The Fed chairman on Friday, March 14, outlined what the Fed is proposing to alleviate the housing crisis. Here are the highlights and the resulting negative outcomes as I see them. Government, stay out if these are going to be the plans!
1. Prohibiting lenders from issuing loans that borrowers cannot repay. Big problem here. We have no accurate way of assessing this. The traditional method, FICO scores, is no longer accurate. The FICO doesn’t take into consideration mortgage resets and is fairly easily manipulated by people who fix credit. FICO says plans are in the works, but a new algorithm won’t be released until 2009. Also, more people today earn nontraditional income–income working from home on 1099s and so forth. These people are often highly qualified but may not be able to get a loan.
2. Making lenders verify income and assets. I have no problem with verifying assets. But it’s difficult to verify the income of many of today’s workers. For instance, many of us work off of 1099s and take business deductions. This makes it nearly impossible for the bank to see how much we really make.
3. Requiring escrow accounts for high-priced loans. This sounds great, but it’s a ripoff for the consumer! People are better managers of their money than institutions are. If they aren’t, they pay a price. Here is a fact. Take a $1 million home, the “low end” price for many areas in Southern California. If we had to put even 1 percent into escrow, that is $12,000/year. That is money we could have invested and earned interest on. Unless the bank is going to fork over the interest we could have earned by investing it ourselves, forget it!
4. Ban repayment penalties including loan flipping. While Id love to be able to refi my primary residence without a prepay penalty, the truth is that loans with prepays often come at cheaper interest rates because the bank knows it will get X dollars from the consumer. Ban penalties, and the banks will offset this income with higher rates. Period. Bottom line: None of these is an answer to the housing crisis.
This entry was posted on Saturday, March 15th, 2008 at 2:29 pm and is filed under Avoiding Foreclosure, Foreclosure, fed, bernanke. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.One Response to “Bernanke’s Big Bust”
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March 21st, 2008 at 6:04 am
The idea that the federal government can micromanage the world’s largest economy is absurd, but this is exactly what the Bush administration is trying to do. The best option for long-term economy growth is to keep the government out of the economy by reducing taxes and eliminating regulations of American businesses. Of course, tax reductions need to be offset by reductions in spending, which is something the Bush administration has struggled with for the past seven years. However, as more people look to the government for help with the economy, the worse the situation will become.