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Bernanke's Big Bust |
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By Dr. Danielle Babb
1. Prohibiting lenders from issuing loans that borrowers cannot repay. BIG problem here. We have no accurate way of assessing this. The traditional method, FICO scores, is no longer accurate. The FICO doesn’t take into consideration mortgage resets, and is fairly easily manipulated by people who fix credit. FICO says plans are in the works but a new algorithm wont be released until 2009. Also, more people today earn non traditional income - income working from home on 1099s and so forth. These people are often highly qualified but may not be able to get a loan. 2. Making lenders verify income and assets. I have no problem with verifying assets. But, it's difficult to verify income by many of today's workers. For instance, many of us work off of 1099s and take business deductions. This makes it nearly impossible for the bank to see how much we really make. 3. Requiring escrow accounts for high priced loans. This sounds great, but it's a rip off for the consumer! People are better managers of their money than institutions are. If they aren't, they pay a price. Here is a fact. Take a $1,000,000 home, the "low end" price for many areas in Southern California. If we had to put even 1% into escrow, that is $12,000/year. That is money we could have invested and earned interest on. Unless the bank is going to fork over the interest we could have earned by investing it ourselves, forget it! 4. Ban repayment penalties including loan flipping - While Id love to be able to refi my primary residence without a prepay penalty, the truth is that loans with prepays often come at cheaper interest rates because the bank knows they’ll get X dollars from the consumer. Do this, and the banks will offset this income with higher rates. Period. Bottom line - none of these are answers to the housing crisis. |
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