Housing Rescue Plan Passes Senate Smell Test

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

Ever see what you thought was a pragmatic idea bastardized?  I’m no politician but I love throwing mock legislation up to the Bloodhound Congress.  If you’ve ever watched C-SPAN, The Bloodhound Congress resembles The British Parliament much more than our domestic legislative body.  Boos, hisses, and cheers abound in the rough and tumble world we live in.

I wouldn’t have it any other way. Madames Porter and Schlicke and Messrs. Kerr, Purcell, Ashby, and Johnson keep me honest and get the old grey matter working.  As Bloodhound Blog approaches its second birthday, I salute the folks who really make it such a special place for me; The Bloodhound Congress.

Y’all remember this plea to Senator Dodd to leave well enough alone?

I oppose individual originator licensing in its proposed form. It doesn’t demonstrate true expertise and might induce a false sense of security to the consumer. This very act may very well damage the consumer by perpetuating the adolescent approach to financial planning the average American exhibits. It transfers the responsibility of prudent money management from the consumer to the license issuing body; sadly, those bodies are not up to the task.

I made the mistake of giving The Distinguished Chairman an inch:

I am recommending a NASD-type licensing model, with comprehensive education and testing standards. Originators should have education in financial planning, loan programs, and consumer suitability- that license will look a lot like a Series 7, General Securities Representative. Loan Processors should be proficient in loan programs and suitability, like the Series 6 license for mutual funds and variable annuities. Finally, managers and underwriters should have supervisory jurisdiction like the Series 24, General Securities Principal license. These licenses should be required for any and all participants, regardless of their employing company, and include federally-chartered banks. The effect will be higher costs to the consumer but expertise has its price.

Be careful what you ask; you might get exactly what you want.  Good Grief!  I didn’t really MEAN it!

This one riled everyone up. I reversed course and recommended yet another bailout.  I actually thought this was a pretty cool idea, exposing the Social Security system as a sham:

The borrowers never have to make a payment on this debt; it accrues like a negative amortization loan. In the aforementioned example, the balance would grow to about $168,000, after 23 years. With a first mortgage paid down to $140,000, we’re banking on the future value of the property growing to $308,000, by the year 2031.

When the house is sold or refinanced, the government loan is paid off. We’ve essentially solved the liquidity problem, bottomed the real estate decline, and “helped” real people by using government funds.

What if the borrower skates on the loan or short sells the property? Moreover, what if the real estate market NEVER comes back, and the property is never worth $308,000, in the next 23 years?

1- Make the remaining loan balance transferable to new properties.

2- If that lien is NEVER satisfied, deduct the balance from the year 2031 net present value of the borrower’s retirement entitlements’ account (social security and Medicare).

Again, be careful with your ideas.  This is what we’re getting.

Borrowers would be eligible for the housing rescue if their mortgage holders were willing to take a substantial loss and allow them to refinance, and if they could show an ability to make payments on the new loan. They would ultimately have to share with the government a portion of any profits they made from selling or refinancing their properties.

Cool.  Now, who pays the lenders for the loss?  If the answer is nobody, then who will get the lenders to play ball?  It is unlikely that a lender would be willing to make another high LTV loan to a borrower that has already failed to make payments.  Nota Bene: If the lenders play ball, they’ll think that the market is going to turnaround soon.  If they won’t play ball, they think we have a lot more room on the downside and will want to cut their losses by foreclosing and selling.

The bill also would tighten controls and create a new regulator for Fannie Mae and Freddie Mac, the mortgage giants that provide huge amounts of cash flow to the home loan market by buying loans from banks.

Okay…how will that provide MORE capital to the markets?  The lenders will be so puckered because of tightened guidelines, they’ll just decline new loans.  It’s already happening today.

It would provide a $14.5 billion array of tax breaks, including a credit of up to $8,000 for first-time homebuyers who buy in the next year. And it would boost low-income tax credits and mortgage revenue bonds. The measure falls $2.4 billion short of covering the costs of those tax items, a sort point for Blue Dogs who oppose initiatives that add to the deficit.

Wow!  Talk about stacking the deck FOR the American homeowner.  I once commented to BawldGuy, Jeff Brown that real estate was the most unfairly advantaged investment in the country.  He, of course, shrugged, and said “so, shut up and make some money”.  Point well taken, Jeff.

The past year has been a doozy, huh? Countrywide stared into the abyss and found its character, err, I mean… savior while the character who captained that ship gave members of Congress a 3.75% 30-year fixed rate loan.  Still, a Long Beach legislator played the stated income game…and lost.

Speaking of stated income, one reader referred to them as either liar loans or tax-beat loans.  Well, they’re paying a tax for those loans today although the government ain’t collecting it…

…unless you’re in Nevada.  There, you can’t even pay the tax; you just go directly to jail.