Monday, October 1, 2007

Mortgage Bailout Promotes Dysfunctional Lending System

by Broderick Perkins
© 2007 DeadlineNews.Com

Deadline Newsroom – Offering more easy money to solve what easy mortgage money has wrought will only throw good money after bad and enable a flawed, strung-out system to flourish.

Even consumers with mortgages that have melted down don't deserve a federal cash-based bailout.
Don't shoot the messenger.

Those are the recommendations of the National Taxpayer Union.
Welcome to the school of hard knocks.

Call it tough love or tough luck, but the Union says borrowers, brokers, lenders and others who took on or gave out too much mortgage risk will just have to, well, suck on it.

They should get no quarter.

"A government bailout is not a viable solution. The government bailout is only going to reward people who made bad decisions -- both borrowers and lenders -- and if we reward bad decisions, it's only going to encourage more people to make these bad decisions in the future," said study author Jacob Vigdor, an associate professor of Public Policy Studies and Economics at Duke University.

Vigdor says just about any kind of financial lifesaver from rewriting a consumer's mortgage to stave off foreclosure to a cash infusion from the federal government to save a lender amounts to a subsidized bailout.

Foreclosure moratoriums, taxpayer-backed loans to troubled borrowers and lender-restrictions that effectively rewrite mortgage contracts all effectively socialize risk while encouraging recklessness from borrowers and lenders alike, the Union says.

While President Bush says he stopped short of a federal bailout for lenders for the same reasons the Union says any bailout is shortsighted, many consumer provisions in the Bush plan are just what the Union denounces.

Says Vigdor, any bailout approach is a "moral hazard" which means that "wealth is redistributed from the responsible to the irresponsible, from the ethical to the unethical."

The study, "What Should Government Do About the Subprime Mortgage Market?" recounts the causes of the current mortgage meltdown by spreading blame.

• Brokers, who account for the majority of subprime loan originations, pursued subprime borrowers aggressively, sometimes recommending loans that were a poor match for the borrower’s financial circumstances.

• Similarly over-eager to attract borrowers and to close deals quickly, lenders engaged in poor underwriting practices, failing to obtain reasonable evidence of a borrower’s ability to repay, offering no-money-down arrangements, and approving borrowers based on "teaser" rates, rather than the fully-indexed rate.

• Seeking to qualify for the largest loans possible, and often assuming that home prices would continue upward, borrowers with little ability to manage payment shock or earnings fluctuation "maxed out" their loans, in some cases by lying about their earnings.
The Union said, as everyone now knows, when housing prices leveled off, or declined in some regions, the house of cards collapsed. Borrowers defaulted on higher payments and couldn't tap their equity, if any, to refinance or pay off the large principal.

Government intervention also isn't necessary, says the Taxpayers Union, because evidence thus far doesn't indicate a "crisis."

It says delinquency, foreclosure and held-for-sale rates of subprime mortgages originated in 2006 are higher than for loans originated in 2003 and 2004, but are on par with those originated in 2000-2001.

Also while the rate of foreclosure this year has soared to 80 percent or more of those last year in some markets in some months, only 7 percent of subprime loans originating in 2006 were recently in danger of being held for sale, foreclosed upon, or going delinquent.

"The only sure way to eliminate the high rate of foreclosures in the subprime market would be to eliminate the market entirely," depriving the other 93-95 percent of subprime borrowers of their American Dream.

Rather than going to such extremes, instead of offering bailouts or ignoring the plight of existing borrowers, less intrusive forms of assistance do work, the Union says.

Some of the best forms of assistance are "educational bailouts" where consumer education and foreclosure-avoidance strategies are employed even after the borrower gets in too deep.

For example NeighborhoodWorks America and its Center for Foreclosure Solutions revealed a year ago how community-based programs can dramatically reduce foreclosure rates without major financial bailouts.

A combination of borrower education, sometime spanning the full cycle of homeownership and debt management, used in conjunction with loss mitigation and limited short-term financial assistance may be a better idea.

While lenders and brokers must retool their efforts to school borrowers, bring disclosures in line with today's complicated mortgages and underwrite based on real risk, NeighborWorks' work serves as a reminder that there are a multitude of ways to help borrowers avoid foreclosure, short of taxpayers taking over their mortgages.

"Consumer education is a theme running through every successful program," the report says.

You are what you know.

© 2007 DeadlineNews.Com

Broderick Perkins, an award-winning consumer journalist of 30 years, is publisher and executive editor of San Jose, CA-based DeadlineNews.Com, a real estate news and consulting service, and the new Deadline Newsroom, DeadlineNews.Com's new backshop. In both cases, it's where all the news really hits home.

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