Friday, May 8, 2009

Subprime Lending Is Back With A Vengeance

This time, led by the state governments and the federal government, according to article here by Andrew Jeffery. [emphasis is mine]

"Just when you thought it was safe to go back in the water... Subprime lending has come roaring back.

"But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.

"If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.

"The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent."

So far, Mr. Jeffrery says, the criticizm of these scheme is that it is not doing enough. (That sounds familiar, too.)

"States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.

Oh wait, didn't you just say that they would get $8,000 credit if they meet certain eligibility requirements? What are the requirements? That they breathe?

"......States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea. "

So the money won't even reach the homebuyers; instead, it will go directly to the states' coffers.

"In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.” "

Shouldn't those would-be first-timers, if they cannot save money for down payment and closing costs, be renting? Wasn't that the lesson we were supposed to have learned in the past 2 years or so?

"In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government -- and now state governments as well -- insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford. "

Mr. Jeffery's punchline (I'd suggest you follow his link and take a look):

"From the looks of it, Washington is leading by example. "


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