Mortgage Assistance: A Matter of Principle

by Peter G. Miller
September 23rd, 2008

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It was just a few weeks ago when the big issue in Washington was whether to spend as much as $4 billion to save 400,000 families from foreclosure. That was the potential cost to the U.S. government under the FHA reform bill.

You remember, it was a matter of principle. If we bailed out hundreds of thousands of people across the country we would be creating a “moral hazard.” In other words, if we allowed people to fail we could be pretty sure they wouldn’t do it again.

Despite the threat of a veto from the Bush Administration, the FHA reform was finally passed by the Congress in mid-summer. What emerged was an offer to help U.S. families with toxic loans — but only if they agreed to share future property appreciation with Uncle Sam. That appreciation, of course, was in addition to interest and loan costs.

So now we have an FHA mortgage program which in theory should help lots of folks. The reason for such help is not because some home buyers didn’t lie on their loan applications, or because some lenders didn’t look the other way when borrowers were patently unqualified for big loans, or that banks and brokers on Wall Street were not obligated to check the value of securities and properly report them, rather it was a matter of self-interest — fewer foreclosures mean less downward pressure on local home values, including the value of your home and mine.

The reason the FHA mortgage debate was a fraud and a fake is very simple:

___Principle is really important — except when we provide roughly $30 billion in federal loan guarantees to buy out Bear Stearns.

___We should let the markets correct themselves with as little government regulation as possible — except when we nationalize Fannie Mae and Freddie Mac.

___It’s not right to let the government be on the hook for as much as $4 billion to help neighborhood families — except when we need a $700 billion bail-out plan that will create a mammoth budget deficit and spur both inflation and higher mortgage rates.

___Spending money to help mortgage borrowers is not the job of the federal government — but it’s okay to lend $85 billion to an insurance company.

Will a lot of families with toxic loans be able to get an FHA mortgage because of the reform bill? Given that mortgage investors will have to take significant losses to unwind the financing they now hold, it’s hard to see much <u>real</u> enthusiasm from loan holders. That said, the federal offer may be vastly better for investors than the perils of the marketplace and thus worth a look.

For it’s part, if we were to rank HUD on the basis of its assistance to families in financial trouble the score would be just about zero, a goose egg.

The latest government figures show that HUD refinanced just 245 delinquent conventional borrowers during the entire month of August and only 3,736 families since last October 1st. The goal for fiscal 2008 is assistance to 5,000 delinquent conventional borrowers, a tiny, pathetic goal that at this rate will never be reached.

Is there more need for government help? You bet. In August, for the first time since numbers have been kept, more than 300,000 families received foreclosure notices according to RealtyTrac.com.

That’s in ONE month. Just one month. And HUD cannot even reach its goal of helping 5,000 families in a year.

It must be a matter of principle.

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