Previous month:
January 2, 2023
Next month:
January 4, 2023

RISK, RISK, WHO'S GOT THE RISK?

Dice-whiteHave we learned nothing from the 2008 mortgage meltdown and the near collapse of our financial system?

Essentially, regulators allowed mortgage originators to evade sound lending practices to offer home mortgages to those who couldn’t qualify to purchase a vehicle, let alone a home.

Through a confluence of events, the risk of mortgage default was transferred from the mortgage originator to the Wall Street Wizards, who thought it was an awesome idea to run the mortgage through a shredder and sell off individual strips to investors who were being offered above-market returns to assume the risk of default. Of course, to make this palatable to investors, the same Wall Street Wizards had to invent non-insurance, not based on sound actuarial principles and maintained reserves, but on wonky spreadsheets based on the faulty assumption that real estate valuations only went one way – UP! Of course, with minor market fluctuations.

These two entities Fannie Mae and Freddie Mac are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.  The two mortgage lenders are essentially a "public policy instrument of the government." ~ Barney Frank

Even the House Financial Services Committee Chairman, Representative Barney Frank (D-MA), assured everyone that all was well in the mortgage markets – until weeks later when it wasn’t, and they were placed under conservatorship. But the heavy hand of the regulators ignored sound banking policies as they opposed efforts to reform the government-sponsored mortgage giants Fannie Mae and Freddie Mac, which were eventually bailed out at great cost to taxpayers.

A not-so-hidden danger…

Of course, following the financial debacle, legislators created the Dodd-Frank Act, named after two of the most corrupt legislators in Congress, and which pretended to limit the size of systemically important financial institutions (surprise, they are bigger than ever) and to limit the risks of another massive taxpayer bailout.

This leads to the “bail-in,” where financial institutions can grab their customers’ money and use it to stave off their potential financial insolvency. Of course, there is the fiction of federal guarantees from FDIC (Federal Deposit Insurance Corporation), NCUA (National Credit Union Administration), and SIPC (Securities Investor Protection Corporation), whose guarantees do not ensure immediate reimbursements for losses.

Why am I concerned?

Rocket Mortgage Introduces Purchase Plus, Helping Make the American Dream of Homeownership More Attainable

Special purpose credit program offers up to $7,500 in lender credits for first-time buyers in underserved communities to eliminate a significant hurdle to homeownership

DETROIT, December 27, 2022 – Rocket Mortgage, part of Rocket Companies, today introduced Purchase Plus, a special purpose credit program intended to increase accessibility to homeownership in underserved communities. The new initiative offers up to $7,500 in credits for first-time homebuyers to use toward their mortgage costs. Purchase Plus is available in specific census tracts across six major cities where potential homebuyers could benefit the most – Atlanta, Baltimore, Chicago, Detroit, Memphis and Philadelphia.

“Homeownership has a significant impact on strong communities and the creation of generational wealth,” said Bob Walters, CEO of Rocket Mortgage. “Our Purchase Plus program is a catalyst that will help narrow the homeownership gap by addressing a concern we’ve heard time and again – the difficulty of saving for out-of-pocket expenses when buying a home.”

Saving for a down payment is often cited as one of the largest barriers to buying a house. Purchase Plus can help alleviate this hurdle by providing eligible homebuyers in one of the six cities a base credit of $5,000 plus an additional lender credit totaling 1% of the home’s purchase price – up to $2,500 – for a potential savings of $7,500.

Another benefit of Purchase Plus is the elimination of exclusions based on area median income, broadening the scope of who can take advantage of the program. The first phase of Purchase Plus will focus on specific census tracts in each of the six cities and their surrounding metropolitan areas – areas where the initiative can make the largest impact in bridging the homeownership gap. <Source>

It should be noted that the ability to provide a down payment, in essence, to have skin in the game, is one of the fundamental indicators of serious first-time borrowers and a severe impediment to those who can take possession of a property with no money down -- only to live rent-free until legal proceedings. Likewise, the ability to pay closing costs upfront is an indicator of individual responsibility.

It should be noted that many areas in the specific census tracts noted in Rocket's plan are declining in value as they age and decay. The cost to repair, restore, and maintain those properties may be a significant factor in upcoming mortgage defaults.

While it may be possible to find prime mortgages among borrowers below the median income, it is unlikely. A condition leading to the creation of more sub-prime loans which use gimmicks to entice borrowers to apply for loans they cannot afford.

Since big companies are about making profits, it is important to follow both the money and the transfer of risk as these behemoths navigate a poor economy. Hoping the practices of the past do not lead us into financial disaster.

Bottom line…

Financial executives, most of whom are personally insulated from the consequences of their policies, as are legislators, appear willing to earn big bonuses by gambling with your money.

Perhaps it is time to remember that some regional banks without massive exposure to certain industry sectors like mortgage and auto lending, may be a safer bet than the banking behemoths who often shade their fiduciary duties to protect their interests at the expense of their customers.

Think like the Better Business Bureau, “Investigate BEFORE you invest.”

We are so screwed.

-- Steve


“Nullius in verba.”-- take nobody's word for it!

“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw

“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”

“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS

"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius

“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell

“Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar

“Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS