I believe you have a few facts wrong. Mr. Franks proposal extends to borrowers that debt ratios are LOWER than 40% not higher. Secondly, and more critically, you have mixed up the governments "guarantee" with the actual "funding" of the loans. FHA is not using their money to buy or purchase or fund the loans. FHA only offers INSURANCE on the new loan made by someone else. Where that money comes from is a mystery. FHA assumes becuase of the FHA Insurance, other lenders will support the deal. The number of families that will "qualify" under FHA underwirting rules is very small. Finally, the lenders will use this vehicle to shove bad loans off their books to other parties with FHA holding the insurance. I wonder WHo will need to bail out FHA when losses exceed premiums earmed. Oh, yea, that's US, the tax payer. Sounds like a GREAT deal, NOT!
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How Not to Save Housing
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About 50 million homeowners have mortgages. Who wouldn't like the government to cut their monthly payments by 20 or 30 percent? But Frank's plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. With the FHA now authorized to lend up to $729,750 in high-cost areas, some beneficiaries could be fairly wealthy. By contrast, people who made larger down payments or kept their monthly payments at manageable levels would be made relatively worse off. Government punishes prudence and rewards irresponsibility. Inevitably, there would be resentment and pressures to extend relief to other "needy" homeowners.
The justification is to prevent an uncontrolled collapse of home prices that would inflict more losses on lenders—aggravating the "credit crunch"—and postpone a revival in home buying and building. This gets the economics backward. From 2000 to 2006 home prices rose 50 percent or more by various measures. Housing affordability deteriorated, with home buying sustained only by a parallel deterioration of lending standards. With credit standards now tightened, home prices should fall to bring buyers back into the market and to reassure lenders that they're not lending on inflated properties.
If rescuing distressed homeowners delays this process, the aid and comfort that government gives some individuals will be offset by the adverse effects on would-be home buyers and overall housing construction. Of course, there are other ways for the economy to come to terms with today's high housing prices: a general inflation, which would lift nominal (but not "real") incomes; or mass subsidies for home buying. Neither is desirable.
None of this means that lenders and borrowers shouldn't voluntarily agree to loan modifications that serve the interests of both. Foreclosure is a bad place for most creditors or debtors. Although the process is messy, promising to lubricate it with massive federal assistance may retard it, as both parties wait to see if they can get a better deal from Washington, which would then assume the risk for future losses.
© 2008
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