As John Carney pointed out in his article about the Home Ownership Mob the mortgage bankers are teaming up with populist types to encourage more easy money loans. In order to do this they seek to decrease the retention by banks of securitized skin in the game. Under Dodd Frank, this 5 per cent skin in the game keeps banks on the hook for mortgage risk as they ship the loans off for securitization. The mob wants mortgages with less than 20 per cent down included in those mortgages that can be securitized without bank risk being attached.
The argument that the mob uses is really perverse, diabolical in fact. They argue that it is class warfare from the top that keeps Dodd Frank in place. But there are two facts that get in the way of this insane reasoning:
1. Dodd Frank was passed to prevent or slow the attacks on mainstreet through predatory loans. The issue people must understand is that if you have too much easy money, the easy money itself pushes up the prices of housing. This undermines the fundamentals of the housing market, and values cannot sustain the bubble. The resulting crash is very hurtful and devastating to mainstreet. It is one thing to have some easy money, for certain qualified people. But it is not in the interest of the rank and file of mainstreet to have housing behave like a commodity, subject to wild swings in value due to toxic lending practices.
2. Mortgage bankers are interested in profiting off of the unsuspecting buyer. They are more likely to be waging class warfare against the buyer than in protecting the buyer from that warfare. They are lenders for crying out loud! It is dishonest for them to claim to take the side of borrowers and complain of class warfare from the top. That is really diabolical when you think about it. Borrowers need to realise that mortgage bankers are not on their side.
Felix Salmon reinforces this Carney article in an article showing that there is a major difference in risk when putting 20 per cent down versus putting 3 or 5 per cent down. Defaults historically skyrocket when the lower amounts are put down. Salmon has a great chart showing that 20 per cent down results in defaults of less than 5 per cent, while 3 to 5 per cent down results in defaults of 15 per cent or higher.
The question then is whether easy money down payments in sufficient numbers would cause a huge increase in the value of houses. I would say that the increases would not rise to the level seen with interest only loans. But history shows that those toxic loans are sometimes tacked onto the mini bubble caused by the dollar down lending. We have seen in Nevada that the ability of people to put 3 per cent down on foreclosures has stabilised and even appreciated those houses.
I think that having a mortgage in these times is tough. The lengths that people will go to undermine Dodd Frank shows the desire for bankers to start the crack cocaine lending behaviour that tanked the market in the housing crash. And they will even use the concept of top down class warfare as an argument even thought they are the lending class! I frankly don’t trust these guys and buyers shouldn’t either.
My only disagreement regarding the Carney article is that he does not acknowledge the real class warfare from the top that exists through easy money lending. CNBC has a history, through Kudlow and others, of not admitting to real top down class warfare. It probably was just an oversight by Carney, but I think it is worth pointing out CNBC’s historical view of the subject. Nothing the rich do in Kudlow’s mind seems to amount to class warfare, which, he says always comes from the lower and middle classes.
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