Groucho Was Right Part 2

It seems that our beloved Federal government is operating full time to prove Groucho was right. In my previous blog, I quoted Groucho Marx as saying "Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies." There is one program and one proposal that seems right out of the "We do not know what we are doing" playbook. The first is the 3.9 billion dollar Neighborhood Stabilization Program. This program gives money to the states to buy foreclosed and vacant homes from the banks so they can be fixed up and resold. The theory is that this will stabilize home prices and help turn around foreclosure devastated neighborhoods. The problem is that the states have been unable to spend the money that the Federeal government has givem them. Why? Investors have been buying up these REOs. In other words the free market has stepped in and is making the corrections. Private money has stepped up and is doing the job. Oh well, another 3.9 billion dollars down the drain.

In order to top itself, there is a bill in Congress to reinvigorate the Community Reinvestment Act (CRA) for short. One of the major reasons we got into this mess was the orignal CRA gave incentives for banks to give mortgages to people who would not otherwise qualify if the homes were in low and moderate income areas. Predictably, the defaults on the CRA loans came in, thus starting the cycle of foreclosure and lower housing prices. For example, CRA loans represent 7% of Bank of America's mortgages but represent 29% of its defaults. This entirely predictable when you lend money to people who not otherwise qualify. Now Congress is proposing spending 4.2 trillion dollars, thats right 4.2 trillion, that is 3 times the cost of healthcare that we are now debating. In addition, these funds will be available not only to banks but to credit unions. As a loan officer, I am all for making more money available for to obtain a Long Island mortgage or a mortgage any where in the country. However, isn't this one of the reasons we got ourselves in this mess in the first place? What are they thinking? Let us lend more money to more unqualified people. Senator Everett Dirksen of Illinois once said "A billion here and a billion there, now you are talking about real money." Unfortunately, now it has to be amended to a trillion.