predatory lending

More Burdensome to Pay Rent Than to Be a Mortgage Deadbeat

by Hans Bader on November 28, 2010 · 1 comment

in Bailout Watch, Economy, Politics as Usual, Zeitgeist

Under government mortgage bailout/modification programs, the mortgage payments of many delinquent borrowers were cut to 31 percent of income, even for borrowers with high incomes and big houses. That cut was based on the false assumption that anything over that percentage was unaffordable (and perhaps even predatory lending). But people often pay far more than that in rent and mortgage payments, especially in prosperous regions like Washington, D.C. So mortgage deadbeats are sometimes getting their payments cut well below what their responsible neighbors have to pay — not merely getting relief from a bad deal.

“One in five renters and one in seven homeowners in the Washington area spend more than half their income on housing, according to census figures,” notes a recent Washington Post story.  Much of the population in the counties surrounding Washington, D.C. spent more than 30 percent: “In Fairfax County, for example, more than half the renters with household incomes of $50,000 to $75,000 spent more than 30 percent of their income last year to keep a roof over their heads,” as did “more than six out of 10 homeowners in that income bracket in Prince George’s and Prince William counties,” and “more than half” in Washington, D.C. itself.

Senior government officials, who mostly purchased their homes long ago, long before the housing bubble (and thus often have mortgage payments that are just a tiny fraction of their income), seem oblivious to this reality.

Many borrowers aren’t making any payments at all. They’re just defaulting on their mortgages, knowing that it will take years for the bank to evict them for non-payment: 492 days is the average number of days since the typical borrower in foreclosure last made a mortgage payment.  As law professor Glenn Reynolds notes, this all “seems calculated to make people who are struggling to make their payments feel like suckers.”

These mortgage bailout programs are harming the economy, say some economists and real estate experts.

I understated things a bit when I noted earlier that some mortgage deadbeats had their mortgage payments cut to just 31 percent of income. Actually, it’s lower than that. That 31 percent figure includes not just mortgage payments but also real estate taxes.  So if a delinquent borrower has a mortgage that’s 20 percent of income, and property taxes that are another 15 percent of income (for a total of 35 percent of income), that borrower could have gotten a reduction in mortgage payments under the 31 percent test, despite having a modest mortgage.

Obama’s Recent $75 Billion Mortgage Bailout Fails: Harmful to Economy, Housing, and Construction, Say Economists and Real Estate Experts

by Hans Bader on January 4, 2010 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Legal, Politics as Usual, Regulation

Economists and real estate experts are saying that a $75 billion mortgage bailout program designed by the Obama administration has backfired and harmed the housing market, reports The New York Times:

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good. . .experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

That “’has the effect of lengthening the crisis,’ said Kevin Katari, managing member of Watershed Asset Management. . . ’We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway,’ and ‘banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books,’” delaying a recovery in the housing market and the construction industry.

The failed mortgage bailout is reminiscent of the government’s attempt to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009, that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

Earlier, the government pushed through billions more in other mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Banks will now be pressured to make even more risky loans. The House has approved Obama’s proposal to create the so-called Consumer Financial Protection Agency. Government pressure on banks to make loans in economically-depressed neighborhoods was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s disturbing proposal would empower the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.  The Community Reinvestment Act was a key contributor to the financial crisis.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, the Obama Administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

Regulation of the Day 93: Predatory Lending

by Ryan Young on January 2, 2010 · 1 comment

in Deregulate to Stimulate, Economy, Regulation, Regulation of the Day

Congress has used the financial crisis as an excuse to regulate what it calls “predatory lending.” As so often happens, its new regulations have had unintended consequences.

A bank in South Dakota, in order to comply with the new rules, is charging 79.9 percent interest for one of its low-limit credit cards. The pre-regulation rate was 9.9 percent.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 makes it illegal to charge annual fees greater than a quarter of a card’s limit. For small-balance cards, the allowable fees are tiny now. That leaves banks with three options:

-1. Lose money. The Wall Street Journal correctly notes that “Banks can’t be expected to give money away, even if Congress is in the habit of doing just that.” So this option is unlikely.

-2. Stop offering low-limit cards. This will hurt people who need them, such as people with low incomes, people with bad credit records, and young people who are trying to establish a credit record.

-3. Charge higher interest rates to make up for the money lost in fees. This is exactly what is happening here with the 79.9 percent rate for a $250-limit card.

If the bank calculated correctly, the 79.9 percent rate will be roughly a wash compared to the earlier high-fee, low-rate policy. But different customers will be paying. The people who incur a lot of interest-rate charges are usually the people who can’t afford them. And they’ll be paying a lot more than they were before the CCARD Act.

People who can afford to pay their balances on time often don’t pay little or no interest interest anyway. The 79.9 percent rate doesn’t really affect them. And now their annual fees have gone way down. The CCARD Act is, completely unintentionally, a wealth transfer from poor people to richer people. Congress is actively hurting the very people it intended to help.