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Mortgage Crisis

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An Overnight Fix to the Housing and Mortgage Crisis--Bring Back Assumable Mortgages

September 24th 2007

Edwin Black

No one needs to be reminded that a significant segment of our population has become geographically and financially immobilized by an infectious condition known generally as “the housing and mortgage crisis.” Make no mistake. The crisis involves not just the so-called “sub-prime” business, but ordinary creditworthy consumers battered by financial misconduct and over-speculation by developers.

People can’t move on because far fewer people can move in or move out. Too many houses exist for too few buyers. Prices have tumbled. Inventories of unsold parcels have skyrocketed. The whole concept of property as “a sure bet” in America has been threatened. For each person who cannot sell a house, buy a house or suffers a foreclosure, the pain and hurt is multiplied like a slow-moving epidemic throughout the domino-structured housing market. Our national housing crisis in turn is flattening or eliminating hundreds of thousands of jobs and economic vitality.

Now to the overnight fix: Bring back “the assumable mortgage.” The financial world abolished this age-old method of home buying and selling during the financially turbulent seventies and eighties when President Jimmy Carter’s double-digit inflationary society inspired the rapacious mortgage lending industry to pressure the last one to five percent assumable loans out of existence and contractually prevent any new ones.

But if Congress would pressure the financial industry to re-enable such assumable mortgages—then qualified, bankable buyers could buy and move into anyone’s home by merely assuming the existing mortgage. Closing costs and normal qualification would still remain a lender’s prerogative and financial benefit. This relief would only be available for actual residents, not flippers or speculators. To be sure, a two-year qualifying residency would be required limiting the program to actual home dwellers.

Assumable mortgages means far less additional equity would be needed to pay the seller the difference between the assumed mortgage and the actual purchase price. That is a reduced risk which could be more safely extended by traditional lenders, or perhaps a home financing beast of government either as primary underwriter or guarantor.

“Congress could not pass a law changing existing home mortgages,” explains real estate attorney David Pordy, managing partner of Shulman, Rogers, Gandal, Pordy & Ecker. “But,” says Pordy, “Congress could certainly pressure the industry. Believe me, Congress gives them enough favors.” Pordy says that he and others saw the collapse coming for a long time. At times he was so disgusted with pending transactions, he refused to work with some mortgage brokers.

While Congress cannot rewrite existing contracts, Congress should ensure that new mortgages moving forward include the assumable feature that served American prosperity so well during post-World War II decades.

Just as important, the pre-existing first-time thin-ice buyers—that is, the waiters and carpenters and recent college grads who were seduced into home ownership with so-called “no-doc” loans, should be allowed to refinance with or without qualifying documentation based upon a flawless record. To have induced thousand of marginal people into mortgages is one thing. To deny those same people with perfect payment records the right to renew an ARM because of new rules disallowing “no docs” is just heightening the injustice.

But assumable mortgages, a government program to cover the equity difference, and an assured renewal for anyone with a perfect recent payment record is just the beginning.

The swift sword of governmental recovery must begin swinging. By now, everyone knows how we got to this sick state. The disease that brought us the collapse of the savings and loan industry in the 1970s and 1980s, which famed economist John Kenneth Galbraith denounced as “the largest and costliest venture in public misfeasance, malfeasance and larceny of all time,” is the same social malady that has repeatedly helped destroy other major sectors of our banking and financial infrastructure generation after generation. That socio-economic virus is “personal greed” and it thrives most in the absence of dogged regulatory oversight.

Predatory and anti-social lending figures operating through big and small mortgage companies have caused the present tsunami of foreclosures which have in turn tightened mortgages. Get-rich-quick lenders “ARMed” a large segment of our homeowning society knowing the chances were good that the increase one, two and three years down the road would be so bad people would default or seek to refinance. It was all deliberate. Whenever someone is taken advantage of, someone else reaps the financial benefit. The wrath of asset-seizing enforcement officers and prosecutors should be let loose against these culprits.

Just as the Office of Thrift Supervision and other regulators over the past decade or so went on a crusade of asset seizures, civil monetary penalties, restitution efforts, and consent decrees directed against bank officers, appraisers, attorneys and accountants, so it should be for this latest scandal. Recovery and prosecution must extend not only to the bank hierarchy, but to their accomplices, namely the appraisers, settlement officers, realtors, attorneys and accountants. Mortgages are complex transactions. Predatory and ill-advised home loans were not one-man jobs.

Without the return of assumable mortgages, without a government-controlled secondary lending program, without allowances for reliable no-doc ARMed homeowners, and without junk yard dogs in the government seeking economic sanctions, we cannot begin to solve this crisis. Financial band-aids will make good sound bytes. But they will not even begin to make sound policy. And we will see the current crisis widen, and repeat itself time and again.
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Edwin Black is an investigative author specializing in corporate and financial misconduct.


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