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Proposed QRM: An Illogical “Solution” by Muddle-headed Bureaucrats: An Editorial

Jul 16, 2011

Posted by

Charles Dahlheimer

Recognized as one of the industrys leading visionaries, Dahlheimer is publisher of The Real Estate Professional magazine and The Real Estate Executive Summary.  He co-authored Real Es Read more

Homeowners and homeownership advocates nationwide seem alarmed that bureaucrats in Washington are considering a requirement that borrowers have a 20 percent downpayment in order to qualify for a home loan.  But why would we expect anything else from the bureaucrats—the same folks who propose higher debt limits as the solution to our fiscal problems.

Consider the current rage over the debt ceiling limit.  The administration is ranting that the nation will experience a calamitous financial crisis if we don’t raise our borrowing limits.  We must be able to borrow more money or the system will collapse under its own weight.  The administration also wants to raise taxes to help close the gap between revenues and spending.

The other side is closing its ears to the doomsayers, and shouting “Stop spending!” and “No new taxes!”

Neither seems to really understand the problem. Or, perhaps, neither seems to want to recognize the real causes of the problem.

Everyone keeps going to the trough for money.  Earmarks continue to be the hallmark of political clout.  Entitlements?  Don’t touch mine! 

The problem is not the debt limit.  The problem is our inability to repay it.  And the only sane solution is to cut back spending.  And that will require some discipline—and, perhaps, some sacrifices, particularly on the part of the politicos who ensure their longevity in office by doling out benefits to their constituencies.

The same muddle-headedness seems to be fueling the QRM debate—but with a curious upside-down twist.

The near collapse of the nation’s housing market was brought about by some of the same wrong-headed ideas, making money available to just about anyone who had the desire to own a home.  (And in some instances, even to people who really had not ever thought about owning a home and who would have been much better off just going on renting.)

Major financial institutions were brought to their knees, some collapsing entirely, some being resuscitated only at the expense of hundreds of billions of bailout schemes.  In the wake of all this, lawmakers are frightened to death that it could all happen again, and the QRM solution is little more than a kneejerk reaction—as is the call for increasing the debt limit.

The argument for sizeable downpayments is based on the premise that when the housing market collapsed and the banks were faced with hundreds of thousands of foreclosures, there was not enough equity in these homes to cover the debt.  The kneejerk solution:  require more equity reserves, i.e. larger downpayments.  The homeowners need more “skin in the game.”

But this rather monolithic approach igrnores the real cause of the problem:  Why did the housing market collapse in the first place?  The answer:  too many borrowers had been victims of crazy lending practices that included “no doc” and “low doc” qualifying that allowed purchasers to borrow without any assurance that they would be  capable of repaying the loan.  Then there were the “teaser” rates, that got otherwise unqualified borrowers into loans by using initial “starter” rates low enough to make the initial payments “affordable” but that would quickly begin to escalate—with payments often escalating two, three or four times the original amounts.  To further fuel the fire, existing homeowners were encouraged to use their home equity as a “piggy bank” to draw out money to pay for all other sorts of luxuries far beyond their earning power.  All of this resulted in escalating home prices, as so many buyers scrambled to get in on the action.

Everyone reveled in the economic “boom times” and regulators held mortgage rates at unprecedented lows while seeming to look the other way as lenders waived some of the most basic, common sense requirements in order to push the money—and the homes—to the largest possible segment of the population.

But the inflated prices were unsustainable.  That meant that values would have to begin falling off.  The “starter” rates expired, and for many borrowers, the monthly mortgage payments began to zoom past their ability to pay.  The basic problem was that people had been allowed to borrow money that they were nowhere near qualified to continue repaying.

The lack of a larger downpayment did not bring about the crisis.  Lack of equity in these homes was only a secondary problem, and one that became a part of the equation only after the other craziness had wreaked its havoc.  With foreclosures threatening, and with prices now hitting all time lows, these homes were “under water” because they carried more debt than could be recovered in a sale.  But they were in foreclosure not because of their high debt-to-equity ratio, but because the borrowers simply were not able to make the payment.

The QRM solution will no more solve the nation’s housing finance problems than raising the debt ceiling will solve our nation’s other financial woes.  It is not at all surprising that such solutions would be entertained.  But it is so ironic that the solution being proposed for “the other guys” (the homeowners) is to require them to have more “skin in the game”—to make more sacrifices, to scrimp and save for a larger downpayment, and to “do without” home ownership until they can build up that nest egg.  While the solution the bureaucrats want to propose for their own financial crisis is to simply allow the government to borrow yet more money, effectively reducing the nation’s “skin in the game.”

Some voice of sanity needs to be heard inside the Beltway.  Let’s hope we hear it soon.