The foreclosure epidemic all began with the housing bubble that occurred with lending expectations creating the real estate crisis. But experts, including the chairman of the Federal Deposit Insurance Corporation (FDIC), are saying the government has yet to learn the lesson. An amendment calling for adequate down payments for home loans was defeated throughout the financial reform debate. Federal real estate agencies have their own predictions. The prediction is that subprime lending is going to return again. And the crisis is being perpetuated by the Federal Reserve, with policies that prevent a natural correction that is the ultimate means to fix the problem.
Will skin in the game help more or loan performance?
Federal regulators should tighten lending rules for home mortgages within the United States of America, as outlined by Sheila Bair, chairman of the FDIC. CNBC showed Bair saying that borrowers have to be able to show they can repay a mortgage loan and make larger down payments on the home loans as part of “common sense” rules. She thinks “skin within the game” and loan performance will work well together. The more money down a borrower is needed to pay, the less likely they will be to walk from the house. There is one way to move forward from the housing situation, she said. It involves having higher specifications for ability to repay, more skin within the game and strict income documentation.
Wanting some subprime lending redux
Weak lending standards brought down the economy, but the federal government still does not get it, according to Edward Pinto at Bloomberg. The Obama administration and Congress certainly don’t want to fix the broken underwriting since last July the Dodd-Fran bill was signed into law, writes Pinto. An amendment to the financial reform bill that would have added a minimum down-payment requirement as well as consideration of credit history, along with definition of a “prudent underwriting” standard, was defeated. This made it possible for low income borrowers with low credit scores to have homes accessible to them. Following the new policies make for a risky move, says Pinto. He thinks it was a better move to use taxpayers to bail out Fannie Mae and Freddie Mac than it is to do this.
Fixing the issue
The Christian Science Monitor has Bill Bonner saying that the housing crisis will likely linger for a when with the reaction the government has taken. Bonner states that the government ignores the issue by just giving out money and credit too many who do not deserve it. The U.S. financial system is holding hundreds of billions in mortgage debt that definitely won’t be repaid. The Federal Reserve has its own opinions about the mortgage debt being held. It thinks that it is an “asset.” Bonner said the real solution is the market correction the government is attempting to stay away from. The government finances more mistakes, keeps paying for the old mistakes and pretends that everything will be fine–until it finally runs out of money.
Further reading
CNBC
cnbc.com/id/39074467
Bloomberg
bloomberg.com/news/2010-09-08/subprime-2–is-coming-soon-to-suburb-near-you-commentary-by-edward-pinto.html
Christian Science Monitor
csmonitor.com/Business/The-Daily-Reckoning/2010/0909/Extend-and-pretend
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