RECKLESS MORTGAGES BROUGHT FINANCIAL MARKET TO ITS KNEES

September 23, 2008

With the government takeover of Freddie Mac and Fannie Mae as well as other bankruptcies in the financial sector, there are a lot of questions.  The strangest fact is that the housing sector is having such problems when the economy otherwise has been doing well.  Why have there been so many defaults when the economy has not been in a recession, asks John R. Lott Jr., the author of "Freedomnomics" and a senior research scientist at the University of Maryland?

The defaults could be the result of rules that were created to accomplish the "noble goal" -- an increase in home ownership among poor and minority Americans.  Accepting these rules and criteria were hardly voluntary, with the Fed warning banks that failure to comply could subject a financial institution to civil liability for actual and punitive damages.

However, those rules now involve outdated criteria, says Lott.

Credit history:

  • Lack of credit history should not be seen as a negative factor because in reviewing past credit problems, lenders should be willing to consider extenuating circumstances.
  • For lower-income applicants in particular, unforeseen expenses can have a disproportionate effect on an otherwise positive credit record.

Down payment and closing costs:

  • Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants.
  • Lenders may wish to allow gifts, grants or loans from relatives, nonprofit organizations or municipal agencies to cover part of these costs.

Sources of income:

  • In addition to primary employment income, Fannie Mae and Freddie Mac will accept overtime and part-time work, retirement and Social Security income, Veterans Administration (VA) benefits and others and valid income sources.

Given these lending practices mandated by the Fed and encouraged by Fannie Mae and Freddie Mac, the resulting financial problems for financial institutions such as Countrywide and Bear Stearns are not too surprising, concludes Lott.

Source: John R. Lott, Jr., "Analysis: Reckless Mortgages Brought Financial Market to Its Knees," Fox News, September 18, 2008.

For text:

http://www.foxnews.com/story/0,2933,424945,00.html

 

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