But it ain't gonna be pretty when the pile runs out. It may have some dark humor in it though.