HUD Backs Away From McCain Mortgage Proposal

by Peter G. Miller
October 23rd, 2008

Presidential elections are a team sport. Once primaries are over everyone in each party gets behind their main candidate to show a united front — or stays quietly in the background.

That, anyway, is how it’s supposed to work.

The usual arrangement has now been broken in Seattle. According to the Seattle Post-Intelligencer, HUD Secretary Steve Preston was asked about Sen. John McCain’s plain to spend as much as $300 billion buying out bad loans — that is, paying lenders face value for mortgages may be in default or which may be secured by properties in communities where values have fallen.

The paper quoted Preston as saying he had “a very grave concern about that” when asked about the McCain plan.

Preston added that “I don’t think we can suffer that big of a loss…. That is not invested money. That is just a loss.”

Aside from the breech of political etiquette, the real question which should have been asked is this: Given the opportunity for a low-cost, low-risk solution to eliminate many toxic loans under the FHASecure program why has HUD failed so badly? How many foreclosures could have been prevented if more people had been able to refinance delinquent conventional mortgages with FHA loans?

For fiscal 2008, HUD refinanced only 3,794 delinquent conventional borrowers with a spiffy, new FHA mortgage. That’s an average of just 76 per state, or 317 loans per month.

It’s not as though there has been a shortage of people who would love FHA loans. According to RealtyTrac.com, there were more than 300,000 foreclosure actions just during the month of August.

Preston, according to the Seattle paper, also said that the buyers of mortgage-backed securities had relied on ratings agencies to validate the credit quality of such financial instruments but says “there was a severe breakdown in the financial due-diligence process.”

This, to be polite, is both true and irrelevant. Had lenders properly underwritten loans then the value of mortgage-backed securities would be clear. Had lenders not offered “affordability” loan products or used stated-income loan applications in too many instances then mortgage investors would have been getting a fair and proper deal. And had the buyers of mortgage-backed securities gotten fair value then credit default swaps would be fine.

In other words, the real point that Preston could have made is that had lenders used traditional underwriting practices — such as though required to get an FHA mortgage — we would not be in this mess.

Such a view, of course, would then cause everyone to wonder why federal regulators did not require such standards for the past few years.

For the full article from the Seattle Post-Intelligencer, see: HUD chief questions McCain’s mortgage plan, October 20, 2008

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