A while back when the house was debating HR 3915 - The Anti Predatory Lending Bill, I had the pleasure of talking with one of the guys who was doing the grunt work on this bill for my congressman, Lacy Clay.  In that conversation he told me that lending had gotten way out of hand and that too many people who didn't deserve loans were getting them.

I have to admit, I agreed with him to a certain extent.  I don't think that people with bad credit, no money and who aren't able to document their income should be getting home loans.  When they got to the point where they were doing loans for people in these situations, it was obvious that the pendulum had swung too far. 

Now I just got an email from one of my investors saying that they are no longer going to be doing Fannie Mae Level II and III loans.  I also understand that many of the PMI companies are no longer going to be insuring loans where the borrower has less than a 620 credit score.  I think that this is a case of a knee jerk reaction that is causing the pendulum to come crashing back the other way.

I'm not signed up with that many investors, so I don't know if this is something that is going on industry wide, but if it is, I think that the reaction to the mortgage crises is getting out of hand.

To those of you who don't know, Fannie Mae and Freddie Mac utilize automated underwriting to classify loan applications that are submitted to them.  These computer programs look at the various aspects of a loan file such as the borrowers credit and job history, as well as the loan to value, savings patterns and a host of other considerations that they are programed to access. 

While I have always had a problem with the fact that Fannie and Freddie don't truly provide for an appeals process in the event that the loan officer feels that the computer got it wrong, I do think that over-all the computer didn't do a bad job.  The end result was that if a borrower got rated a level two or even three, they would end up paying more for the loan, but they still ended up with a Fannie or Freddie loan that didn't have a pre-payment penalty or an adjustment period that would put them at risk further down the road.

Even in the event that the computer got it wrong, the people could fix whatever the problem was and refinance without too great a penalty.  The key point being that they got the home! Also, from what I understand, these loans have actually performed rather well and have not experienced a foreclosure rate that much higher than loans that received higher ratings from the computer.

Now it seems like the folks who would be in this situation are going to start being denied the privilege of owning a home all together.  

From what I understand, one of the reasons that this is happening is because the PMI companies are starting to have difficulty getting insurance on the bonds that they issue to raise capital.  No bond insurance means that they have to stop issuing pmi policies. So in essense, these folks are actually being penalized twice.  Once for whatever reason that they would have gotten a level approval, but also a second time because the bond insurers made some bad decisions.

The end result is that home-ownership is being denied to a large portion of our society.  That, by itself, would be bad enough, but the truth of the matter is that it's also hurting the rest of us as well.  It's hurting the rest of us because it's reducing the potential number of buyers out there.  This reduction in demand means that home prices are going to continue to decline (at least in the short run).

With home prices declining, consumer confidence is also likely to continue to decline which will result in consumers reigning in their spending.  This is turn is leading us towards a recession (if we're not already in one).  

Frankly, it's time for our leaders to stop pussy footing around.  It's the HOUSING MARKET STUPID!  The talking heads can dance around the issue all they want, but until something is done to stop the slide in housing values our economy is not going to prosper.  

It's truly not that hard to comprehend.  You can cut the discount rate until you're blue in the face and all that is going to do is to make the banks richer and our dollar worth less.  FACE THE FACTS!  Homeownership needs to be protected and encouraged.  If you would like to read more about what I would do to correct this situation, please feel free to read my article, "Four Concrete Steps To Stop The Slide In Housing Values" 

R.B. "Bob" Mitchell

ValueList Real Estate Services, Inc. 

Bob Mitchell is the president of ValueList Real Estate Services, Inc., St. Louis' largest discount/full-service real estate and mortgage company.  To find out more about Bob, ValueList or our flat-fee listing program please feel free to visit our web page, valuelistre.com