Does the congress have the “Big Fix?”

By Joel Persinger
YourRealEstateDude.com

This past week the U.S. Senate passed S. 2338, the FHA Modernization Act. It did so to great fanfare. The California Association of Realtors even sent out a broadcast email to all of its members boldly stating, “Senate Passes FHA Loan Limit Increase! Big Win for California REALTORS!” This was supposed to be the panacea, the cure-all pill for what ails the housing and mortgage markets. Since the bill passed, my phone has been ringing off the hook with people calling to pump me with questions about what this is going to accomplish and how soon the market will turn around as a result of the Senate’s amazing achievement.

Politicians are a funny breed, and when you put a bunch of them together and ask them to solve a problem they have a very strange way of going at it. Committees are formed, hearings are held, talking points are issued, blustery speeches are given and promises are made all in the name of fixing the problem, which quite often was created by the politicians in the first place. Take the current state of the housing and mortgage industry, for example. Some years back, the congress decided that everyone in this country was entitled to own a home regardless of whether they could actually pay for it. So, the political folk put pressure on the mortgage industry to find ways to lend money to people who otherwise would never have a prayer of getting a loan. Thus, the sub-prime lending market was born.

Many years later we have a collapsed sub-prime market and a great many politicians who have been making blustery speeches expressing their shock and dismay at the fact that the evil mortgage industry has put so many people’s lives in unbelievable turmoil. Those greedy lenders have been making ridiculous loans to low income people who had no way of paying them back; never mind the fact that lenders would never have done it if congress hadn’t pushed them to do so. So, they march into the hallowed halls of congress, form committees, hold hearings, issue talking points, make blustery speeches and promise to fix the problem that the evil mortgage companies have caused.

I realize that by pointing out the classic role reversal on the part of congress I may appear to have become a cynic in my middle age, but there are some things that government simply doesn’t do well and fixing the problems it creates is one of them. By way of illustrating my point, let’s look at just one of the many issues plaguing the FHA Modernization Act which the Senate just passed. On the one hand, the Senate has expressed its concern that so many borrowers with no money were previously able to get loans. But, according to Shanne Sleder at Clarion Mortgage the bill that the Senate just passed by an overwhelming majority vote would reduce the amount of down payment that a borrower is required to have in order to get an FHA loan from 3% to 1.5%. This directly contradicts the Senate’s stated intent by lowing the bar, effectively allowing people with less money to get a loan. As Albert Einstein once said, “The problems that exist in the world today cannot be solved by the level of thinking that created them.”