Should We Let the Federal Government Run the Mortgage Industry?

Roger Schlesinger
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Posted: Sep 06, 2008 10:52 AM
Should We Let the Federal Government Run the Mortgage Industry?

Perhaps you think I am kidding? The deteriorating credit markets are holding the economy hostage, and no matter what the industry comes up with, nothing seems to help. But before you cry “Uncle…Sam,” look at this cautionary tale from the Coachella Valley, best known for the city of Palm Springs, California, where our government directly and indirectly has set up a conundrum of epic proportions. Through the Stimulus legislation, they have come up with a form of jumbo loan with a maximum of $500,000 which expires in a little over 90 days. It will be replaced with a new conforming loan limit (conforming loans are smaller loans, in dollar amounts, than jumbo loans) of $625,500 through the Housing Bailout legislation on January 1. How could this be? A conforming loan with a $125,000 higher limit replacing the jumbo limits? And one wonders why the credit markets are screwed up. This example definitely inspires a “no” vote on the headline of this column.

On the other hand, lenders really aren’t interested in lending at this time. They do not want to entertain any thought of losing more money. If you have read any of my recent columns, you will note how often I have written about this phenomenon. Our government isn’t afraid of losing money; in fact you might say that “it’s job one!” They are so used to giving it away that the chance they might get it paid back could influence a culture change in Washington. In all seriousness, the SBA business loans are a very successful program for both those who get these loans and the government because the government gets ample collateral for the guarantee they supply. If the programs were designed like the SBA programs, I might have to give a “yes” to the headline of this column.

When the credit markets are working, loans are generated and funded based on a set criteria where everyone is treated equally. Let’s say you need a $550,000 loan and the value of your property is a little over $800,000, creating a 68% LTV, or loan-to-value. If your income and credit scores fit the parameters, you and anyone else who has this same financial profile would get a loan. Could you imagine the Feds running such a fair system? What would happen to cronyism, to favoritism, to the unlevel playing field that has become the birthright of big donors and lobbyists? Call me caustic but I haven’t enough faith to see the necessary changes in Washington to keep the fairness and equality in the mortgage market. This is definitely an area that prompts a no vote.

After a frustrating year, I realize that the only way to get the market moving is to have someone guarantee the lenders against loss. I have suggested adding private mortgage insurance to almost every loan and to my chagrin no one is saluting that idea. What then do you say about having the government, for a fee equal to mortgage insurance, give the lender the guarantee and get them to start lending again? This actually could work and perhaps change the atmosphere of loss to a climate of new prosperity and hope. I have thrown in the word “hope,” as in I “hope” you realize that if we gave these fees to the government, they would spend them on whatever they wanted and not put them aside to pay the claims when a number of the loans default. Even with the aforementioned problem, I still have to say yes to the vote we are discussing in this column.

The danger in letting the credit crunch try to work itself out is the economic crisis it can cause for the entire economy and not just real estate and real estate finance. As more lenders shut down, more people become unemployed (6.1% is the new figure in our country) and as unemployment grows, it shakes the entire economy. One doesn’t need more food servers when unemployment is growing as fewer people are eating out. You may not need a mortgage today, tomorrow or ever, but that doesn’t mean the mortgage industry doesn’t affect your personal financial condition. If you own a house and find yourself without equity or as much equity as you used to have, then your longing for a healthier housing market is directly tied to the mortgage industry. Everyone’s opinion and everybody’s help is needed to turn the tide.

Yesterday over lunch, my son—a long-time mortgage pro himself—and I had a debate about the industry. I lamented that people are “gaming” the lenders with their complaints that they didn’t understand the way option ARMs worked, especially the negative amortization aspect. Is it fair that those people should be getting help from the lenders with lower fixed rates and even a reduction in their balances? He took the position, which may be a wiser one, that the lenders created the loans and that no one is forcing the lenders to give the lower rates and the reduction in the balances. In the movie “City Slickers,” this type of action was considered a “do over” and my feeling is life doesn’t work that way. Lenders obviously feel anything is better than a foreclosure. Our little lunch time discussion might very well be a microcosm of the entire credit problem: what appears to be right versus what appears to be practical.

I leave you to your conclusion with the score tied 2-2. Something has got to happen, and you actually can be part of the solution by influencing your congressman, senator or even your governor. Overall, I favor the government keeping its nose out of the economy and sticking to the common defense and general welfare of our country. Maybe yours truly and a lot of other diehards need to adjust our thinking. Something has got to happen to turn this around!