April 13, 2007

Democrats want to help with the subprime mess

I hate the term 'bailout'... it reeks of the Resolution Trust Corporation and assets being sold for pennies on the dollar, while taxpayers bear the brunt. However, that is exactly what some Democrats in Congress are proposing. Some of this is good, some of it is bad. What I dislike is the blanket assumption that all these people were taken advantage of. It's bullshit. 95-98% of this is bad acts on the parts of mortgage brokers and banks. The rest is pure and simple greed and stupidity on the part of borrowers. So, what to do to minimize the damage, especially going forward. I've got some ideas:

McBlogger's Handy Tips for fixing the


subprime mess...

1) Disclosure, Compliance and Regulations... Don't add, enforce what's there already. Trust me, I've worked throughout the lending industry and there are more rules and regulations than anyone realizes. The problem is, enforcement is LACKING. It's like Congress made the rules, patted themselves on the back and then zero'd out the funding to enforce them. Predictably, not everyone complies. The solution here is a massive funding increase to HUD and the state agencies that oversee brokers and banks.

2) No damn Bailout. Keep in mind, many of these people KNEW what they were getting into. They made the decision assuming that their homes would appreciate astronomically allowing them to sell, realize the gain and move on to a more affordable place.

3) Borrowers... don't buy more than you can afford. If you're spending more than 40% of your gross income on TOTAL housing expense (mortgage, taxes and insurance) then you're just setting yourself up for trouble. Make sure you have at least six months of the payment in the bank at a maximum or three months at a minimum. When you own a home, you're responsible for the air conditioner, the water heater, etc. Make sure you have the ability to pay for repairs that may become necessary.

4) Require that borrowers with scores below 600 being credit counseling as part of the mortgage, coupled with credit repair. How the hell some of these people expect to refinance without improving their credit is beyond me.

5) Expand and modernize the Federal Housing Administration. Drop the 3% down payment requirement, raise the MIP cost slightly to compensate on new originations and raise the loan limits to 75% of conforming. Finally, streamline the lender approval and annual audit process. Make it easy for the brokers to set up for FHA and they'll do that rather than send borrowers to subprime.

Keep in mind that the real estate market is always driven by speculation and that periodically, there is a spike. Couple that with some irrational lending and you have the problems we have today. To fix it, return stability to the market. Which brings me to my final suggestion... implement an immediate 75% capital gains tax on all profits made from the sale of a home that's been owned for less than 2 years.

If you want to drive out speculators, tax the hell out of their profits. Speculation always ends up hurting people and when the final chapter is written on this particular bubble, they will be the ones that bear the majority of the blame.

Posted by mcblogger at April 13, 2007 09:06 AM

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