Minor Thoughts from me to you

The Department of Justice is interested in racial quotas. It doesn't really care if meeting those quotas requires banks to blow up the economy.

In a complaint filed Wednesday and settled the same day, Justice claimed that California-based Luther Burbank Savings violated the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act by setting a policy that had a "disparate impact" on minorities. Between 2006 and mid-2011, 5.2% of Luther's single-family residential mortgage loans went to African-Americans and Hispanics, compared to an average of 41.7% for other lenders in the area. The complaint doesn't cite evidence of intentional discrimination because there wasn't any.

Luther Burbank wasn't a fly-by-night operator that marketed those loans to any and all. The bank insisted on a minimum $400,000 loan amount and made loans with an average 680 FICO score and 67% loan-to-value. Over the period that Justice examined, Luther Burbank foreclosed on a mere 11 borrowers out of 629 loans outstanding—a loss ratio of 1.75%. In a normal world, Luther Burbank would get a medal from regulators for its risk management, having chosen borrowers even at the height of the housing mania who could meet their monthly payments.

But Assistant Attorney General for Civil Rights Thomas Perez has a different priority: He wants banks to meet lending quotas to minorities—regardless of whether those borrowers can afford the loans. Many minority borrowers have low incomes that make them riskier lending bets. Is that a bank's fault?

To be fair, Congress passed the laws that the DoJ is enforcing. Is there any chance, at all, that we can repeal those laws without having the entirety of the liberal and progressive world scream "racist!"?

∞

Be still my beating heart. No, wait. Start beating, my stilled heart. Barney Frank just recommended killing Fannie Mae and Freddie Mac.

"As I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their present form and coming up with a new whole system of housing finance [is in order]," House Financial Services Chairman Barney Frank (D, Mass.) said at a hearing.

This is the same Congressman Frank that previously refused to believe that anything could possibly be wrong with Fannie and Freddie.

"These two entities--Fannie Mae and Freddie Mac--are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

And this is the same Fannie and Freddie that the government is bailing out, with no limits whatsoever on the losses to the American taxpayer.

The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday.

The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.

Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s.

Of course, this is Barney Frank we're talking about here. I shudder to think about what he has in mind to replace Fannie and Freddie. Whatever it is, be sure that you'll be paying for it, not him. You'll probably be paying a lot.

The Obama administration is working on a mortgage bailout plan. Supposedly, they only want to help the people who are responsible home owners. That's a good aim. Given that 41% of modified mortgages end in default, we shouldn't send good taxpayer money after bad results. If the administration is sincere about their desires, I have a proposal.

We should only help homeonwers who have either made a significant investment or spent a significant amount on their house. Here's how I define those terms.

A significant investor is someone who has equity equal to at least 20% of the purchase price of their house. For example, someone who took out a loan for $200,000 would need to have already paid off $40,000 in order to qualify for assistance. Anyone who owns less than that, isn't really a home owner -- they're more like renters with extra privileges. We should only help those who have invested a significant amount in their homes. They've already proven that they can meet payments and put considerable resources into their homes. They're likely to continue doing so, given a little help.

A significant spender is someone who spent at least 6 months gross salary on a downpayment. They're someone who has demonstrated an ability to scrimp, save, and plan for the future. They've locked up a considerable amount of capital in their house and made sacrifices to do so. They've already demonstrated an ability to manage their money and defer spending. They're likely to continue doing so, given a little help.

Both of these criteria would apply no matter what the current value of the house is. Those who are prepared to stay in their house long-term shouldn't be worried about whether or not their mortgage is currently underwater. It may yet rise back above water. And if it doesn't, the government shouldn't be worried about helping them earn a profit on their investment. Rather, our sole focus should be on keeping responsible homeowners in their homes, if at all possible.

These two criteria can help us identify who the responsible homeowners truly are. What happens after they've been helped over their current financial short fall is up to them.

What do you think?

(Updated on Feb 25, to reflect James' suggestion.)

Sometimes the federal government is unusually annoying. This is one of those times.

Efforts to create new tax breaks to encourage home purchases are gaining attention on Capitol Hill, as lawmakers gird for a major debate this spring on how best to shore up the nation's troubled mortgage markets.

Some Democrats, among them Michigan Sen. Debbie Stabenow, have signaled support for expanded tax benefits. And the idea is proving especially popular among Senate Republicans, who are hoping to carve a distinct role as Congress takes up housing issues and often find tax cuts an appealing option. The discussions reflect a growing sense that the housing, mortgage and credit mess may require more expansive federal government action.

"The momentum on this thing has been good," said Sen. Johnny Isakson, a Georgia Republican. Sen. Isakson, a former realtor, is pushing a proposal that would provide a temporary tax credit to any individual purchasing a newly constructed house or a foreclosed home.

First, it's little surprise that a "former realtor" would want to help his friends in the biz by giving people more incentive to buy and sell houses. After all, realtors get a 6% cut nearly every time a house moves. Way to look out for #1 there, Senator. (This blog supported his primary opponent, Herman Cain, for the Senate. It's gratifying to see how right we were.)

Second, when have the feds ever seen a crisis that didn't "require more expansive federal government action"?

Thirdly, this proposal is flat out discriminatory. It prefers new homes to existing homes. It benefits banks stunk with foreclosed homes over homeowners who simply want to sell their house. It's a giveaway to home builders and banks. It's a slap in the face to responsible home owners. It stinks to the high heavens.

How dodgy debt is transformed into High Grade Enhanced Securities, sold for million by creative bankers, then recognized as just some dodgy debt.

Two months ago, I wrote about the sub-prime mortgage "crisis". Specifically, I wrote about Mrs. Audrey Sweet and her troubles repaying a loan from Countrywide. Two days ago, Mrs. Sweet stopped by our humble blog to plead her case.

Countrywide forged my loan documents, they lied about the tax amount and my income to get the loan approved then gave me a different set to sign, they broke the law. That is why I was invited to testify before congress regarding my situation. The proof of what they did is in black and white. Because of my interest rate I had already paid back 27% of the amount I was loaned in a mere 30 months.

Mrs. Sweet, I looked up your Senate testimony. It was very enlightening. Let me begin by saying that Countrywide is not a bank I would ever want to do business with. Like you, I find them completely untrustworthy. Like you, I find their lack of accountability and their lack of accessibility to be completely appalling. Unlike you, I'm not sure that I find their conduct illegal, although certainly distasteful.

This is what I learned about your home buying experience.

1. You knew you couldn't afford a large monthly payment
2. You knew you had been turned down by multiple lenders in the past
3. You desparately wanted your piece of the "American Dream".
4. You were shocked at the total amount of the monthly mortgage payment
5. You took the verbal assurance of a loan officer that your high interest rate could be renegotiated, but didn't ensure that that promise was in writing with specific terms.
6. You failed to notice that your loan agreement specified that the interest rate "can only go up never down!".
7. You testified that "In the excitement of the moment, I did not focus" on the amount of your total monthly payments.
8. You continually fell behind on the mortgage and seriously neglected your property taxes. You left it up to Countrywide to step up and pay the back taxes out of their own funds.
9. You admit to signing loan papers that were different from the loan papers that you were given 10 days before closing.

Mrs. Sweet, from what I can see you did not pay enough attention to what was going, what you were signing, or what you could ultimately afford. It was your responsibility to reread the loan papers before signing them. It was your responsibiliy to total up the monthly mortgage and tax payments and realize that it was more than you could afford. Ultimately, it was your responsibility to look out for your own investment rather than assuming that the mortgage company would place your interests above their own.

Growing up, my dad taught me to always assume that I was the only one looking out for myself. When I bought my own house a year ago, I approached both the lender and the real estate agent with that lesson in mind. I knew that they had their own agendas, just as I had my own agenda. I triple-checked every piece of paper I signed and didn't sign the loan documents until I had a clear understanding of exactly what I was committing myself to. I did my own research on the type of loan I was taking out. I did my own research on current interest rates. I asked other people about whether or not the loan made sense. I thought that was the only prudent thing to do.

Countrywide is not responsible for your misjudgments and inattentiveness. They are only responsible for their own sleazy behavior. That sleazy behavior wouldn't have mattered if you had taken more time to research the loan and double check your responsibilities. I'm sorry you had to learn these lessons the hard way, but I sincerely hope that this is the last time you have to go through an experience like this.

Last night I said that homebuyers were more likely to be greedy than lenders. I haven't changed my mind yet. Instead, I read a story that convinced me even more.

The New York Times describes a couple who bought "a modest home at the southern end of Silicon Valley". Now they're suing their broker and real estate agent for setting them up with a third loan that they didn't even know they had. They may well have a valid complaint -- from the facts presented in the article, the agent was playing both the lender and the buyer for suckers.

But that's not the part of the story I'm interested in. I'm interested in how much house this couple tried to buy. Here a few facts, hidden throughout the story.

First -- how much did their house cost? This is never directly mentioned in the article. It's buried beneath a photo caption.

Sarai Torralba, 5, riding by the home that her family bought for $595,000 in San Jose, Calif. Prospero and Cirila Torralba borrowed almost $610,000 for it.

Second -- how much does this family make? The article never actually says. I would have thought that a key piece of information. The article does mention the Hernandez family, who only earns "about $4,000 a month", or $48,000 a year. We'll assume that the Torralba's are in a similar situation.

Third -- how were these loans set up?

The first and biggest loan was a pay-option adjustable rate mortgage. The loan allows borrowers to pay less than the interest due, adding the difference onto the balance so more is owed with each passing month. The interest rate on the loans from Mr. Curiel was 10 percent, with a 15 percent upfront fee added to the principal balance. That loan called for borrowers to make interest-only payments and pay off the full amount in two years.

The loan from Mr. Curiel is the one that the owners are suing over. Still, what's with the pay-option adjustable rate mortgage? I'd think that simply considering such a loan for 5-10 minutes would convince me that having the loan get bigger month after month was a really bad idea.

Reading these stories, I'm convinced that these buyers were trying to buy something that they knew they couldn't afford. Rather than having enough of a backbone to say "no" to pushy agents and brokers, they allowed themselves to be talked into obviously bad loan ideas.

Again, lack of resources isn't a truly valid complaint. Internet site after internet site explains what the various loans mean and what the amortization schedules are. Even having a poor command of English isn't really a complaint. After all, you are the person signing on the line. It's your responsibility to find someone that you trust, with a good command of English, to go over the loan terms with you. Otherwise -- don't sign.

Though vowing to fight, Mr. Hernandez said his family’s hopes and goals have been dashed. They came to the United States from Mexico nearly three decades ago. Over the years, he and his wife have worked in agriculture, picking cherries, apples and asparagus. They had three sons here — two have their own families, and one son, 17, still lives with them.

They doubt they will be able to pay for him to go to college, as they had planned.

The Hernandez family was trying to buy a $745,000 house. Whether or not their mortgage was a good one, I'm not sure how you afford college at all with a three-quarter million dollar loan of any sort.

Although an apparently crooked agent was involved, I think greed ultimately did these families in.

I find the current narrative, about the housing market meltdown, to be extremely disingenuous. Take Barack Obama, for example.

He described this summer's subprime lending crisis as a case study of greed among mortgage lenders and the agencies that provide information about them. ...

Well, that's certainly one way to describe what's happening in the housing market. But I don't think it's very honest. As I've said before, I don't see how giving mortgages to people who are unable to afford them, then going bankrupt when they default on the loan, qualifies as greed.

Instead, I prefer to consider Hanlon's Razor: "Never attribute to malice that which can be adequately explained by stupidity."

Stupidity, sure. Giving money to people who can't give it back is about as far from greed or theft as a business can possibly get.

However, I'll be happy to accuse home buyers of greed. What would you call it when someone earning $40,000 a year decides to buy a home costing $200,000 or $250,000? Many of the families now defaulting on their loans were looking to get in on a "hot" housing market that had the potential to double or triple the value of houses in the area. They saw cheap money and jumped at the opportunity to get rich.

That's why I'm convinced that this won't do any good:

Mr. Obama of Illinois called for regulatory efforts to increase transparency and accountability among financial companies. Mr. Obama zeroed in on the housing market, proposing tighter federal rules on mortgage fraud and government rating systems for mortgages and credit cards.

"If more Americans were armed with this kind of information before they purchased risky mortgage loans," he said, "the current crisis might not have happened."

If Senator Obama really believes that, he's delusional. We were buried in paperwork when we bought our house. We had to sign sheet after sheet of paper, giving us all of the details about our mortgage. Our Realtor and mortgage banker answered all of our questions, throughout the entire process. Even if they hadn't, website after website offered comprehensive information about every different type of mortgage. Americans had plenty of opportunity to arm themselves with whatever information they needed.

The housing meltdown happened because everyone involved believe that the market would continue to go up forever. Consumers got greedy and banks began taking irresponsible risks thanks to easy money. This "crisis" can't be blamed on any one group and I'll not respect anyone that tries to do so.

The New York Times published a long story last week on the sub-prime mortgage "crisis". Can the Mortgage Crisis Swallow a Town? - New York Times. As I read through it, there were a few points that jumped out at me.

One of those loans belonged to Audrey Sweet, a Maple Heights resident and a first-time home buyer who borrowed $118,000 from Countrywide in late 2004 without putting any money down. Because of Mrs. Sweet's poor credit history and lack of assets, the adjustable loan's rate was 10.25 percent, but she says she was told that if the couple "just proved themselves," they could quickly refinance at a lower rate.

Mrs. Sweet says Countrywide advised her that the monthly property tax bill would be $100, but it turned out to be $230 and the Sweets quickly fell behind. Countrywide stepped in and paid $3,493 in back taxes in March 2007, and the next month raised the Sweets' monthly mortgage bill to $1,713 from $1,055.

That was far beyond the budget of the couple, so ... working with a local lender, Third Federal Savings and Loan, the Sweets managed to refinance the loan at a fixed rate of 7.2 percent, and the original $1,055 monthly payment now covers the property taxes the Sweets couldn't afford before.

Notice the main points of this little sob story. The Sweets did not put any money down on their house. In effect, they were on a rent-to-own plan with their house. Even if they had defaulted on the mortgage, they would not have lost any money -- they never put any down in the first place. They were only making monthly payments, no different from paying monthly rent.

Note also that the couple had a poor credit history and no assets. Countrywide took a big risk in loaning money to them. For this, Countrywide is demonized throughout the article. (What a great way to encourage companies to take risks!)

It is also clear that the Sweets bear some responsibility for their predicament. "I do blame myself a little bit," Mrs. Sweet acknowledges. "I feel dumb." She explains that she was focused on the monthly payment when she borrowed from Countrywide, not the interest rate or taxes due. "Once we got the loan documents at the closing, I just came home and stuck them in a drawer."

Wow. Just ... wow. I just took out a mortgage recently. I know for a fact that you have to sign a stack of documents that state in very plain language exactly what your monthly payment covers and exactly what the terms of the loan are. The Sweets don't just bear "some responsibility" for their predicament. They bear all of it. They signed the paperwork, the saw the terms, they chose to ignore the terms. End of story.

They had a lender give them a chance, even though previous evidence (and this story!) shows that Countrywide was taking a huge risk. They very nearly threw that chance away.

[Mr. Stefanski, CEO of Third Federal Savings and Loan] never offered no-money-down loans, piggyback mortgages, exploding adjustable-rate mortgages or the other financial exotica that ultimately tripped up the Sweets and millions like them.

[Mr. Stefanski] does not hide his feelings about just what went wrong in places like Maple Heights. "The whole system was based on raping the public," he says, matter-of-factly. "Not everyone should own a home -- just those who can afford it."

Mr. Stefanski is just dead wrong. The system was not out to "rape the public". Indeed, I find it hard to see how someone can "rape" another person by giving them free money and risking not getting any of it back. How, exactly, does the lender make out in that situation? If any "raping" is going on, it seems to be that the borrower is raping the lender.

Secondly, Mr. Stefanski's attitude is 100% discriminatory. He only favors giving loans (and taking chances) on borrowers who are supremely well qualified and well-off. In other words, existing middle-class Americans. If everyone had the attitude he did, no one would ever move up from the low-income ranks to the middle-income ranks.

I'm grateful that lenders across the country chose to take risks on low-income, high-risk borrowers. Many people proved unable to handle those loans. Many other people were able to get ahead, thanks to those loans. I'd rather focus on the people that got ahead instead of shutting down lenders because of the people that didn't. Wouldn't you?

In Washington, Aid to Homeowners Debated - New York Times

Faced with a possible tidal wave of home foreclosures beginning this fall, Democrats and Republicans are battling over a philosophical question with huge practical implications: should the government ride to the rescue?

Both the Bush administration and Democratic leaders in Congress agree that legions of homeowners could be overwhelmed in the next 18 months, as low teaser rates expire on more than two million adjustable-rate mortgages, causing monthly payments increase sharply.

But the Bush administration and Congressional Democrats are ideologically divided about what Washington should do. Administration officials are reluctant to bail out people who bought homes they could not afford or simply gambled that easy credit and rising real estate prices would lead to quick profits.

Democrats, though opposed to a broad bailout, are proposing an array of measures to help lower-income people renegotiate their loans and stay in their homes.

The proposals would expand the program of insuring home loans under the Federal Housing Administration, part of the Department of Housing and Urban Development; create a national fund for "affordable housing"; expand the ability of Fannie Mae and Freddie Mac, the government-sponsored finance companies, to buy renegotiated subprime mortgages; and give bankruptcy judges more power to order easier terms for borrowers.

The Bush administration, with the Treasury Department heading the efforts, is looking for more limited solutions. Administration officials are working on their own ideas to let the F.H.A. insure slightly more expensive homes, which could make it easier for people with low incomes or weak credit to switch out of subprime mortgages and into more traditional fixed-rate loans.

I realize that bailing out overextended homeowners plays well in election years. But what's the long-term cost? If we bail out everyone that bought more than they could afford, if we bail out everyone who didn't ask hard questions before signing a $200,000 loan, if we bail out those too eager for quick riches to read the fine print, what message do we send?

A bailout is just another way of subsidizing risky, irresponsible behavior.

The government needs to let the housing market land however it lands. Everyone involved in the current crisis bears some responsibility for the crisis. Banks got a little too loose with their money. Would-be homeowners got a little too confident in an ever brighter tomorrow. Bad decisions were made all around.

A bailout would only convince people and banks that it's okay to take on huge risks -- Uncle Sam is waiting to save you and protect you from consequences. Ultimately, that's more dangerous to the economy than a turndown in the housing market.