Another Well-Intentioned Program? No Thanks!
Friday, July 17, 2009 | Ethan RobertsRating:
There is an old saying that goes back hundreds of years, that "the road to hell is paved with good intentions." Some might argue that this old saying reflects exactly what is going on in the general economy today, and nowhere is that more true right now than in the real estate market.
Good intentions to the left....
Specifically, I am referring to several "do-gooder" programs under the auspices of the current administration that purport to help the housing market, but in actuality are really hurting it.
Now to be fair (and so that I don't get blasted for being a "blankety-blank Republican"), doing damage under the rubric of good intentions is nothing new. The administrations of both Bill Clinton and George W. Bush were equally responsible for promoting subprime and other high-risk loans, to enable low-income families to afford a home.
Their compassionate "good intentions" (aka, political pressure from special-interest groups) ultimately led to a housing bubble, and the subsequent collapse of much of our economy.
Another Initiative That May be Too Good to be True
More recently, an agreement between Fannie Mae, Freddie Mac, the Federal Housing Finance Agency and the New York State Attorney's office has created the Home Valuation Code of Conduct (HVCC).
These rules were, of course, created with the best of intentions -- to stop a small percentage of villainous mortgage-loan officers and brokers from pressuring the appraisers they select to create artificial appraisals that support the sales price of homes for which they are writing loans.
Such pressure was at times overt, as in, "If you want my office to continue using you to appraise homes, you had better get that home to appraise."
And at other times, pressure was more subtle, such as favoring particular appraisers to value certain homes because the mortgage company knew it was more likely to get a favorable valuation out of that appraiser.
There is no doubt that these kinds of shenanigans contributed to the apex of real estate sales in 2006.
Letting in the Outsiders
The problem with the HVCC, however, is that lenders are now forced to use appraisal management services who subcontract the work to appraisers outside of the area being assessed. Their unfamiliarity with an area often leads to inaccurate appraisals on the low side, and to more and more sales not closing.
The appraisers are told to only use sales from the last three months, and to use foreclosures or short sales if they don't have enough comparatives from which to choose.
Talk about throwing out the baby with the bathwater! How is this helping the real estate market?
Fannie, Freddie, and the N.Y. State Attorney all in the bath together...
A Fine Line Between Helping, Hurting Matters
The latest of the programs, enacted to "help" the real estate market and thereby the general economy, is the $8,000 tax credit. You might have seen ads on billboards, in real estate offices or even on television, promoting the credit to homebuyers who have not lived in a primary residence for the past three years.
I have previously mentioned it in The Tycoon Report. You may also recall that initially, in 2007, the tax credit was only a maximum of $7,500 and was actually a loan that had to be repaid over 15 years. Then, in 2008, the credit was raised to a maximum of 10% of the sale price or $8,000, whichever was lower.
The question then became, how and when is this money going to be delivered to the buyers? Like most of the government programs, there were few real details given at the time of announcement, because the people responsible for the program hadn't quite figured it all out yet!
Eventually, it was decided that the money would come from the Internal Revenue Service (IRS), and it was even touted that the money could be given to the buyers at the time of closing to provide money for their downpayment.
WHOA! Pull the reins back in on your horse for just a minute.
It's a great stimulus plan, but that leads to the question of...
How is this plan different from the Down Payment Assistance programs, such as AmeriDream, that were so heavily criticized, and ultimately prohibited by the federal government?
Did the government can the DPA programs because THEY wanted the votes they could gain from being the ones to hand over the money?
That Sound You Heard is the Other Shoe Dropping
In both cases, the homebuyer is receiving the money needed for their down payment from a third party. Granted, with the DPA programs, it was the sellers who contributed the money, which often led to an artificially higher sales price.
By contrast, the government is now the one who is giving the buyer the tax credit, thereby not artificially inflating the sales price, but of course costing the taxpayers up to $8,000 for each person who buys a home.
Rodeo rider learns a lesson about government programs...
But here's the crux of the problem. IN BOTH CASES, THE DOWN PAYMENT ASSISTANCE LEADS TO THE SAME RESULT -- i.e., the buyer ends up with a zero-down loan.
And haven't we learned already that, when people have no down payment money tied up in a home, they are much more likely to just let it foreclose if values decline or if they fall behind in their payments?
The point is that Congress has not learned its lesson. So, while they may be stimulating home sales with the $8,000 tax credit, they simultaneously could be contributing to more future foreclosures! And this will lead to decreasing home values, which makes it harder for people to sell their homes.
Now here is where I must admit, I get all mixed up and I don't know whether up is down or down is up.
Which way is this escalator going?
But Wait, There's More
The Federal Housing Authority announced this week that it will NOT allow the $8,000 tax credit to be given to the homebuyer at closing. In other words, if you are taking out an FHA loan, you cannot use the tax credit for your down payment.
Now, considering that most of the loans being produced right now are FHA loans, what was the point of Congress' decision to allow the IRS to give buyers the money at closing? Who, except a small percentage of people (who probably have more money, since they can afford to put 10% or more down on a conventional loan or pay cash), will even benefit from this? Just another public relations job by Uncle Sam, with no real substantive benefit to the American people.
Not to be outdone, Shaun Donovan and the Department of Housing and Urban Development (HUD), has now put together a "reform" law that will require simpler language on mortgage papers, ban mortgage brokers for selling a higher-cost loan that compensates them with hidden fees, and will mandate that loan originators retain 5% of the credit risk of a mortgage (i.e., a stake in the outcome of the loan originated).
Sounds great on paper, right?
Wrong Again!
My sources tell me that all of these wonderful "reforms" are going to hit the lenders hard, and they may ultimately pass on to the consumer as much as a half-percent more on their interest rate!
Higher interest rates make it more difficult for your average first-time homebuyer to afford a decent home, and crush the motivation to buy. My question then, Mr. Donovan, is "How is that going to help the real estate market get back on its feet?"
So, the bottom line for me is to simply say, "Uncle Sam, please spare me from any more of your good intentions! Every time you come up with another plan, another program, another bill, all of which have 'good intentions,' things just get a whole lot worse!"
Tycoon readers, what do you think? Can you remember any "good intentions" from our government that have worked out well for our country or our economy within the past 50 years? I want to hear from you!
The Federal Housing Authority announced this week that it will NOT allow the $8,000 tax credit to be given to the homebuyer at closing. In other words, if you are taking out an FHA loan, you cannot use the tax credit for your down payment.
Now, considering that most of the loans being produced right now are FHA loans, what was the point of Congress' decision to allow the IRS to give buyers the money at closing? Who, except a small percentage of people (who probably have more money, since they can afford to put 10% or more down on a conventional loan or pay cash), will even benefit from this? Just another public relations job by Uncle Sam, with no real substantive benefit to the American people.
Not to be outdone, Shaun Donovan and the Department of Housing and Urban Development (HUD), has now put together a "reform" law that will require simpler language on mortgage papers, ban mortgage brokers for selling a higher-cost loan that compensates them with hidden fees, and will mandate that loan originators retain 5% of the credit risk of a mortgage (i.e., a stake in the outcome of the loan originated).
Sounds great on paper, right?
Wrong Again!
My sources tell me that all of these wonderful "reforms" are going to hit the lenders hard, and they may ultimately pass on to the consumer as much as a half-percent more on their interest rate!
Higher interest rates make it more difficult for your average first-time homebuyer to afford a decent home, and crush the motivation to buy. My question then, Mr. Donovan, is "How is that going to help the real estate market get back on its feet?"
So, the bottom line for me is to simply say, "Uncle Sam, please spare me from any more of your good intentions! Every time you come up with another plan, another program, another bill, all of which have 'good intentions,' things just get a whole lot worse!"
Tycoon readers, what do you think? Can you remember any "good intentions" from our government that have worked out well for our country or our economy within the past 50 years? I want to hear from you!
State of Florida road sign in front of a swarm of alligators....another great example of the government trying to be 'helpful'...
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Ethan Roberts
Contributing Editor
The Tycoon Report
