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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.
Now that you've read this bare knuckles brawl, it's time to turn in your scorecard.
Choose the winner of this tussle by voting below.
Pick Today's Fight Club Champion
I'm about as conservative as you can get but garrett's right about the crony capitalism being more responsible for 08 than the unqualified who signed. I would like just one change to the proposed program, the banks who write the loans have to hold the paper with no government insurance on the loan. what no takers?
Frank has a strong argument, and Garrett has good points about no one owning up to the losses created by those insane CDOs which everyone knows was the leading cause of the crash. So let's put Frank and Garrett in a room and not let them out until they arrive at a solution!
Mr. Garret is right dignity loans would be a great help to middle class in my case our
property in BC Canada, we were forced into selling lender was paid out in full but credit
rating agency will not remove it from my credit file this property sold in April 2011. It is
still affecting my ability to borrow. Three lawers told me Equa Facts is the worst of the
Credit Rating Agencies in Canada Thank You Robert Butt
Frank takes points for steamy outrage, Garrett scores TKO with intelligent points. When people finally realize it is the banksters that are the real cause of our macro economic problems, maybe it won't be too late to reign in their unbridled greed, if not their callousness.
There are enough abandoned homes that are being vandalized and misused that don't belong to anyone now that could be given, with some reasonable requirements, to displaced families. There is no need to give away money or build any more homes. Just place families in them, give them some community service work and the healing can begin.
Both gentlemen make good points, but generating a solution ahead of the market is asking for those usual unintended consequences that result from government intervention. I say let the market repair itself. As for someone "paying" for the collapse of the housing bubble, ain't gonna happen in my lifetime, too many vested interests.
You know some of us that lost are homes weren't deadbeats. I owned a home decor store that did amazingly well till the housing crash! I paid my bills on time and was living the american dream. Unfortunately I lost my business. My now ex husband was payed salary and commission and couldnt handle the financial and emotional stress so we lost it all. He finally walked out on our family leaving a mom and kids to defend for ourselves after a four year legal battle I finally get child support and now alimony. I have been working as hard… Read more »
Wait a minute. If one borrows money for a car/home/whatever, doesn't he have a personal responsibility to be reasonably sure he can make the payments? To claim that Barney Frank's social welfare program to coerce banks into lending to unqualified borrowers, and the banks' reluctant willingness to do as the federal government ordered them, is responsible for borrowers being too stupid or irresponsible to avoid signing loan agreements they couldn't honor is not just naive, but dishonest, maybe even malevolent.
Garrett is absolutely correct! Why is it that the "authors" of such "idiocracy" that figured out how to STEAL from us TWICE (once directly and secondly in bailouts) continue to pile on the profits with NO ONE going to jail? Where are these profits going? To workers? (NO) to managers (NO) but to CEO's and owners.
And nothing has changed. The august House of Representatives wants to weaken already wimpy Dodd-Frank so the whole mess can continue. Reinstate Glass-Steagall, and support state banking modeled by the Bank of North Dakota. For good measure let's actually prosecute some of those responsible for gambling with the world's financial resources, eliminate risky financial products created just to provide something more to gamble on, restore some sanity to the wage disparity (Can anyone truly justify paying someone thousands of dollars an hour or more, while paying someone who serves their meals at a restaurant $2.10 an hour? It is easy… Read more »
It was Mitt Romney that called 47% of Americans deadbeats, you need to keep the politics out of your articles. Turns people off. Romney lost the election. All liberals do not think like you think they think, many are hard working individuals that pay their bills, keep up their properties, and are not on any type of subsistence.
They say the devil is in the details and unfortunately, the details of the program are lacking. First, Garret's discussion of the banks being greedy and guilty is irrelevant here. While I agree that they have some guilt, it really is not important to this discussion. Two wrongs don't make a right. The question really boils down to this; will this program be another boondoggle or will it help those who are able to afford a home but due to present circumstances, not be able to get a home, and thus, truly help the economy? Let's ask some questions. First,… Read more »
While agreeing with most of your comentary about Dignity mortgages, I take issue with one statement in particular. "The new mortgage holder should learn: how to become and stay employed;". How can you expect the general hard-working person to do that rediculas statement when they are for the most part, fighting the greedy corporate owners that dump them on the street after working faithfully for almost enough years to retire. The key word here is "Almost". I have seen over and over how businesses have filed bankruptcy then after the employees are put in a position to lose everything, the… Read more »
When you give a person a second chance, they should not be rewarded for the previous failure. Just let them line up with the rest and judge the application based on its merits.
Garrett Baldwin Has It Right!!! I am a 75 year old General Contractor and have been building and selling homes to the average middle class American for 55 years and have experinced all of the ups and downs during those years. It has been a constant battle with banks and mortgage companies and interest rate swings, etc, trying to find ways that people could afford to buy a home, it is a very difficult business, most of the difficulty is with the banks. The banks are the major problem with our housing, economy and the belittling of our American middle… Read more »
One thing keeps puzzling me; if someone in line for a dignity loan has problems with paying bills, making payments and has a limited income etc. why are they supposed to pay a higher interest rate? Does a risky borrower suddenly become less risky when charged with a higher interest rate? Really? Doesn't this makes it even more difficult for them? I am convinced that the housing crisis could have been a lot mitigated, if not prevented, if right at the beginning when teaser interest rates expired all mortgages would have been frozen at the lowest market level. I know… Read more »
And why were banks lending to people they knew couldn't afford a mortgage, and then packaging and selling these loans as a collatoralized investment? Does anyone remember the "Community Reinvestment Act"? They were mandated to give these loans by Congress under threat of "penalties" Don't lay all the blame on the banks as once again the politicians are the source of the problem. I blame a meddling Congress who is always mucking things up, and sticking their collective noses where they don't belong.
It frightens me that results are 50/50. Do half the people in this country forget that making loans to people who did not qualify for a loan is what caused the economic situation we are now trying to recover from ?
What Garrett neglects to take into account is the pressure Bill Clinton's AG put on banks to lower their lending standards allowing poorly qualified people home mortgages. Reno threatened lenders with federal lawsuits if the banks didn't comply. A do-good law, the Community Reinvestment Act, signed by Carter in '77, enabled Clinton to create this mischief and it was all based on the socialist idea of wealth redistribution.
Bob Colby (comments) and Frank got it right; Garrett got at least part of it wrong. To buy more votes and get re-elected, our Princes and Princesses in DC pushed the CRA on the banks and others. Read the official transcripts. Old Barney pointed the finger at everyone but the true culprit in the mirror. Google "Barney Frank roll the dice" for just one of the smoking guns. And Garrett, the last thing banks want to do is lower their lending standards; that drastically increases risk… unless, of course, the legislators set-up conditions to mitigate that risk. Which they did.… Read more »
I like the idea of the interest rate going DOWN in a year or so. One of the problems was the balloon payments and interest going UP after 5 years in the old loans. People were always hopeful their situation would improve in five years, and when it didn't, they were in over their heads. I read somewhere that REAL wealth has only gone up 4% in the last 36 years for the bottom 50%. Not 4% a year, but 4% total!
The more those in charge make people look at piecemeal aspects of something, the easier they distract us [like magician's do] from what is really going on – the bigger picture > ACCESS TO CREDIT. They know and control that simple principal – because they have the sheer power to keep access. Up front, I am an independent, responsible person, but against the current banking system; it is prejudicially set up to insure the banking elite, linked with the political elite however you want to describe it, always have access to credit and all others [except large corporations] so intermittently… Read more »
Capitalism fails when ethics are thrown out the window. Our society as a whole has been degrading ethically for at least 40 years if not more. It's so obvious at so many levels it's simply self-evident. The sheer number of laws and regulations in existence is proof of the erosion of common ethical decency, requiring more rules to fuel more lawyers and create a society perpetually thrashing in the courts. Systemic ethical failures are exemplified by corrupt institutions such as the government, banks, and wall street. The proof of systemic ethical failure is simple … people who should be fired… Read more »
Garret makes a good point about the banks not having been punished for their role in the financial crisis. However, this program would not solve that problem. The solution to that problem is to go after the banks and investment firms responsible for this mess. Give them more than just a hand slap fine. Put those responsible in jail. However, that issue should not be used as justification for this program. I'm inclined to agree with Frank that this program just takes us down the same path all over again.
A simple equation:
Too big to fail = Too small to survive.
OK, the mortgage industry was working fine until we stopped underwriting the loans. FHA was the means of getting younger people qualified to buy a house. They paid 1+% up front mortgage insurance, and 1+% per year in that same insurance. Oh yea they had to have a job, decent credit and a decent debt t income ratio. OK FHA, Fannie and Freddie were doing fine. Then in the late 90s well Wall Street got into the act. Well we really don't need proof that you have an income, ah what the hell, forget the down payment. These programs backed… Read more »