Bankers Won’t Lend To Themselves, So You And I Step In

Bloomberg reported that FHA is now the business of financing luxury condos in NYC.  Apparently the little agency that has grown so dramatically since traditional banks fled the mortgage market has also extended its reach to the Big Apple, where you can put down 3.5% on a condo that cost 700k+.  Previously, having a government agency involved in the financing was looked down upon, but now if a building is approved to have FHA-guaranteed loans on its units this piece of information becomes a sharp sales tool. 

Obviously, after we safeguarded the employment and income of those in the banking business by first rescuing their sinking ships and then providing them with an explicit/implicit guarantee (first we did it outright, but now the taxpayers are just the rich uncle standing off-stage, ready to help when and if needed) that requires almost nothing in terms of a change of business practice, we should now assist in the purchase of luxury goods by extending loans that no self-respecting, um, well, banker, would ever extend.  Who in their right mind would risk the capital of their firm by lending 96.5% of the cost of buying a condo today?  Any takers?  I think the banker that originated such a loan would be fired.  Unless, of course, he worked for us, the US taxpayers.  Apparently we are jumping at the chance to make such loans. 

I can’t get past the irony that a NYC banker whose job we saved through the bailout, and who’s bonus we guaranteed through our perceived backing which allows those banks to get funding at ridiculously cheap levels today, won’t extend mortgage financing to (potentially) himself on such fabulous terms, so we do it.   

All dripping sarcasm aside, the point of what the FHA is doing is to create liquidity through government intervention, and a US govt guarantee on a 96.5% loan on real estate definitely qualifies as intervention.  But is that the role of our government, to create liquidity in such markets where a perfectly functioning private market exists?  Others might argue that there is no liquidity, but that is not true.  Apparently if you come to the table with 30-40% down, there is no problem obtaining a loan.  The issue arises because there are not enough buyers with enough capital to satisfy newly restrictive lending standards.  I believe the new lending standards to be a much better idea than what passed for lending standards in 2005, and it seems a poor use of taxpayer dollars (yes, I know these are guarantees, not monies spent, but a rising percentage of them do default, which costs us money) to provide this backing.  Certainly we can do better.

Read the original story at H. S. Dent