07 March 2008

More Mortgage Bailouts?

Reuters reported yesterday that Senator Chris Dodd will put forward legislation aimed at “setting up a federal entity to spend billions of federal dollars buying up faltering home loans at a discount.” The idea is for a federal agency, either new or existing, to use tax dollars to buy existing mortgages, then refinance them for the home owners “under more favorable terms”. Additionally, these government refinanced home loans would be “insured by the Federal Housing Administration (FHA) or backed by government-sponsored housing finance giants Fannie Mae and Freddie Mac.”

Perhaps it’s just me, but I think that creating or extending a government agency to make a more favorable loan environment for folks who are in self-created mortgage trouble is wholly out of the federal government’s scope. The act of buying and refinancing home loans would essentially use American tax dollars to somewhere justify and placate bad economic behavior by buyer and lender alike.

While I recognize that perhaps something needs to be done, I do not believe that the federal government needs to be the cure-all. Perhaps closer oversight of loan policies is what’s needed. Perhaps banning of “balloon payment” type loans is in order. Perhaps sound, verifiable documentation should be required before a home can be purchased. While these remedies aren’t retroactive, they would certainly guard against future bubbles. Now, I’m not an economist by any stretch…but they seem like reasonable measures to me as an everyday mortgage holder. Much better than adding an arm for financing to the federal government, which already backs many home loans.

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