Prevent another real estate crisis with increased skin within the game

The foreclosure epidemic only took place because of the real estate problems which started with weak financing specifications creating the housing bubble. The chairman of the Federal Deposit Insurance Corporation (FDIC) thinks the federal government has not learned from its mistakes yet. The financial reform debate ended in one decision. This choice was to not require borrowers to put down an acceptable down payment on their mortgages. Federal housing agencies have their own predictions. The prediction is that subprime lending is going to return again. And the crisis is being perpetuated by the Federal Reserve, with policies that prevent a natural correction that is the ultimate strategy to the issue.

Will skin in the game help more or loan performance?

Federal regulators should tighten lending rules for home mortgages in the United States of America, as outlined by Sheila Bair, chairman of the FDIC. CNBC showed Bair saying that borrowers have to be able to show they can repay a mortgage loan and make larger down payments on the home loans as a part of “common sense” rules. She said there was a strong correlation between “skin within the game” and loan performance. Borrowers do not walk from homes they practically own. A borrower is more likely to walk from a home he or she doesn’t have much to lose on. Going forward from the housing crisis, Bair said lending standards need to call for strict income documentation, higher ability to repay criteria and more skin in the game.

Subprime lending redux

The government is slow at picking up on things says Edward Pinto at Bloomberg. The government nevertheless does not realize weak financing criteria are what brought the economy down and will keep it there. Pinto writes the Dodd-Frank bill signed into law last July makes it clear that Congress and the Obama administration don’t intend to fix broken underwriting. The amendment wasn’t added to the financial reform bill that should are. This amendment made it so there was a definition of a “prudent underwriting” standard while also adding a minimum down-payment with consideration to credit history. Plus, in early September, the Federal Housing Finance Agency finalized affordable housing mandates that focus nearly exclusively on low income borrowers with low credit scores — subprime lending redux. Pinto thinks that it is riskier to follow all the brand new policies than it was bailing out Fannie Mae and Freddie Mac with taxpayer dollars.

Fixing the issue

The current government response to the housing crisis will extend today’s issues into the future, as outlined by Bill Bonner at the Christian Science Monitor. Bonner states the government ignores the issue by just giving out money and credit too many who don’t deserve it. Billions in mortgage debt that will never be paid are sitting on the United States of America financial system right now. The Federal Reserve has its own opinions about the mortgage debt being held. It thinks that it is an “asset.” Bonner said the real solution is the market correction the government is intending to avoid. The government finances more mistakes, keeps paying for the old mistakes and pretends that anything could be fine–until it finally runs out of cash.

Additional reading

CNBC

cnbc.com/id/39074467

Bloomberg

bloomberg.com/news/2010-09-08/subprime-2–is-coming-soon-to-suburb-near-you-commentary-by-edward-pinto.html

Christian Science Monitor

csmonitor.com/Business/The-Daily-Reckoning/2010/0909/Extend-and-pretend