[Rhodes22-list] Economics - Housing

[Brad Haslett]

I can't believe we're even having this discussion, but then again, the world
is a crazy place (US included).  Remember "redlining"?  Well, we gave home
loans to homeless persons and guess what, they didn't pay them back. DUH?
The fact that major banks played the game and got burned pisses me off to
the extent that roughly 5% of my mutual funds are in banks, but in the long
run, they learned a lesson most of us know by heart.  Will Rogers said it
best, "worry about the return OF your investment, not the return ON your
investment".  Why should house prices rise without end?.  It may be good for
you but how would your children ever afford to buy a house?  When things
don't make sense it's because they don't make sense.  Read the following
article.

Brad

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*A Sarbox for Housing*
How to restrict lending to the poor for years to come.

*Tuesday, November 6, 2007 12:01 a.m.*

Throughout the 1980s and '90s, Congress prodded, even strong-armed, banks
into making more mortgage loans to low-income and minority families.
Washington enacted anti-discrimination and community lending laws with
penalties against lenders for failing to issue riskier mortgages to
homebuyers living in poor neighborhoods or with low down payments and subpar
credit ratings. And so it was that the modern subprime mortgage market was
born.

Now, and for a variety of reasons, some two million of those loans have gone
sour, and the same politicians are searching for villains. Leading the
charge is House Financial Services Chairman Barney Frank, who is accusing
banks of "predatory lending"--by which he means making loans to the very
group of borrowers that Mr. Frank and his colleagues urged banks to serve.

As early as today, Mr. Frank plans to hold a committee vote on his Mortgage
Reform and Anti-Predatory Lending Act of 2007, which would impose new rules
and financial penalties on subprime lenders, while providing new lawsuit
opportunities for distressed borrowers. "People should not be lent money
that's beyond what they can be expected to pay back," Mr. Frank says. Now,
there's an idea. Why didn't the bankers think of that?

Mr. Frank's proposal is a trial lawyer's dream. It would forbid banks from
signing up borrowers for "overly expensive loans"; require banks to make
sure that the consumer has a "reasonable ability to repay the loan"; and
insist that loans must be "solely in the best interest of the consumer."
This kind of murky language would invite litigation from every borrower who
misses a payment. If it becomes law we can expect to see billboards reading:
"Behind on your mortgage? For relief, call 1-800-Sue-Your-Banker."

Also for the first time, banks that securitize mortgages would be made
"explicitly liable for violations of lending laws." This is a version of
secondary liability that holds the bundlers and resellers of mortgages
responsible for the sins of the original lenders. The reselling of mortgages
has been a boon both to housing liquidity and risk diversification. So to
the extent the Frank bill adds a new risk element to securitizing subprime
loans--and it surely will--the main losers will be subprime borrowers who
will pay higher rates if they can get a loan at all.

 No one disputes that there were lending excesses during this decade's
housing revels. The Federal Reserve's easy money policy created a subsidy
for debt and fed an asset bubble that made borrowers and lenders alike think
prices would rise forever. If companies or individuals committed fraud, they
should be punished. Meanwhile, federal regulators have been rewriting rules
to outlaw the most abusive practices, such as onerous prepayment penalties
and disguised balloon interest payments.

But for all the demonizing, about 80% of even subprime loans are being
repaid on time and another 10% are only 30 days behind. Most of these new
homeowners are low-income families, often minorities, who would otherwise
not have qualified for a mortgage. In the name of consumer protection, Mr.
Frank's legislation will ensure that far fewer of these loans are issued in
the future.

All of this would also hit banks when they and their shareholders are
already being punished in the marketplace. The stock values of financial
companies have taken a beating and executives are losing their jobs. Lenders
are fleeing the subprime market, and the pendulum has swung to the opposite
extreme as banks have tightened credit, which is contributing to the
mortgage meltdown.

The latest housing data indicate that new home sales are down 23% from a
year ago, with the biggest retrenchment in the subprime market. The volume
of subprime securities was down a whopping 70% to $15 billion in the third
quarter from $62 billion one year ago. Originations of the controversial
subprime ARMs are down by 50% so far this year compared to 2006. Mr. Frank's
bill couldn't come at a worse time, as it will further shrink credit to
marginal borrowers, which will mean fewer buyers and extend the housing
downturn.
The Frank bill is essentially a Sarbanes-Oxley for housing, an attempt to
punish business in general for the excesses of an unscrupulous few and the
perverse incentives created by Washington policy.