97% Mortgages are 100% Insane
I am not sure there was ever any excuse for considering a 97% loan-to-value mortgage as "sensible" or "responsible." After all, even without a drop in the market, the buyer is likely underwater on day one (net of real estate commissions). Perhaps for someone who is very wealthy, whose income is an order of magnitude or two higher than the payments, this might be justfiable, but in fact these loans tend to get targeted at the most marginal of buyers.
But how can this possibly make sense when just 5 years ago the financial markets collapsed in large part due to these risky mortgages? Quasi-public, now fully public guarantors Fannie and Freddie had to be bailed out by taxpayers with hundreds of billions of dollars. There are still a non-trivial number of people trapped deep underwater in such mortgages, still facing foreclosure or trying to engineer a short sale after seeing the small bits of equity they invested swamped by a falling housing market.
But, here they go again: Fannie and Freddie, now fully backed by the taxpayer, are ready to rush out and re-inflate a financial bubble by making what are effectively nothing-down loans:
Federal Housing Finance Agency Director Mel Watt has one heck of a sense of humor. How else to explain his choice of a Las Vegas casino as the venue for his Monday announcement that he’s revving up Fannie Mae and Freddie Mac to enable more risky mortgage loans? History says the joke will be on taxpayers when this federal gamble ends the same way previous ones did.
At his live appearance at Sin City’s Mandalay Bay, Mr. Watt told a crowd of mortgage bankers that “to increase access for creditworthy but lower-wealth borrowers,†his agency is working with Fan and Fred “to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97%.â€
The incredible part is that the Obama administration is justifying this based on all the people still underwater from the last time such loans were written. The logic, if one can call it that, is to try to re-inflate the housing market now, and worry about the consequences -- never, I guess. Politicians have an amazing capacity to mindlessly kick the can down the road, where short-term is the next morning's papers and unimaginably far in the distant future is after their next election.
