Tuesday, May 18, 2010
Even though Las Vegas is full of never-sold and foreclosed-upon houses, a rumble of new home building has begun there. Similar trends are seen in other housing meltdown meccas: Phoenix, Florida and inland California.
Awesome. Vegas has almost 10,000 empty new houses, and thousands of older ones go into foreclosure every month. If builders want to gamble on new development with their own money, more power to them.
But wait. They're not doing it entirely with their own money. As in the bubble days, the taxpayers continue to take on much of the risk through government-guaranteed mortgages. Using taxpayers as suckers of last resort has got to stop.
What a shock to learn that the Federal Housing Administration still backs loans requiring only a 3.5 percent down payment -- and in flattened housing markets like Las Vegas'. No private lender today would let ordinary people put down so little of their own money on a mortgage.
The tiny FHA down payment helps builders unload the houses to struggling buyers. Builder and buyer are happy. But who assumes the risk of the loan going bad? Tommy and Tillie taxpayer, that's who.
Question: If home prices in Las Vegas have already plunged 60 percent from the boom days of 2006, why can't the folks who want to buy a house there scrub up a more traditional 20 percent down payment? The reason in many cases is that they've already gone under every seat cushion and can't find another nickel. Without Uncle Sugar's help, they are unable to close the deal.
Across America, meanwhile, Fannie Mae and Freddie Mac continue to finance or back the vast majority of single-family house mortgages -- 70 percent in 2009. They buy mortgages from lenders, then package them into securities bearing "implicit" taxpayer guarantees.
The scandal of Fannie and Freddie is that they were also private companies seeking to maximize profits. The result was the sleaziest of all Wall Street arrangements: Executives made big bucks off the subprime orgy while leaving the taxpayers holding the bag when it all went splat.
Fannie and Freddie have since been nationalized. From 2008 through 2020, they will cost taxpayers almost $380 billion, according to the Congressional Budget Office. This lousy deal has enraged the public, as well it should.
The Senate has asked the Treasury to come up with a plan to close, privatize or otherwise lighten the Fannie and Freddie burden to taxpayers. That is a fine idea, but there's always opportunity to muck it up.
Several Republicans tried to skip the careful removal of the taxpayer guarantees and instead do something simple and simple-minded with glossy political appeal. Sens. John McCain of Arizona, Richard Shelby of Alabama and Judd Gregg of New Hampshire called for a two-year deadline to remove the government crutch.
Problem is, with private companies having virtually abandoned the housing finance market, Fannie and Freddie are about all that's left. They provide what little liquidity there is. A quick shutdown would send the very fragile housing market into collapse, with dire consequences for the whole economy.
Senate Banking Committee Chairman Chris Dodd, D-Conn., was right in calling the proposal "the height of irresponsibility." And the Senate did well to reject this piece of populist pandering.
One safer immediate crowd-pleasing change would be to stop the FHA from backing loans with less than a 4-percent down payment. Funny how Congress hasn't made that simple, no-brainer demand -- especially since the FHA is itself in lousy shape. Could the reason be that too many big-money interests still rely on risky mortgage lending?
If so, let them take the risk. That's the capitalist way -- or used to be.
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