Friday, May 8, 2009

Minyanville: Subprime Lending is Back with a Vengeance

The shell game is very clearly laid out now... FHA, Fannie, Freddie, and now even state government's will be giving out nothing to "3%ish" down loans, to low credit borrowers, who will have no stake in the home since many will be putting nothing down. We will declare housing recoveries. Then quarter by quarter the sausage will be squeezed out the other end as Freddie, Fannie and eventually the FHA suffer magnificent losses. We've outlined the losses Freddie and Fannie are already taking, and this morning is another $20B bailout that I'll delve into in a separate piece. This is truly a shell game of the most amazing magnitude and we are simply continuing the practices that got us here. Because Americans are not savers and there are not enough marginal buyers we literally are turning renters into homeowners and they need to bring nothing to the table ... again. So they will have no problem walking away... again.

This is the latest outrage via an excellent piece at Minyanville... that $8000 credit we were lauding as an incentive? Well it is no longer being used as it was intended to be... i.e. borrower comes to government with their 3% down and then gets the $8000 the following year. The American "saver" is so scarce that states are rolling out programs where the $8000 "refund" is used as the down payment, and for closing costs. So essentially the US taxpayer is now being used to subsidize not the tax rebates, but indeed closing costs/down payments for people who cannot even come up with 3% down. In the old days we used to call people who could not save 3% of a home value "renters". Not anymore.

I simply cannot make this stuff up.
  • Just when you thought it was safe to go back in the water... Subprime lending has come roaring back. But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down. If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.
  • The federal government, as part of the recently passed economic stimulus program, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent. Critics, however, argue that rebates don't end up in a buyer’s pockets until his or her 2009 tax returns are filed - even though rebates are credits, not just deductions.
  • Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn't go far enough.
  • In an effort to boost home buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.
  • States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate. States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea.
  • Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.”
  • Exactly. That’s the point. This is precisely what differentiates a “would-be” home buyer and a home buyer. And that’s the way it should be.
  • If the federal government wants to subsidize home ownership, fine. It's already proven unwilling to learn the lessons of Fannie Mae (FNM) and Freddie Mac (FRE) about the costs of jamming borrowers into homes they can't afford. But these rebates should at least be limited to borrowers that meet even the most modest requirements to buy a home in a responsible manner.
  • The Federal Housing Administration -- another vehicle for government-backed mortgages where taxpayers bear all the risk -- gives out loans that require borrowers to post a meager 3% down payment. If a “would-be” homeowner cannot scrape together this amount of cash, that person should rent and save their pennies. They should not receive a no-interest loan from the state government. This is not discrimination, this is not redlining, its common sense.
  • In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government -- and now state governments as well -- insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford.

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