Tuesday, August 14, 2007

Hillary's Mortgage Bailout

Hillary continues to earn her socialist/communist stripes with her newly unveiled mortgage bail out plan. You can find it here
Let's take things here one at a time.

1)Require mortgage brokers to disclose to borrowers that their compensation rises when borrowers' mortgage rates and mortgage fees are high. Too many prospective homebuyers believe that the mortgage broker is acting on their behalf. In fact brokers earn more when they steer borrowers to mortgages with higher rates and fees. The broker's and borrower's interests are not always aligned. Borrowers need to be aware of this when assessing the advice brokers give them. To address this need, Hillary will require that brokers disclose to borrowers how they are paid.

Now, anyone that has every closed on a loan knows that the paperwork is overwhelming. What is Hillary planning on doing? That's right, folks, she wants all of you to sign yet another meaningless disclosure so that the process becomes even more overwhelming. Do you want to know why there is so much paperwork at a closing? It is politicians like Hillary Clinton. Hillary will introduce meaningless signed document number one hundred fifty eight. The irony is that if I understand Hillary correctly this disclosure already exists. In fact, multiple places within the closing documents disclose exactly how much the broker makes. Either Hillary is creating yet another document to say the same thing, or she is creating a new one that reveals that the higher the rate, the higher the fees, the more your broker makes (duh!!!) This document will go right next to the Equal Credit Opportunity Act Disclosure. This particular disclosure says that, me, the mortgage broker, cannot discriminate based on anything but credit worthiness. The absurdity of that disclosure is thick. Think about it folks. If you are getting a loan, does it sound as though I am discriminating against YOU. The problem with the closing process is that there are so many darn documents that the important ones, the Settlement statement, the Truth in Lending, the Note, are glossed over by borrowers that frankly just want to get it over with. Hillary's solution is to add another meaningless document to an already overwhelming process.

2)Work with states to develop strong licensing standards and require federal registration for mortgage brokers. Unscrupulous brokers have steered people into high cost mortgages, qualified them for loans they could not afford, and attached fees unnecessarily. These brokers are responsible for many of the lending abuses that occurred in recent years, but there is no single, national source for information about individual brokers. Hillary will establish national registration for brokers so that prospective borrowers can easily look up a broker's employment history, violations, complaints, and other information. As President, she will also work with the states to develop strong licensing standards to ensure that mortgage brokers are qualified and properly screened.

First, I recently read the book Freedomnomics. It is hypothesised and strongly backed up that licensing only goes to reduce qualified people from an industry. By creating a bureaucratic licensing and testing process all you really do is discourage good, bright people who don't want to hassle with meeting all of the overwhelming requirements from entering the field. What extra layers of licensing and testing really do is simply keep new competition out of industries.

Second, Hillary once again plays the populist narrative that this crisis is all the fault of those evil, evil mortgage brokers who took advantage of unsuspecting victims. It may play among the uneducated, but it just ain't true. We, mortgage brokers, are unscrupulous no doubt, however the idea that the homeowner's were just innocent victims is pure nonsense. Here is how I explained it recently

"Now, the mainstream media would have you believe that evil mortgage brokers
committed fraud on unsuspecting banks while innocent poor people stood by
helplessly and put themselves in an untennable position that they had no control
over. (This is a position that Hillary Clinton holds and one I will address
later). Stated loans are those loans in which an income is stated but no proof
is provided to verify it. They were initially created for self employed people
who have great accountants, but they filtered to other borrowers, and even
borrowers who have a simple salary. Why do you ask would someone need to go
stated if they simply make a salary? Couldn't they simply provide their taxes?
They could but then they wouldn't qualify for the house they want.

banks are not without blame here either. Stated loans were excepted regularly
with janitors supposedly making 60k per year and more, teachers making as much
as a hundred thousand, secretaries north of 50k per year. These were common
place. Now, if a bank is willing to believe that a janitor makes 60k per year in
order to approve a loan, whose fault is it if that loan goes bad? To use a crude
metaphor, this is like a girl getting naked jumping into my bed and then
wondering why I tried to f$&k her. If a bank doesn't want to take on
fraudulent loans maybe they shouldn't be so quick to believe janitors make 60k a
year, maybe they should not allow for stated loans for salaried borrowers

The borrower is not without fault by a long shot. While the
bank may think the janitor makes sixty thousand a year, the janitor knows what
he makes. He knows if the mortgage payment is eating up to sixty percent of his
monthly income. If this person goes ahead and accepts the loan anyway, is it
really the fault of the mortgage broker when they go bad on it."

3)Eliminate prepayment penalties on mortgage products. Prepayment penalties, which are often used on subprime, Alt-A, and non-traditional mortgages, are a problem for borrowers. These penalties can lock borrowers into loans until the rates and monthly payments escalate. Families should not be discouraged from responsibly paying off their mortgages early, particularly when this would allow them to avoid balloon payments or high floating rates. Studies have shown that loans with prepayment penalties have a 52% greater risk of default than those without. Hillary will restrict the use of prepayment penalties.

Now, Hillary demonizes a specific loan that has no doubt been abused. This is just fine and dandy however, what Hillary doesn't realize is that there are plenty of good reasons to take on a prepayment penalty. For instance, everything else being equal guess which loan has the lower rate? In other words, if you the borrower are confident you will still be in the loan after the specified pre payment period it only makes sense to take on a pre payment penalty. Finally, wouldn't you the borrower at least like to have the option available to you just in case there is a reason. Not in Hillary's world, she wants to make sure to slash the mortgage product portfolio for the banks.

She says this for instance,"Families should not be discouraged from responsibly paying off their mortgages early, particularly when this would allow them to avoid balloon payments or high floating rates."

Those borrowers should simply take on a loan with a smaller amortization, 20 year as opposed to thirty, or one without a pre payment penalty. Remember folks pre payment penalties are optional not mandatory. Yet, Hillary wants to eliminate them entirely.
She follows with this, "Studies have shown that loans with prepayment penalties have a 52% greater risk of default than those without. Hillary will restrict the use of prepayment penalties."

This maybe so, however what if a study showed that red cars, or sports cars, have a 52% higher incident of deadly accidents, would Hillary be in favor of banning such cars? If not, why does she ban loans with similar high degrees of danger.

4)Require mortgage lenders to include the cost of taxes and insurance in the underwriting assessment of higher-risk mortgages. Many borrowers fail to consider taxes and insurance costs when weighing whether they can afford a particular mortgage. Sometimes, lenders exclude those costs from the underwriting assessment, and in the process qualify people for mortgages they cannot afford. Hillary will require that taxes and insurance costs be included in the underwriting assessment so that prospective homeowners can properly determine whether they can afford a particular house. This requirement would apply to subprime mortgages, Alt-A mortgages, and non-traditional mortgages like interest-only, no-money-down, and payment option ARMs.

Here, Hillary is off her rocker. There is no such loans. There are loans where the taxes and insurance aren't included in the payment (escrow), but there is no bank in the world that doesn't factor in taxes and insurance into the monthly payment. In fact, it is on page 3 or 4 of any application that anyone signs. In fact, here in Illinois (and I am certain in every state) it is required by law to be listed there. I don't know what Hillary wants but it is likely that she wants to make escrows mandatory.

Let me tell you how escrows work. The bank collects enough money, and usually an extra two months worth, of taxes for the escrow account at the time of the closing. In other words, let's suppose that you are closing in June and your next tax payment is September 1. In this case, your next payment would be August 1. This means that you will make two payments before your taxes are due. You would be required to come up with six month's worth of taxes at the time of closing (four extra necessary to cover the payment and two more just to be safe). That means that there would be an extra six months worth of taxes required to be held in the account at the time of the loan. If I understand Hillary's plan correctly, escrows would no longer be optional. This means that every loan would now require significantly more in settlement costs. It is exactly those borrower's strapped for cash that Hillary wants to save that would struggle to come up with the extra money.

5)Establish a $1 billion fund to assist state programs that help at-risk borrowers avoid foreclosure. Hillary will establish a $1 billion fund to support state programs that help at-risk borrowers avoid foreclosure. Some state programs help borrowers make the single payment necessary to become current on their loans; others help borrowers renegotiate their loan terms, or simply provide financial counseling. These foreclosure mitigation efforts are more important than ever right now. Federal assistance for state programs that assist at-risk borrowers supplements Hillary's call earlier in the year for "foreclosure timeout." At-risk borrowers and lenders should be encouraged to work out alternatives to foreclosure
This is the ultimate throwing good money after bad approach. The people about to go into foreclosure are deadbeats. Here is how I described it...

"Let's examine this. First, let's remember the overwhelming majority of people about to go into foreclosure are dead beats, and the Senator wants to use public funds to extend even more credit to these dead beats. Yes, this certainly sounds like a good populist proposal, but let me tell you how it will work in the real world.

Here is an example of a dead beat I ran across. This couple was struggling to pay their mortgage, and they should have, since it was eating up almost 70% of their total income. The only thing they weren't paying was the taxes on the home. In the middle of the loan, they went and bought a car. Yes, that's right. They couldn't afford to pay their taxes, their mortgage ate up 70% of their budget, and they saw fit to buy a car. You think this is out of the ordinary, not that much, and Senator Clinton proposes that we extend one billion dollars in public money to exactly these types of dead beats."
hat's right, Hillary wants to establish a fund so that irresponsible borrowers can get access to even more money. Brilliant.
Finally, she says this...

Expand Fannie Mae's and Freddie Mac's Foreclosure Prevention Efforts. Hillary would expand the goals of Fannie and Freddie, the government sponsored enterprises (GSEs) that help stabilize the mortgage markets, to include helping a larger number of at-risk homeowners avoid foreclosure. This would be consistent with Fannie's and Freddie's existing goals that promote home ownership. The GSEs already help mitigate foreclosures by enabling some borrowers to swap into less risky, lower-cost loans. Fannie also helps homeowners arrange payment forbearance, financial counseling, and loan restructurings. Hillary will expand those initiatives to make foreclosure mitigation a greater priority.

The absurdity of this proposal is just overwhelming. Fannie Mae and Freddie Mac are the only loans that Wall Street still likes. Now, Hillary wants Fannie and Freddie to take on problem loans so that Wall Street stops buying mortgage bonds entirely.


Rybu said...

I'm glad you had the guts to call this bailout plan socialist! After all, thats exactly what it is.

I stopped just short of it in my discussion of it.


Where is this money going to come from and where could it better be spent? Anything better than bailing out poor financial decisions!

mike volpe said...

not that gutsy, Hillary is basically a socialist.