Responsible Borrowers Should not Bail out Reckless Borrowers

Addressing realtors in Nashville and Chattanooga this week, Senator Corker discussed his proposal for long-term housing reform and sharply criticized recent comments by New York Federal Reserve President William Dudley who has advocated using Fannie Mae and Freddie Mac to write down the principal on home loans where the borrower owes more than the home is worth. 

“Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom,” Corker said. “It is absolutely egregious that the Federal Reserve would insert itself in this manner and ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country. A program like this one that reduces principal for a few million underwater borrowers would come at a substantial cost to American taxpayers and responsible borrowers everywhere.”

Senator Corker has introduced the Residential Mortgage Market Privatization and Standardization Act in an effort to start a real conversation in Washington about the need to responsibly unwind government-sponsored enterprises Fannie Mae and Freddie Mac and gradually end dependence on the government for housing finance.

I agree with Senator Corker and like Senator Corker I am a proponent of expanding homeownership opportunity.   However, there is a wrong way and a right way to do it. Irresponsible behavior should not be subsidized and encouraged. Many homeowners somehow feel they should be bailed out because their home did not increase in value or because they owe more on their home than its current value. There was never a guarantee that home values would always increase. 

Homeowners who got a conforming loan should not bail out those who got an adjustable, 80/20, negative amortization, pick-your-payment, interest-only or other type of "creative financing" product. Homeowners who bought a reasonably priced home should not bail out those who bought more home than they could afford. Those who planned for their retirement and either had their home paid for by the time they retired or had a reasonable mortgage payment they could afford on their retirement income, should not bail out those who at age 50 got a 30-year mortgage and upon retiring at age 65 can no longer afford their mortgage. Those who paid a reasonable downpayment should not bail out those who got into a home with no money down. Responsible people should not have to bail out irresponsible people.

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The Homebuyers Club

While many people want to blame the current housing crisis on programs that helped low income people become homeowners, they usually have no clue what a person has to do in order to become eligible for these programs. For the last fifteen years I have administered and taught a program called “Homebuyers Club.”

This program has helped over 550 families become homeownwers. I know it has changed lives. It has taken people out of ghettos and placed them in neighborhoods. It has made people change the way they think and the way they deal with money. It has made irresponsible people become responsible. It has given low-income people the skills that middle-income people take for granted. Most of the people in this program came from a background of generational poverty. It gave them the American Dream.

Below is a condensed version of an except from my annual HUD grant application. If you are with a non-profit agency or just someone that wants to create a program that helps lift people out of poverty, maybe this will help you design a program. If you want to be better informed of how low-income people become homeowners, I hope this helps.

Homebuyers Club

Homebuyers Club is an in-depth year-long program that combines one-on-one housing counseling and group sessions. It is in serving the Homebuyers Club clients where we use a lot of volunteers. Below are the important elements of this program.

The time element: The curriculum is one-year long but many clients stay in a Homebuyers Club for two to three years. Clients may enroll, drop out and reenroll several times. One can learn what one needs to learn about buying a house in an 8-hour workshop. However, if one has serious obstacles to buying a house, one cannot overcome those obstacles in a short time period. Spotty work history, poor credit, excessive debt, and changing bad habits, and changing attitudes take time. Learning money management skills and establishing savings takes time.

Combined one-on-one and group sessions. HBC members get both group sessions and one-on-one sessions. All HBC members get an initial one-on-one session called a “Front Door” at which time we evaluate the clients potential for homeownership and help the client develop an “Action Plan” designed to get the client from where they are at to homeownership. Most clients also get a follow up one-on-one session where we work on cleaning up credit, and another one-on-one where we help the client develop a written budget, and another session where we reevaluate the progress the client has made and develop a second Action Plan. Also one-on-one phone sessions occur with clients to discuss specific problems or to answer questions. Once a month, the client attends a one- and-half-hour group session.

Peer counseling and support. In a Homebuyers Club a group of 12 to 15 people bond and mutually encourage each other. The atmosphere of a Homebuyers Club more closely resembles that of an AA meeting or other self-help group rather than a typical home buying education workshop. Clients advise and encourage each other. They openly discuss their trials and battles and celebrate each others successes and triumphs. Sometimes the class may go off on a tangent and members may discuss how to deal with relatives that ask to borrow money or friends that belittle them for trying to improve their lives. If the class wonders off-topic, we allow it. The group counseling, peer support, and group bonding are important elements of what makes the Homebuyers Club a success. While the Homebuyers Club is a series of twelve workshops, it is much more. It is also a dynamic support group.

Expanded Curriculum. The curriculum covers all of the normal topics of a pre-purchase workshop, but due to the fact that our customers are from the lower end of the economic scale and many of them are moving from public or subsidized housing to homeownership and most of them are single mothers, we tailor our curriculum to address the special needs of our clients. Topics which may be covered in our class but that may not be covered in the curriculum of other housing counseling agencies are classes on getting child support, life insurance, basic banking, and being a wise consumer.

Relationship building. We become friends and mentors to our clients helping them with other issues they may face which affect their ability to become homeowners. We become a resource to help them with a wide variety of issues. Even after they become homeowners, many of them still call us for advice and referrals with both housing related issues such as refinance and home repair as well as referrals and advice on other issues such as taxes, insurance, child support, and employment and education. This post-homeownership relationship has kept some of our clients from defaulting on a loan or helped them avoid refinancing and getting a predatory loan.

Layered financing and grant assistance: In the WCO Homebuyers Club, we not only educate the client and help them get mortgage-ready but we work with the client to get the grants and loans and assistance they need to buy a home. One of the tools we sometimes use is we help the client accumulate funds in a matched savings program called Individual Development Account (IDA). Other programs may be products for people that qualify for specific programs such as Section 8-to-Homeownership. Another tool is partnering with another non-profits such as a church that will build a house for the client and the clients provides sweat equity. We search for the product that will help the individual client and get creative in developing the package of products to move someone into homeownership.

Staff Support: Much effort is expended on client retention. Prior to each club meeting or counseling session the client gets both a reminder card and phone call. The clients in this program often move and often change phone numbers. A constant effort is made to keep addresses and phone numbers current. A lot of rescheduling of sessions occurs. Also, many clients get discouraged and may start skipping class. When that happens we call the client and try to determine the problem and give them a pep talk. Another service we must provide to our Homebuyers Club members that would not have to be provided to clients in a typical homebuyer education program is child care. Most of our clients have minor children. Without child care, they could not attend the classes. This is an additional expense that most other pre-purchase counseling programs would not incur.

Holistic Approach/Other Services. While our clients are striving to get mortgage ready and achieve homeownership they may have other obstacles or needs that are either more immediate or are larger obstacles than can be addresses in our Homebuyers Club. We provide a broad range of services that are available to our Homebuyers Club members as well as other low to moderate income people. These services are provided here at the Woodbine Center. These services are not exclusive to HBC members and are not included in the budget of Housing Counseling Department, but many of our clients use these services. These services include the following:

o Volunteer Income Tax Assistance (VITA). Prior to membership in our HBC, our clients may have been accustomed to going to a commercial income tax preparations firm that charged them a high fee for a relatively simple income tax preparation, convinced them to get a “rapid refund” at a interest rate that may equal 500%, and then charged them for cashing the refund check. Not only are we providing them with a valuable service, but discussing income tax preparation in class gives us a change to discuss attitudes about delayed gratification, being a wise consumer, and interest rates.

o Child support advocacy. We discuss child support issues with our clients who are single mothers and will refer them to someone who can provide them with assistance in getting child support if they desire to pursue it.

o Job Resource Office. This is a partnership with Goodwill Industries and last year 290 people were placed in jobs, including some of our HBC members.

o GED. We have several students in this class. This is provided at our center in partnership with Metro Schools.

o Referral. In addition to services here at our center we routinely provide referrals to other social service providers.

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Don’t Blame the Housing Crisis on Poor People

Whether you are a gardener or a physician or an auto mechanic or whatever, you have probably had people share their uninformed but strongly held opinions about your area of expertise. A lot of people have strong opinions about things they know little about.

I am a housing counselor and have helped many low-income people become homeowners. I routinely hear people assert that the reason we have a housing foreclosure crisis is because the government had programs that helped low income people become homeowners. I have heard Rush Limbaugh make this assertion and our local Rush-want-a-be and lot of other people say this.

It is true that a large part of the housing crisis was caused by lenders making loans to people who should not have gotten loans. It is true that there were many irresponsible borrowers. There were a lot of people who bought houses with no money down. Some of these people were low-income but many of them were not. These people who were low income did not get these bad loans due to government assistance programs.

Those low-income people who got government assistance for down payment probably were less risky borrowers than the typical borrower. There have been a variety of programs that helped low-income people become homeowners over the years.

In recent years the most widely available program was the Bush Administration’s program called American Dream Downpayment Initiative (ADDI). Under this program, the borrower could get into a house for an out-of-pocket cost of only 1% of the sale price and the balance of the closing cost and downpayment was provided in the form of a grant or a loan.

To take advantage of this program, the first mortgage had to be an FHA loan, or VA loan, or conforming conventional loan. This meant that the borrower could not get a “liar’s loan,” also know as a “stated income” loan. They could not get a negative amortization mortgage or an interest only mortgage or the really bad adjustable rate mortgages. The borrowers had to have decent credit and could not have excessive debt and their housing cost, including escrowed taxes and insurance, could not be over 32% of their gross monthly income.

ADDI is but one of a number of similar programs that I have been familiar with over the years that were designed to help low income people become homeowners, but almost all of them had these same requirements. Most of these programs also required that the borrower attend homebuyer education programs. These borrowers were better informed homebuyers than the average buyers.

Another reason that low-income people who become homeowner using down payment assistance programs are not likely to default on their mortgage is because the agency that assisted them usually ends up holding a second mortgage on the property. The second may be in the form of a “due-on-sale” mortgage, which means the assistance will be paid back if the property is ever sold. It may be a “forgivable loan,” where for example, 20% of the downpayment assistance is forgiven each year for a period of five years. The assistance could simply be a low-interest, long-term second mortgage.

If one wishes to refinance a first mortgage, one cannot do so without paying off the second mortgage, unless the second agrees to subordinate. When the non-profit agency holds the second mortgage, they can prevent the homeowner from refinancing into a bad loan or persuade the borrower that it is not wise to do so. Many borrowers end up refinancing when it is not in their best interest to do so, but borrowers who got downpayment assistance usually can’t do this.

I think that programs that help low-income people become homeowners is money well spent. It helps lift people out of poverty rather than subsidizing their life in poverty. These programs have genrally been sucessful.

While it may be popular to blame the housing crisis on government programs that helped poor people become homeowners it is simply not the truth.

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The Obama Easy Payment Plan for Irresponsible Homebuyers

The Homeowner Affordability and Stability Plan

On February 18, President Obama announced a $75 million comprehensive plan to help homeowners avoid foreclosure by providing affordable and sustainable mortgage loans. The Homeowner Affordability and Stability Plan has two parts major parts but also contains other minor provisions. One part of this program one may have heard about, the judicial modification as part of a bankruptcy, is not achieved by this act but is simply proposed. Here is what is in the plan.

The first major part of the program provides for a sweeping loan modification program targeted at borrowers who are at risk of foreclosure because their incomes are not sufficient to make their mortgage payments. Some 3 to 4 million homeowners will be helped under this program.

The second part of the program provides refinance opportunities for borrowers who are current on their mortgage payments but have been unable to refinance because their homes have decreased in value. They may now have the opportunity to refinance into a 30 year, fixed rate loans. Fannie Mae and Freddie Mac will allow the refinance of mortgage loans that they hold in their portfolios or that they guarantee in their own mortgage-backed securities. Four to five million people will be helped under this program.

Here are the major components of the Loan modification provision of this program.

• A Shared Effort: If the lender will lower the payment so that the mortgage payment does not exceed 38% or the borrower’s income, then the treasury will match the reductions dollar for dollar down to 31% of the borrower’s income. The interest rate reduction necessary to reach this lower ratio would stay in place for five years then would be stepped back up to the conforming loan rate in place at the time of the modification. Subsidies could bring the interest rate as low as 2%.
• Incentive to servicers: For each loan so modified the servicer will be paid $1000 up front and up to $1000 a each year in “pay for success” fees.
• Incentives for Borrowers: As long as the borrower stays current the borrower will get $1000 a year for up to five years.
• Reach Borrower early: To encourage servicers to help at-risk borrowers before they go into default, an additional fee will be paid servicers and mortgage holders for loans they modify.
• Home Price Decline Reserve Payments: This is an insurance fund to grantee loans so that lenders will be willing to modify more loans in areas where house values are declining.

Here are the major components of the refinance provision of the program.

• Conforming loans. The loans had to be good loans to start with.
• Standard underwriting. The borrower must meet standard credit standards
• Higher Loan to value. The new loan can be up to 105% of the homes value.

Commentary

I do not like this plan. It may work. It may stabilize housing, but it is wrong. We could have done better. I do not have much of a problem with the refinance provision of this act but do not like the loan modification provision. Something had to be done however to slow the rate of foreclosures.

If the house next door to you goes into foreclosures your home value can drop. If several houses on your street go into foreclosure your homes value can drop considerably. Your wealth can be eaten up through no fault of your own. If you need to sell your home, you may have to sell it for considerably less than what you think it is worth. There is a social cost to other people’s foreclosures and we must do something. As long as existing homes are dropping in value lenders are going to be reluctant to ease up on credit and allow even deserving borrower to finance homes. This crisis stated in the housing sector and I do not think we can pull out of the economic crisis until we stabilize the housing market. Nevertheless, I don’t like this plan. We needed to so something else other than what we have been doing, but I think this is the wrong thing to do.

Rather than just give the money away, I would have preferred a plan that placed a second or third mortgage on the home of the borrower that got the assistance. We could have designed a program that made a loan to the borrower in order to “buy-down” the first mortgage. This loan could be a “due on sale” loan so the borrower would not have to pay the loan back as long as they lived in the house. If the home value never increases then the tax payers would still be out, but if home values stabilize and then increase the taxpayer subsidy would be paid back and the irresponsible lender and borrower would not realize a profit due to the government rescue.

Another possible way the bailout of irresponsible lenders and borrowers could have occurred is a “shared equity” loan designed so that if and when property values again accelerate the government recoups any subsidy but in a way that is proportional to the increase in equity. We needed to so something and I could have designed better ways to do it.

Perhaps the simplest way to achieve the desired effect of slowing the foreclosure rate but not enriching the irresponsible is to simply encourage mortgage companies to modify the loans by changing the amortization period to forty years or fifty years or however long it takes to make the payments affordable. The loans could still be 30 years loans but with a balloon at the end of 30 years. The homeowners who benefited by buying housing they cannot afford would still get to live in the houses they should never have purchased in the first place, they simply would not benefit by pocketing the equity and sticking it to the taxpayers.

One thing I do not like about the loan modification provision of this program is that it only helps the irresponsible. I see responsible people who are losing their home every day due to the loss of a job. I would have preferred that some of those people to whom bad things happen be helped and fewer of those who simply bought more house than they can afford. The economic impact would be the same weather we help a person who is facing foreclosure because a spouse died or because they bought too much house. This package does nothing to help the deserving borrower.

One of the most objectionable aspects of this program is paying people $1000 a year for simply making their new lower mortgage payments on time. This is an outrage. All of those people who didn’t buy more house than they should have bought, and who were smart cautious borrowers and who got good loans are not going to be rewarded for paying their house payment on time; the irresponsible will be. If you are a responsible person in today’s world you are a fool. I guess rewarding the irresponsible is the kind of change people voted for in November.

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Are CRA, Clinton and Carter Really to Blame?

by Harold Black

I am fed up with the conservative talk show hosts putting the blame of the current economic crisis on the Community Reinvestment Act. I’ve heard them say that the CRA was signed into law by Jimmy Carter and aggressively expanded under Bill Clinton forcing banks to make loans to people who could not afford them. Fannie Mae and Freddie Mac were also forced to buy these loans. Since people could not afford them, they defaulted causing the failure of Fannnie and Freddie and precipitating the crisis.

As my father used to tell me, “Harold, that sounds good if you are interested in sounds”. But what is the truth? The truth is that republican presidents rather than democrats were ultimately responsible. When I was Deputy Director of Economic Research at the Comptroller of the Currency, the Congress passed the Equal Credit Opportunity Act in 1974 and the Home Mortgage Disclosure Act in 1975. I was charged with determining if national banks (those who received their charter from the federal government) were guilty of discrimination and of redlining. Discrimination is the act of denying a person a loan based on a prohibited basis such as race. Redlining is the denying a loan to anyone regardless of race who is applying for a loan in a specific geographical area.

My study (published in the American Economic Review, "Discrimination in Mortgage Lending," (with R. L. Schweitzer and L. Mandell), May 1978, v. 68, n. 2, pp. 186-192) showed weak statistical evidence of racial discrimination in the accept/reject decision but no evidence of redlining. These acts and our research at the OCC laid the foundation for other research on discrimination and to the passage of the CRA in 1977.

Although the CRA was signed into law by Jimmy Carter, two other important acts the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA) were signed by a republican, Gerald Ford. The talk show hosts also state that Bill Clinton was responsive for the expansion of CRA and forcing the banks to make bad loans. However, the two major changes in the CRA occurred in 1989 with the passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. Both were signed into law by George H. W. Bush. Under FIRREA, the reporting requirements of CRA compliance were expanded. The latter act required Fannie Mae and Freddie Mac to support affordable housing by purchasing CRA-qualifying loans. Even though the talk show hosts have said that up to one half of Fannie and Freddie loans were CRA loans, the act suggests that by the year 2010, that one-third of their purchases be affordable housing loans.

If there were pressures to expand CRA lending, it came in part from the banks themselves. As a result of the Riegel-Neal Interstate Banking and Branching Act of 1994, signed into law by George W. Bush, CRA ratings became an important factor in determining if banks could merge or acquire across state lines. Because advocacy groups would use CRA ratings as a protest against the banks in order to get additional CRA lending, the banks greatly expanded these types of loans. I recall going to a Fed Atlanta conference on CRA lending, compliance and enforcement. A banker told me that the Feds never pressured him into making a bad loan. However, because they wanted to expand into other states, they had instituted a more liberal CRA lending policy. So the truth is that if there is blame to be handed out for a misguided CRA policy, it has to be laid at the feet of the republicans and the banks. Jimmy Carter and Bill Clinton are convenient whipping boys and are well deserving of other blame but CRA lending is not one of them.

As to the banks making loans to people who could not pay them back? We in Finance have a technical term for such lenders – it is a fool. This makes no sense at all. Some people will say that the bankers could make bad loans because they would be sold to Fannie Mae and Freddie Mac. Well most CRA mortgages and subprime mortgages were sold to private investors. If these loans defaulted within 90 days, then the purchasers would put them back to the originator, If they defaulted later and more bad loans were made by the originator, then the investors would either not buy them or would offer low prices on mortgage pools of the originator. Either way, the originator would lose and would quit making bad loans.

Lastly, there are too few subprime mortgage to have caused the financial crisis. At year end 2008, there were $1.3 trillion in subprime mortgages. The default rate on subprimes had increased from 8 percent to around 20 percent. If you assume 100 percent loss on the defaulted mortgages, then this totals $260 billion. Well in 2008 the total loss in mortgage backed securities was $435 billion. If subprime defaults were at fault, then there would have been no need for the $800 TARP package. So like Carter and Clinton, subprime is just a convenient whipping boy. As my readers know, I am a laissez-faire free market conservative. But that does not blind me to the truth.

Harold A. Black is the James F. Smith, Jr. Professor of Finance, University of Tennessee, Knoxville. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. Dr. Black blogs at Caveat Emptor where he originally published this article. It is reprinted on this blog with his permission.

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The housing crisis: I saw it coming.

To tell you the truth, two years ago I didn’t know the difference between a credit default swap and a collateralized debt instrument, but I knew a housing crisis was brewing. I did not know how widespread it would be or the impact it would have on the rest of the economy, but I knew something was terribly wrong.

I have been Director of Housing Services for a non-profit housing counseling agency for the last sixteen years. For most of this time our primary housing service has been providing prior-to-purchase, housing counseling. We provide two types. We offer single session, eight-hour housing workshops, which we call “Fast-track." We also offer in-depth, long-term counseling, which we call “Homebuyers Club.”

Fast Track is for people who are already eligible for a home mortgage. People are often motivated to take the class because it is required in order to be eligible for certain down-payment assistance programs or preferential interest rate programs. In an eight hour class the client learns all they need to know about working with a realtor; getting a good mortgage; protecting their investment; purchasing homeowners insurance; getting a home inspection; down payment assistance programs; and closing on their home.

Our Homebuyers Cub program is quite different. It is for people who have serious obstacles to homeownership. While clients learn the same things as participants in the Fast Track, the focus is on getting people ready to get a mortgage. Most of the clients in our Homebuyers Club are single mothers. Most are African American. Most are low income. Clients attend class for an hour and a half, once a month, for a year. Many clients are still not ready after a year and they re-enroll and stay in class. For many of our clients it takes two or three years before they are ready to purchase a home.

In a Homebuyers Club, we not only teach the mechanics of home buying but, more importantly, we change people’s values and habits. We teach the virtue of delayed gratification. We teach people how to clean up their credit and improve their credit score. We encourage people to get a checking account and to stop using check-cashing services. We teach money management skills and encourage savings.

Many times, after being in a Homebuyers Club for a while a Club member may decide that, rather than pursuing homeownership at this time, they are better off getting their GED or skills or training that will enhance their potential to earn more money, and then at a later time try to become homeowners. Many participants in our Homebuyers Club never buy a house while in our program but make other positive changes that will improve their lives. While the primary measure of success in this program is the number of people who actually become homeowners, the number of people who improve their lives, yet do not become homeowners, is a greater number. I have always felt like we helped a lot more people than simply the number of people who became homeowners. Since the start of our Homebuyers Club we have had over 735 people become homeowners. Unfortunately, not many of these successes occurred in the past three years.

At one time we had sixteen Homebuyers Clubs and average attendance in each club was about twelve. Now we have four clubs and attendance is only about six per club. About three to four years ago attendance started dropping in our clubs, and when we offered new clubs we had few takers.

Managing a Homebuyers Club requires providing a lot of encouragement to participants. Clients can easily get discouraged. Prior to a meeting, clients get a reminder call and a reminder post card. If a client misses a couple meetings, we try to reach them to find out why they have not been attending.

It was about three years ago that I noticed a disturbing trend. I would call a client and the conversation would go like this: “I noticed you missed the last couple of Homebuyers Club meetings and I just wanted to see what was going on.”

“Mr. Rod,” the client would say excitedly, “I have good news. I bought a house.”

I would immediately have a sinking feeling in my stomach. I knew the client was not mortgage-ready. “Great!” I would say. “Tell me about it.”

The client would start describing her new home. Then I would say, “Tell me about the financing. What kind of loan did you get?”

More often than not, the client did not know. I would ask the client to bring in her mortgage papers for review. What I would find is that our clients were getting terrible loans. They would buy their homes with no money down. They often were getting 80/20 loans with the 80% loan a hybrid adjustable, with a low teaser rate fixed for three years and then adjusting every six months thereafter. These loans had high margins and payments that would adjust steeply after the end of the fixed period. The 20% loan was often fixed but with very high interest rates of 12% to 22%.

Most often the clients had no idea what they had gotten themselves into. If they would have just stuck with our program, they could have gotten a FHA fixed loan but they did not. The temptation to do it the easy way was just too great. Also, the clients were often misled and told they could refinance before the loan reset. They were told this as if it was almost automatic. They were not told that they would have to meet income and debt and credit standards in order to refinance their loan. It was presented as something they could do almost automatically.

After a while the problem was not that our clients were dropping out of our program and getting bad loans, they were never enrolling in the first place. They no longer needed us and the discipline our program required. With “creative financing” they could buy a house without saving any money or changing their habits. They could get a loan without becoming responsible. Income and credit were not necessary. Knowing the clients I was serving, I was shocked that anyone would give these clients a loan in their current circumstances.

I saw this crisis coming. It was like watching a train on a collision course; I knew without a doubt that many of these clients were going to default.

I still believe in the goal of helping poor people become homeowners. If done the right way it permanently helps people escape terrible environments. It causes people to be more responsible. It builds wealth. It lifts people out of poverty for generations to come. It changes lives. Helping low-income people climb out of poverty is good for society and is the right thing to do.

If done the right way, low-income people can be given assistance to help them become responsible homeowners and it does not have to lead to foreclosures. Handing out mortgages to undeserving people, however, who have not leaned new skills, behaviors, and values can be detrimental to society and it betrays poor people in the process.

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Congress Should Pass the Palson Plan

It is with reluctance that I conclude Congress must past the amended version of the Palson Plan. I would prefer the House Republican Plan, if I thought it would work. Unfortunately, from what I have read, I don't think the House Plan would be sufficient, and the stakes are too high to gamble. I hate the thought of the federal government taking on a $700 billion dollar obligation and buying all of the bad mortgage loans that should never have been made in the first place; however, I think it is necessary.

I know some free market purists are advocating letting the companies that made these bad loans and the investors that purchased this bad debt fail and let the chips fall where they may. I understand the argument. I understand the dogma. Now is the time, however, for pragmatic solutions that will get us out of this crisis. It is great to have guiding principles, but you shouldn’t let them guide you over a cliff.

I also understand those who don’t like the idea of bailing out rich, fat cats while letting homeowners get foreclosed and neglecting other unmet needs. Yesterday I was in a chat group and someone wrote, “Isn't it funny how they can find $700 billion for this, yet they can't come up with enough money to get us health insurance? Man, I wish I was rich enough to get bailed out by the government when I couldn't pay my bills.” I understand the sentiment, but resentment is no substitute for sound policy.

This bailout is not just for Wall Street. If an economic meltdown is not avoided, everyone will surfer. Senator Bob Corker made this point in an article appearing in today’s’ Tennnessean:

There is a record shortage of credit in our nation's economy and the situation is growing worse by the day. If the credit markets continue to deteriorate, and credit provided by our country's banks and lenders is no longer available, businesses will no longer be able to secure short-term loans, forcing them to lay off workers because they can't meet payroll. It will become impossible for individuals to secure car loans or mortgages — leading to more foreclosures, pressure on housing prices, and a worsening of the credit crunch. In a worst-case scenario, credit cards may no longer function and the ability to even cash a paycheck may no longer exist. This is how a financial crisis becomes an economic calamity that will have an effect on every American and Tennessean.
(Read more)

I understand that those on the left are going to blame this crisis on Republicans and deregulation and a failure of free enterprise. They are going to use it for political advantage and blame it on the “failed policy of the last eight years of Bush and McCain.” They will try to use this as an excuse for greater government interventions, and to achieve social goals of income redistribution. By agreeing to the bailout, we are not acquiescing in the analysis of what caused the problem. As Tennessee’s senior senator, Lamar Alexander, has said, “fix the problem and next week we can fix the blame.”

I am appalled that Democrats have tried to use this crisis as a means of permanently funding the liberal activist organization ACORN. I assume there are enough pragmatic Democrats who will put country above party and that provision will be stripped from the bill. I would not support the bailout if the ACORN provision is in it, and unless the taxpayer protections, as stated in Lamar Alexander’s article below, are included. If those changes are in the final version, then I think the plan should be adopted. If I were in Congress, based on what I know now, I would have to hold my nose and vote for the bailout.

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Alexander: Fix mortgage problem, then blame

By U.S. Sen. LAMAR ALEXANDER, R-Tenn, The Tennessean, September 27, 2008

Before Monday Congress should enact a significantly amended (to protect thetaxpayer) version of the "Paulson Plan" to permit the Secretary of the Treasury to buy and then sell troubled mortgage-related assets. This is necessary to unfreeze credit and make sure that Americans can secure car, auto, mortgage and student loans and cash their paychecks. .... Read more

Comment
This is an excellent article by Tennessee's Senior Senator Lamar Alexander. He answers in simple terms: "What's the problem?", "What's causing the credit freeze?", "How will the Paulson Plan help?", and "How can taxpayer be protected?"

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What Caused the Economic Crisis

I am not going to pretend that I fully understand all of the causes of the current financial crisis. Quite frankly, after listening to hour upon hour of pundits discuss the crisis and reading numerous articles, I am not sure anyone fully understands it. No doubt there were multiple contributing factors. A lot of supposedly smart people had to do some stupid things to allow this mess to develop.

The left is painting this crisis as a failure of free enterprise and blaming Wall Street greed and deregulation. No doubt greed and regulatory failures were contributing factors, but we should not overlook the governments responsibility in this mess by pressuring lenders to make "affordable" mortgages available to unqualified borrowers. The Community Reinvestment Act pressured lenders to make risky loans that should never have been made. Government has had a policy of assuming that a lower homeownership rate among minorities was a result of discriminatory lending practices rather than a result of economic reality.

An interesting fact brought out in this video is that the liberal Democrats were the largest receipt of Fannie Mae campaign contributions. Chris Dodd, followed by Barack Omaba were the largest recipients of these contributions. When it comes to assessing blame for the current crisis, Democrats do not have clean hands.

This video is the best thing I have seen on the current crisis. At ten minutes, this is a little long but it is well worth watching. This video is fast-paced. I would suggest you use the pause button to take a good look at some of the charts and graphics.

I discovered this video posted on Blue Collar Muse. This needs to be seen by everyone wanting an understanding of the current crisis. If you are a blogger or belong to chat groups, please repost it. No need to post a link back, just repost it.

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FBI Investigates 14 Firms in Subprime Crackdown

Tue Jan 29, 2008 5:39pm EST
By Randall Mikkelsen

WASHINGTON (Reuters) - The FBI has opened criminal investigations into 14 corporations as part of a crackdown on improper subprime lending, agency officials said on Tuesday.
FBI officials told reporters the probes involved potential violations, including accounting fraud and insider trading.

They did not identify the companies. But the probes reached across the industry to include developers, subprime lenders, companies that securitized loans and investment banks that held them, said Neil Power, head of the FBI's economic crimes unit.
"Currently there are ... 14 investigations, inquiries open right now," he said.
Cases involving individual loans have also risen sharply in a crackdown on subprime lending irregularities, officials said.

"We anticipate in the next year that another wave of adjustable rate mortgages will reset and with that we anticipate that the mortgage corporate fraud potential cases to increase," said Sharon Ormsby, head of the FBI's financial crimes section.

The FBI is investigating the corporate cases in parallel with the Securities and Exchange Commission, which has opened about three dozen civil investigations into the subprime market collapse. Some of the probes overlap, an official said.

Targets of the SEC probe include Swiss bank UBS AG and U.S investment banks Morgan Stanley, Merrill Lynch, Bear Stearns, as well as bond insurer MBIA.
The SEC, which has formed an internal subprime mortgage task force, is looking at how financial firms priced mortgage-based securities and whether they should have told investors earlier about the declining value of those securities.

The U.S. attorney in Brooklyn, New York and the FBI earlier launched a criminal investigation into two mortgage-related hedge funds at Bear Stearns that collapsed during the summer.
There are also state investigations.

The corporate investigations are part of an FBI crackdown on improper subprime lending, which also includes a focus on fraud in loan origination.

The agency has about 1,200 active cases, up 40 percent from 2006, with 321 criminal complaints or indictments, officials said.
"Subprime loans are decreasing but ... suspicions of mortgage fraud are increasing," Ormsby said.

Some of the loan origination cases are spurred by individuals lying to qualify for mortgages, but about 80 percent of the cases involved fraud for profit, Power said.
Particular problem areas included California, Texas, Arizona, Florida, and the Midwest, officials said.

My Comment: As a housing counselor, I see people all of the time who are losing their home and who got loans they should never have gotten.

Many times there is not a lot of reason to feel much sorrow for the borrower. Often the sub-prime Adjustable Rate Mortgage with a teaser introductory rate allowed the borrower to buy more house than they could afford and they got into the house with no money down. If they lose the house, they are not really losing anything, since they have no equity in the home. They wanted a $200,000 house when they could only afford a $120,000 house. The borrower just knew they wanted that house and did not pay attention to the details of the financing. The borrower was greedy and irresponsible. Don't waste your compassion on these people. They got to live beyond their means for two year, and now they have to face reality. In these cases, they need to lose the home, learn a hard lesson and just start over and do it right next time.

On the other hand, I also see people who could have qualified for a good loan, but were sold a very bad sub-prime product. I also see cases of falsified loan applications. Usually in the case of the falsified loan application, the falsification was started by the loan officer. The loan officer types up the app and gets the borrower to sign it. Either the borrower never notices the incorrect information or the loan officer explains away the discrepancy and tells the borrower not to worry about it, that that is just how things are done. I also see inflated appraisals. I have seen "flipping" of loans which is when loan is refinanced over and over each time eating up the equity in the house until the person can't refinance anymore and loses the home.

Buying a home, for most people is the biggest financial decision they will ever make and is their primary method of creating wealth. They should use caution and make sure they understand what they are doing. However, many borrowers are not very sophisticated or educated, and financing a home can be complicated. Many borrowers assume their loan officer will get them financing that is in their best interest. There are many honorable, honest loan officers who do just that and over the years I have worked with many people for whom I have the up most respect. There are, however, a lot of unscrupulous crooks waiting to prey on the unsophisticated borrower. They target the elderly, minorities, and anyone who they think they can get by with victimizing. They lie, mislead, and withhold vital information. I am all for a person making an honest buck, but to rip people off by putting them in a bad mortgage product when the borrower could have qualified for a good product is unconscionable.

I do not believe this culture of greed and corruption in the mortgage business started at the level of the loan officer. I must believe that it was condoned higher up the chain of command. I will be delighted to see some CEO's go to jail. I hope it happens.

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Bad Bitch

I love the work I do even if I do not always love my job. If it were all enjoyable and rewarding they wouldn’t have to pay you for doing it. As Director of Housing Services for a non-profit housing counseling agency, I have had a role in helping 685 people become homeowners. Most of these people were low income. The majority was African-American. Many were moving out of public housing. Many of them were single mothers. Most of them were the first in their family to ever achieve homeownership. Many of them had only worked sporadically until the advent of Welfare Reform.

These clients of mine attend a year-long program called Homebuyers Club. A Homebuyers Club is more than just a series of meetings teaching the fundamentals of purchasing a home. A meeting of a Homebuyers Club often resembles a revival meeting or AA meeting. Clients share their setbacks, their challenges, and celebrate their successes. Clients learn improved money-management skills and they learn how to repair and maintain their credit. They learn how to avoid being victims of unscrupulous people who prey on the financially less sophisticated. They open checking accounts and stop using check-cashing services. They learn that to get ahead you must learn delayed gratification. They budget and save money. Some of them work with us for three or four years before they are ready to purchase a home. They have to not only change their circumstances but also change their way of thinking and change their values.

These clients, when they purchase a home, do not get the exploding ARMs and sub prime loans one hears so much about, but get FHA fixed-rate loans. Most of them take advantage of down payment assistance programs such as the American Dream Down payment Assistance (ADDI) program or other assistance programs. The thing that contributes more to their success than the down payment assistance is that we help them believe that the American Dream is possible.

For most low-income people, homeownership is the key to building wealth and giving their children a better life than they had. Homeownership creates a sense of self-esteem in a person. It makes them more invested in their community. Studies show that in a comparison of renters to homeowners, holding the variable of income fixed, that children of homeowners have fewer pre-marital pregnancies, commit less crime and do better in school.

Unfortunately, not everyone who expresses an interest in our program makes it to home ownership. Many inquire but never follow through. Other try but drop out. Even those who drop out however may benefit. They may learn how to repair and protect their credit rating. They may benefit by leaning why a “whole life” insurance policy is not as good as a “term” policy. They may learn that an income tax “rapid refund” is a rip-off. So, even those who do not become homeowners may benefit from being in the program. Also, one never knows what seed may be planted that germinates years later. But you know that many other who you encounter don’t “get it”. They cannot be convinced they there is any reason to try to improve their life.

Last Saturday, I went to an event at a public housing project where we offered the clients a service we call a “Front Door”. This is a one-on-one counseling session where we review the client’s income, debt, and credit and if they chose to pursue homeownership we help them develop an “action plan”. One of my clients on Saturday was a young black girl in her early-twenties. She was the mother of three children, by three different fathers and was not receiving child support. Two of the fathers were incarcerated and one she did not where he was. She worked at a job that barely paid above minimum wage. She had never graduated from high school and did not have a GED.

She was wearing a low-cut V-neck dress. I can’t help myself; when a woman is showing cleavage, I look. Tattooed across her chest were the words “Bad Bitch”. I could not see the first “B” or the “h” but could read the words.

I wondered what would cause a young girl to so brand herself? Is it the total sense of helplessness? Is it the hip-hop culture? Was it done in a drug-induced state? Does it make her more attractive to men in her social circle? Did she ever have anyone in her life that said to her, “that is not a good idea”?

I had to tell her that her chance of achieving homeownership was very slim in her current financial circumstances. Her income was too low to qualify for even the most generous assistance programs. I suggested she join a companion program to our Homebuyers Club, called “Financial Fitness” where she could learn some improved money-management skills. I told her we offer the GED classes at our center and that if she would get her GED, she could find a better paying job and make more money, and then pursue homeownership. She said she would think about it.

There are plenty or resources to help a young lady like this. Our programs are not operating at capacity. We never have to turn anyone away. There are programs that help people get their GED, there are job-training programs, there are programs that teach grooming and “Dress of Success”. There is no shortage of programs offering support. But how do you reach people and make them believe that there is a better way to live?

Welfare reform has been a great success in ending the welfare enslavement of many Black Americans, but we need to do more. We should not be content that millions of Americans are trapped in despair and poverty. No young girl should grow up and assume that it is the norm to be an unwed mother who drops out of school by age sixteen. No young man should have to assume he will be in prison or dead by the time he is twenty.

How can they be made to believe that there can be a better way to live? I don’t know. I wish I did. But we should not give up. We need bold programs; not programs that make people dependent on a government handout, but programs that break the cycle of poverty. Perhaps we should pay a girl $5000 if she graduates from high school and is not an unwed mother. Maybe we should pay a young boy $5000 if he can graduate from high school and has never been arrested or gotten a girl pregnant. In the short run, it may cost more to help people break the bonds of poverty than to subsidize their poverty, but I think we should do it.

I will probably never hear from Bad Bitch.

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