Tuesday, October 21, 2014

Two Simple Words of Advice to First Time Home Buyers ... Caveat Emptor ... Those 'Friendly' Faces Are Simply Going for the Money

When potential first time home buyers are considering a purchase, lots of friendly faces appear on the scene and are eager to "help" the buyer part with as much money as he can possibly borrow. And that's the problem.

So for those who may be contemplating buying a home, and especially if it's the first home, please accept two words of advice --- Caveat emptor --- let the buyer beware.

The first time home buyer currently represents the target and key to getting the real estate money machine rolling again, and that's where lots of seemingly friendly, interested and purportedly helpful people enter the picture.

Caveat emptor warns the target to be careful about what's going on, because these friendly folks, including the developer, the home seller, the builder, the real estate broker, the home inspector, the insurer, the bank lender and even Fannie, Freddie and the FHA, the government's mortgage enablers and facilitators, are on the other side of the deal. In other words, they are each and all self interested parties whose goal is to get their 'fair share' of the money from the sale.

And to the extent the buyer is short of funds, which he will be, then they are there to help the buyer qualify for a big loan and go deeply into debt. To get the money, there must be a sale, and the 'friendlies' need a buyer. That's where the target comes in.

And the higher the price the new buyer agrees to pay for the house, the bigger the money flow will be to the various players on the other side of the transaction. And to repeat, for them the deal needs to happen, because no transaction means no payday.

So when it comes to buying a house, we're very much on our own. But it's about to get even worse than that.

Now comes our friendly government helpers to provide taxpayer backed mortgages with as little as a 3% down payment. It's deja vu all over again in the housing market.

But why would government want to do that again so soon after the recent housing bubble and its tremendous negative effects? Well, since neither new home construction nor the economy is booming these days, the 'friendly' faces want more houses to be sold, and the quickest and easiest way for that to happen is to make it easier for first time home buyers to get a mortgage. And low to no money down down financing is a great way to get the unsuspecting first time buyer into the 'pool' and on the hook.

Finally, there's an election next month, and announcing this "assistance" may help the incumbent politicians' reelection chances. Politics sucks.

Mortgage Giants Set to Loosen Lending has the newest example of "We're from the government and we're here to help:"     

"Fannie Mae , Freddie Mac and mortgage lenders are nearing an agreement that could lower barriers and restrictions on borrowers with weak credit, a move that would expand access to home loans amid the sluggish housing recovery.

The move by the mortgage-finance giants (will) help lenders protect themselves from claims of making bad loans ....

Regulators and White House officials have struggled to expand access to mortgages, which have been hard for some borrowers to get since the financial crisis despite a sharp rise in home prices. But the ... moves by Fannie and Freddie could provide kindling for critics who worry about repeating some of the mistakes that led to the housing boom and bust. . . .

The latest moves underscore just how much the government is relying on Fannie and Freddie to help increase the supply of credit. Steps to reduce down-payment standards would further signal a turn away from previous efforts to shrink the influence of the two mortgage giants....

But Mark Calabria, director of financial-regulation studies at the libertarian Cato Institute, said: “This is the sort of thing that gets people underwater. Three percent [down payments] can disappear and become zero real quick.”

While Fannie and Freddie don’t make loans, they buy them from lenders, package the loans into securities and then give guarantees to make investors whole if borrowers don’t repay....

In previous years, Fannie’s and Freddie’s regulator had tried to shrink their outsize role in the mortgage market. However, under new director Mel Watt, who took office in January, the FHFA has turned to expanding mortgage access, partly to ensure that tight credit doesn’t stifle the housing recovery. . . . {Housing Regulator: Pact With Lenders Could Expand Mortgage Access.}

Separately, Fannie Mae, Freddie Mac and the FHFA are considering new programs that would allow the companies to guarantee some mortgages with down payments of as little as 3%. The program might be limited to certain kinds of loans, such as mortgages to first-time home buyers."

Summing Up

So here's the real deal.

We are simply witnessing more government knows best politically pandering and insanity in action.

What's being represented as a good deal for first time home buyers will end up being a really a bad deal both for them and other taxpayers as well.

We've been down this road in America (and much of the rest of the world too) quite recently. That painful fiasco ended very badly. So it's time to do it again?

When home buyers are offered 3% money down mortgages backed by the full faith and credit of the U.S. government, aka the taxpayers, we can expect nothing good to happen.

And if the buyer defaults or simply walks away from his obligation to repay the mortgage loan, his credit will be ruined and taxpayers will get the bill --- again. It's nuts but it's happening.

That's my take.

Thanks. Bob.

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