Friday, April 12, 2013

Uh Oh: Here Comes Another Bubble!?

Obama administration pushes banks to make home loans to people with weaker credit

The Federal Reserve and the Obama Administration are pushing for more housing loans to individuals with marginal credit which could set off a new round of taxpayer bailouts of bad mortgage loans.

Haven't we learned our lessons?  Nope.

The Washington Post reported that housing officials [in the administration] are asking the Department of Justice to assure banks they will not have to worry about financial or legal consequences should they lend to riskier borrowers who measure up to government standards and later default. [can you believe it??!!]
Under Federal Housing Administration (FHA) rules, borrowers can get a mortgage with a credit score as low as 500 or a down payment as small as 3.5 percent[!!!], according to The Post. In the event of a default, taxpayers “are on the line, a guarantee that should provide confidence to banks to lend.”  [I would say that FHA rules are already far too lax]
However, banks are rejecting low scores, with the average on FHA loans at about 700, and under some situations, the FHA can retract insurance or take legal action penalizing banks in the event of a default, The Post stated.
Does Washington DC ever learn any lessons?  I know that housing and housing prices are recovering.  It is true to some extent, but recovering from a very low level.  If you need a house to live in, then it's probably a good idea to buy a house that you can comfortably afford.  But if you're buying on speculation, which accounts for many of the transactions and holdings in the 'bubbly' areas like Phoenix, then good luck to you.

The last housing bubble long ago exhausted the pool of qualified buyers with a need for housing and have sufficient ability to service their debts.  In fact, they exceeded it by a wide margin.  Now many of the housing plays are dominated by speculators again.   I don't know how it will play out.  I don't think the economy will be in good shape until after Obama's 2nd term, so I question whether home prices will keep going up.  If they do keep going up, then I'll be more worried than now.

Lastly,  the Federal Reserve is also trying to re-ignite any bubble that it can; in housing, in gov't bonds, in equities, you name it.

I just think it's ironic when I hear the same government initiatives and rhetoric from politicians that led to the last disaster.  

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