Congrats! You Are A Co-Signer On Your Neighbors House

FHA (Federal Housing Association) loans used to make up only 3% of home loans in the U.S. In just three years that number has moved to 30%.

FHA loans are backed by the Federal Government which means the taxpayer is on the hook for any mortgages that default…therefore you and I are now co-signers on some a lot many most of our neighbors mortgages.

FHA has replaced the subprime lenders as the new lender of first resort. Banks we would normally go to for home loans like Wells Fargo or Bank of America, are under intense scrutiny from the FDIC to write-off or downgrade their non-performing assets.

As a result, banks have raised their lending standards to levels that most Americans can’t qualify for. That leaves the FHA as the only lender available for just about anyone looking for a home.

The trouble is, the lending requirements at the FHA are so low, that there are very few people who won’t qualify.

“The agency’s share of home loans has surged from 3% in 2006 to nearly 30% this year as credit has tightened and borrowers’ bank accounts have been depleted. But that increased exposure has led to more defaults, driving the FHA’s reserves below their mandated levels.” ~L.A. Times

“…below their mandated levels” is another way of saying, “taxpayer funded bailout coming soon.”

Our government, including Obama, will not allow home prices to return to their fundamental valuations. They insist on socializing the losses by using every taxpayer in the U.S. as a co-signer on every mortgage going bust. A moral hazard of the first order, as everyone who acted prudently is being handed a bill from our own government to bail out the foolish.

This is no different than making your child use their allowance to buy a new toy for the careless kid down the street who broke his. Why is this socialization of losses an acceptable practice to our government?

And lucky us, we’re also on the hook for renovations that home buyers want to make. That’s right, with the help of the FHA’s 203(k) renovation financing loan program, buyers can fold a loan for improvements to the property into the home loan. “Meyer folded about $100,000 worth of repairs and improvements into his $422,000 mortgage. He had purchased the home for $320,000.”

So how could this end?

“My best guess is that it will end with a crash in the housing finance sector, with the federal government forced by popular revulsion at mushrooming losses to remove itself almost entirely from the housing finance equation. The Resolution Trust Corporation will look like an amateur warm-up act…

The bottom line is simple. The continuation of “business as usual” is re-creating the essential problem that made the sub-prime crisis so disastrous. Once again, taxpayers have been forced to subsidize the private purchase of massive amounts of residential housing, and to offer guarantees against future losses, without any effort to reduce costs should their funding help turn some markets around. Warren Buffett made huge profits for his shareholders by investing in under-valued assets. By contrast, our leaders are making massive losses for taxpayers by investing in over-valued assets.” ~Prof. Andrew Caplin

Categories: Housing Market

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