Editor's Note: There's a new idea sweeping through the country. It's called dignity mortgages.
Backers say this new financing idea will help millions of homeowners and get the middle class back to the heart of the American recovery.
Opponents think it's a recipe for disaster that will make the first financial crisis look like a cakewalk.
Today the Fight Club is taking on this growing issue -- let's get ready to rumble...
Frank Marchant: The Dignity Mortgage Is Insanity
The definition of insanity is repeating the same action over and over while expecting a different result. If true - and I wholeheartedly believe it is, this "Dignity Mortgage" idea is insane!
The dignity mortgage is supposed to provide low-cost mortgage loans for people who lost their home to foreclosure. The loan rate is supposed to be 1.25% higher than those with good credit and would drop in five years, if they make payments on time.
Upon hearing this latest sliver of insanity, I was not surprised the left-leaning Operation Hope Chairman and CEO John Bryant suggest it was a new twist on an old disaster.
I was even less surprised when a certain baseball hat-wearing colleague cocked his hat and boldly announced he would like to debate the issue. As if there was one!
Déjà vu? Didn't we try this "homes for all" debacle already? Didn't this end up one of the biggest financial disasters in American history? Aren't we still digging our way out of the mess it caused?
The so-called dignity mortgage, in a nutshell, gives people who don't qualify for a mortgage a mortgage anyway! In some cases even the down payment is provided.
You know what, I have an even better idea: Let's just give everybody a house and call it a day!
Why fool around with all that financial stuff like, interest rates, credit scores, closing fees, points, etc.? All that confusing stuff just gets in the way of the real goal:Everybody who wants a house should be given a house.
I even have a slogan for the program: "You bring the picket fence, and we'll give you the house!" It's the 2.0 version of "A chicken in every pot!" but with gusto.
Ben Bernanke could work with each new homeowner personally! The homeowner could write a short note. (We wouldn't want anyone to work too hard). Tell Ben how much the house costs and he could print that amount of cash. He sends the cash in a brown paper bag to the mortgage company for payment. Done!
Instead of The Dignity Mortgage we could call it: The No Muss, No Fuss Cash-In-a-Bag, Instant Mortgage.
Come on! Why not? We already provide enough food stamps to feed the entire population of Spain. Free cell phones are on every corner, and now there's talk of free Internet, too!
Really, shouldn't everyone have a house to keep all the free stuff? It's not like Ben Bernanke isn't already running the presses around the clock anyway. What's a few extra billion? Maybe we could save even more money if the new homeowner could pick the cash up at the Fed in person.
This concept failed colossally the first time, and it will when repeated!
It is well intended. But like most liberals and their ideas; a bit flawed. Clearly this is yet another way to redistribute wealth and here's how they do it!
Banks will originate these loans and after a year pass them along to Fannie Mae and Freddie Mac where they will become a problem for every taxpayer when not paid -- once again.
There is not a reason in the world for me to believe that the same person who didn't pay their mortgage the first time will pay their mortgage now.
What is needed more than a hand out is a hand up!
The Department of Motor Vehicles educates and monitors licensed drivers. Education should be mandatory for everyone getting a first mortgage. The new mortgage holder should learn: how to become and stay employed; how to pay their bills in a timely fashion; and how to care for their home!
There is more to owning a home than just living there. The concept should be taught, to treat your home like an investment. Live there, enhance the property value and then sell for a profit. Voila. If you can't do that, rent.
If we can find a way for all homebuyers to do this, we all win! Passing out free mortgages isn't the way to prosperity, it's the fast track to yet another disaster!
Garrett Baldwin: Bank Leaders... not Homeowners... are the Real Deadbeats
Dignity mortgages provide a critical opportunity to help struggling, average Americans get back on their feet.
Despite the sirens and concerns from my detractor, aka the Man in the Sweater, this program isn't close to welfare or a devious plan to start another housing bubble.
This is a program designed with sustainability of the middle class in mind. I stress the Middle Class, because I'm sick and tired of people calling ordinary Americans "deadbeats," like one daily financial paper did recently when discussing this program.
These loan-seekers aren't deadbeats.
Some people think we're re-inflating the housing bubble. Others think that these people are somehow living off the system with their feet up in a hammock. They aren't.
These are middle class Americans looking for opportunity, and they aren't getting one from a financial system designed to suck every penny from their pockets.
Dignity Isn't a Bad Thing
Need proof these are not welfare recipients? I have it covered.
Dignity mortgage loans are designed for people who a) have jobs (show proof of employment), b) have saved enough for a 10% down payment, c) are willing to pay a higher interest rate, and d) struggle to qualify for a loan after the bottom fell out of the lending market. These individuals will pay a higher interest rate premium for the opportunity.
For example, these subprime loans might require a borrower to pay 1.25% more than a typical loan. So if a creditworthy borrower would pay 3.25%, dignity borrowers would pay 4.5%. After five years of timely payments, the mortgage lowers to ordinary lending standards.
This is a project designed to help people reestablish credit. Given that the banks aren't loaning to them now (and weren't held accountable for their blatant disregard from 2004-2008), it's only logical to improve the health of the middle class homeowners who lost everything and ultimately found themselves with credit scores in the low 500s.
As you may know, the difference between building and maintaining good credit in the high 600s, and being stuck in the low 500s is life altering. It reduces interest burden and puts more money in their pockets after five years of hard work and diligence. It gets them on the right track.
Greed Built the Bubble
The very notion that we are having a debate over subprime lending shows that some individuals fail to understand the primary causes of the financial crisis -- human nature, and the blatant con-artistry of the housing markets leading to the crash.
Here we are having a debate about whether we should enable individuals to have some level of homeownership and put them on a path to the American Dream, and it quickly gets scuttled into red herrings about socialism, bubble inflation, and these people being "deadbeats."
Remember, Investor's Business Dailycalled these individuals "deadbeats," but then spent the next five pages of the newspaper talking about record profits for the banks. Did they forget who lobbied for lower lending standards... who sliced and diced mortgages... who required trillions in bailouts because they refused to be accountable?
The homeowners suffered when they lost everything in the crash. Meanwhile, the banks walked away scot free. No one in Washington lost their jobs, and no one on Wall Street was thrown in jail. Yet there is still some incessant and illogical desire to go after ordinary American homeowners and blame them for the entire financial crisis.
Blaming the entire U.S. population of subprime homeowners for the housing crisis is like blaming all the fish in the sea for a tsunami.
Frank, do you know how collateralized-debt obligations work?
Neither did the banks. But they made the financial sector and investor class a ton of money, and left us holding the bag.
Homeowners seeking loans were not the primary reason why the financial crisis happened. Instead, look at two things: First, the Commoditization Act of 2000 that allowed banks to get people to sign the dotted line at all cost, then ship the mortgage off somewhere else and not be held liable for the risk.
Second, leverage. In 2004, banks were able to raise their leverage standards to 31-1, levels that hadn't been that high since the start of the Great Depression.
Start there, and work backward. Capitalism on its own survives... crony capitalism fails and crashes in a horrid spectacle. Capitalism relies on rational actors...
The financial crisis featured zero.
If banks weren't lobbying for special treatment and were doing their job in the first place, there would have been loans designed like dignity mortgages that require higher interest payments given the risk of the loan. Instead, we were living in a time of pure speculation where there was no principal required.
"Just sign this loan, no money down... don't worry about it... Trust us... Come on... trust us..."
Regardless, these dignity loans are going to help this economy. A strong economy is not possible without a strong middle class... and building a strong middle class relies on individuals having assets to help them build a nest-egg and something of value for them down the line.
If you want to keep people off welfare, allow them to own a home and build wealth. Rather than have people spend thousands of dollars a year on high rents, allow them to own a home with a mortgage that is less than the rent they are currently paying.
With rents so highly priced, it makes categorical sense to allow individuals to own their own home. If their rent is higher than what a mortgage payment would be, then what exactly is the problem?
As it is readily apparent, the job of the banks over the last eight years had been to suck every dollar out of the pockets of Americans... and then suck even more out of their pockets under the guise of bailouts, capital injections, money printing, and crony capitalism. No one cared about average Americans.
We have to stop blaming homeowners for the crisis and attempt to build a healthy middle class.
No one is advocating socialism or massive wealth redistribution here. But there are things that lie between radical socialism and unfettered libertarianism. Programs like this educate and counsel individuals, and help them get on a path to financial wealth and independence -- the only sure source of freedom in this world.
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