President Obama’s got a new plan to fix the mortgage industry, and boy is this one hard hitting:
If the Obama plan for simplifying the mortgage process is approved, here’s how it might work:
The government would give its seal of approval to a handful of mortgage types — a standard 30-year fixed-rate mortgage and perhaps a few varieties of adjustable-rate loans. For a loan to get the "vanilla" label, the lender would have to verify borrowers’ income and have them set aside money for property tax and insurance.
Borrowers would still be able to get mortgages that don’t pass the government’s vanilla test. But they would be warned about the risks.
WARNED about risks. That should put a stop to the insanity, shouldn’t it? You could still throw caution to the winds and get a "risky" loan though:
[C]onsumers who take out mortgages would automatically get a "plain vanilla" loan — such as a traditional 30-year fixed-rate mortgage — unless they opted for a riskier variety.
I wonder why the vanilla loan is "automatic"? Does the administration assume that the foolish or uneducated wouldn’t bother asking about other types if plain vanilla choices are "automatic"?
I can almost see myself seated in front of an L.O. [Loan officer] now…
L.O.: Good morning, Ms. Twist. Have a seat. What can I help you with today?
Twist: I’d like to apply for a mortgage loan.
L.O.: [Stunned silence]
Twist: Please pick your jaw up off of the desk- that expression doesn’t become you. I always said I was going to get around to this eventually.
L.O.: Does this mean that hell has…?
Twist: No, it doesn’t. Come on, I’m trying to make a point here.
L.O.: Right. [Reaching for a stack of forms.] Sorry. Let’s just start filling out these forms. Full name please?
Twist: Aren’t you going to discuss my mortgage options with me first?
L.O.: Don’t be silly. If I do that, the next thing you know, you’ll demand a zero down, neg am loan. I’d probably give it to you, you’ll default within 12 months and insist that you were the victim of predatory lending. When that happens, I lose this job and the next thing you know, I’m asking my customers if they want fries with their purchase. No thank you. We’ll just stick with the certified, grade A plain vanilla mortgage, shall we? Like I said before, full name please?
Twist: Could you define a plain vanilla mortgage for me?
L.O.: A traditional 30-year fixed-rate mortgage.
Twist: Well what if I want….
L.O.: I thought we just went over this!
Twist: A 15-year fixed-rate mortgage?
L.O.: Oh, [Chuckles.] you were just messing with my head, weren’t you? That’s plain vanilla enough. You had me worried for a minute. Let’s get back to the form…
Twist: What if I want to put down 10%? 20%? Zero?
L.O.: We can fill that in automatically. It keeps you from making a poor decision.
Twist: What if I WANT to make my own decisions?
L.O.: Did I explain to you how much I really dislike fries? I couldn’t handle the smell. Please…
Twist: What if I want an adjustable rate loan?
L.O.: What variety?
Twist: What do you mean, "What variety?" Garden variety, I guess.
L.O.: You had to go and do that, didn’t you? Now before we proceed, you’re going to have to watch THE VIDEO.
Twist: THE video? What video? Why do I have to watch a video?
L.O.: The law clearly mandates that anyone who wants a non-vanilla mortgage be shown Practicing Safe Mortgage Borrowing- Avoiding Risky Flavored Mortgages. A garden variety adjustable rate mortgage is considered "risky".
Twist: I didn’t say I wanted an A.R.M. I just said, "What if?"
L.O.: There’s no use you trying to impress me with the fact you know the acronym now. You brought it up, so you need to watch the video.
Twist: What if I refuse?
L.O.: I’m sorry, but I’m afraid I’m going to have to insist. It’s your own fault you know. You could have just gone with the certified grade A plain vanilla mortgage, but no, you had to go and start asking questions. You know, it was people like you back in 2006 who messed up the housing market for the rest of us in the first place!
OK, so maybe the process wouldn’t go exactly like that, but it sure sounds like it!
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talk about locking the barn door after the car has been stolen!
Today, virtually no option arm loans exist, and the interest rate comparison between loan types makes only fixed rates worth considering.
I just checked my local credit onion: the 30 year fixed rats is actually LESS than the 5yr and 7 year arms, and only .75 more than the 3 year arm. Now, from my experience, I know there are still buyers out there stupid enough to take an ARM at the same rate as a fixed, but who cares? I’d bet 97% of all loans today are fixed rate!
Or… just throwing this out here… let the lenders.. you know.. fail? If Obama’s administration stopped covering lender losses, then perhaps they wouldn’t have to dictate what kinds of loans the lenders can provide. Don’t bail out stupid lenders, and the problem will correct itself. Hell, like azrob pointed out, the lenders are -already- trying to fix the issue, making adjustable mortgages cost more.
If an individual/company wants to take a risk, that’s their right, as long as they don’t misrepresent that risk to other parties involved. Next thing you know, the gov’t will be looking at loans to startup companies and denying them if they feel the startup won’t succeed or will compete with existing companies (we gotta save teh jobz!!)
But that just makes too much sense, I suppose..
Rob:
That conundrum (adjustables are lower than fixed) is predicting that we’ll see lower rates in the future (at reset), not higher rates. Put that in your thinker and consider what that means…
Line:
Not to be jaded, but the Federal government would never help startups. They don’t pay enough campaign contributions.
Chuck Ponzi
this plan is relative genius compared to the stimulus plan, health care, cap and trade, missile defense cuts, etc. etc. etc.
Good morning citizens. It’s 8:00 A.M. You know what that means. “Global Warming and Your responsibilities” video time. After a short recess you’ll then watch “Acorn’s guide to being a smarter voter” video. Then of course the “Obama” hour.