Predatory lending, in my mind, is when a lender encourages a buyer to purchase a loan that they know puts a buyer at risk for default, in order to enrich either the seller or the lender. Representatives Barney Frank and Anthony Weiner would undoubtedly deny the charge, but they are promoting predatory lending in their support of relaxing borrowing standards for condominium developments:
(Reuters) – Two U.S. Democratic lawmakers want Fannie Mae and Freddie Mac to relax recently tightened standards for mortgages on new condominiums, saying they could threaten the viability of some developments and slow the housing-market recovery, the Wall Street Journal said.
In March, Fannie Mae said it would no longer guarantee mortgages on condos in buildings where fewer than 70 percent of the units have been sold, up from 51 percent, the paper said. Freddie Mac is due to implement similar policies next month, the paper said.
In a letter to the CEO’s of both companies, Representatives Barney Frank, the chairman of the House Financial Services Committee, and Anthony Weiner warned that a 70 percent sales threshold "may be too onerous" and could lead condo buyers to shun new developments, according to the paper.
The legislators asked the companies to "make appropriate adjustments" to their underwriting standards for condos, the paper added.
My friend and long time real estate agent L told me several years ago that he was discouraging buyers then from buying homes in developments that had no hope of selling out any time in the immediate future. There are a couple of reasons for this.
First, properties are virtually guaranteed to decline in value as the developer will be forced to drop prices to sell out the development.
Additionally, developers arrange the financing on a development with an assumed date for buildout. If the development does not reach buildout by that date, the developer may be forced into bankruptcy and be unable to maintain the development.
By tightening their standards from requiring 51% of units be sold in a condominium project to 70%, Fannie Mae and Freddie Mac are correctly indicating to potential buyers the risk involved. Barney Frank has indicated on several occasions that buyers should be protected from risky [predatory] loans. You would think then that he would support the tighter standards.
In 2007, Barney Frank issued a letter stating his views of predatory lending. He listed principles that he stated that the Financial Services Committee would keep in mind when drafting legislation, including the following:
All Americans should be protected against predatory lenders. We will put the best ideas and protections to work for every mortgage borrower, regardless of where they live or what institution they borrow from.
By guaranteeing a loan with a high risk of default, Fannie and Freddie would be putting buyers at risk in order to financially assist developers. If this is not predatory lending, what is?
Lenders should not make loans that they know the consumer cannot pay back or that exceed the value of the home. This seems simple – why would lenders ever make such loans? Unfortunately a number have, and consumers and communities bear the results. We will implement standards that help ensure lender and consumer interests are aligned, and that result in good loans and financially healthy borrowers.
Is it any better to make a loan on a home that is guaranteed to leave a buyer underwater shortly than making a loan that exceeds the value of the home on day one? Any buyer that plans on living in a home is not going to flip it instantly, so the net result is the same.
As Barney Frank put the following quote on his page of the website of the House of Representatives, it could be assumed that this is his stance:
Barney Frank is the only politician I know who has argued that we needed tighter rules that intentionally produce fewer homeowners and more renters. Politicians usually believe homeownership rates should – must – go higher. The rarity of Mr. Frank’s contrarian thinking is a reminder that when markets are committing excesses, we certainly should not expect Washington to act as a check on them.
Condominium developers were committing acts of excess when they overbuilt these projects. If Barney Frank really believes that borrowers should be protected from predatory loans, he should support Fannie and Freddie in tightening their standards.
Last time I checked, America was fighting the monster of too much inventory, or as Igor puts it, “Too Much!” So one would think that the above is exactly what responsible policymakers would be striving for — the market discouraging new developments.
John-
All that easy lending would do would be to encourage speculators [Who somehow manage to have multiple primary residences] to buy them. The rental market is glutted, so when the prices fall, the condos are abandoned.
It will just end up one more way for assets to move from the balance sheet of developers to the balance sheet of the taxpayers.
They can play all the games they want with financing, but ultimately it’s going to take a lot of people moving in or a wrecking ball to solve the problems with the condo market.
As I was advising a solicited request from a friend today regarding purchasing additional real estate for his business expansion, I considered that most of us often forget fundamental economics as they apply to real estate.
The real estate market is buoyed by jobs, as jobs decline, the real estate market must necessarily decline as the two are not separable.
Therefore, real estate will be forced to continue its downward march until such time as sustainable jobs return in numbers to our landscape.
We have not seen the worst of the job losses and the price of real estate will continue to decline as desperation and foreclosures will dictate price rather than original or replacement costs.
Perhaps Mr. Frank would do well to comprehend this basic force of economics rather than spending fruitless time and money dwelling on the symptoms of a jobless society.
Igor seems to grasp the situation entirely; deflation
MtnMike-
There are a number of “economists” who would have benefited by sticking with Econ 101 and “supply and demand” rather than learning to develop complex and meaningless models. Then they might have seen this coming.
barney (and) frank would not be elected to clean sewers in any but about half-dozen districts in this country.
most people who were as complicit in the housing debacle might sort of lay low but you’ve got to hand it to barney; he is right out in front, espousing his liberal prattle that will serve only to prevent a market clearing and delay recovery.
what a country!
The Honorable Barney Frank has advanced degrees from the esteemed Elmer Fudd school of economics, which is world famous.
Mr Frank also had some advanced linguistics training while there!