Mr. Hermes Maldonado is buying a home. Again.
You may have run across his story in the Denver media, although he lives in California - where he has his eye on a $170,000 four-bedroom demesne, on which he will pay a minimum amount up front, financing the rest with a loan guaranteed by the Federal Housing Administration. His story is instructive as we approach the "fiscal cliff" and the Washington Full-Contact Steel Cage Death Match over how to avoid it. Here's why:
The last time Mr. Maldonado owned a home he used it as a cash machine, refinancing four times to take money out and running up a $45,000 credit card bill to live rather large, as his Cadillac and Mercedes attested. In 2009, he declared bankruptcy, wiping out his sizeable debts; it was the second time he'd done that. Now, taxpayers are going to guarantee his new mortgage. Good luck.
There are probably tens of thousands of borrowers like Mr. Maldonado in the FHA's portfolio of loans. Exactly how many, the FHA isn't saying, but there are enough to have a special group title: "rebound buyers." Programs catering to their circumstances are known variously as "FHA Portfolio Advantage," "FHA 580 Credit Score" or more accurately, "FHA Low Credit Score" loans. One needs a down payment of 3.5 percent and a minimal credit score of 500 to qualify. Past bankruptcies are no bar, provided they occurred more than three years previously. The FHA either doesn't care about how much of its one trillion dollar portfolio consists of this sort of loan, or it knows but won't tell its owners because it fears the ensuing panic.
Yes, the FHA has owners. They are called taxpayers. And if the FHA continues to lose money at the rate it has over the past three years, we will have to bail it out, to the tune of about $16 billion - probably early next year.
Aren't shaky financial dealings like this what supposedly caused the financial implosion and housing debacle of 2007-08, and the much-maligned bailouts that followed? So why are "faceless bureaucrats" now taking the place of "greedy bankers" in extending loans to borrowers so sub-prime that even Lenny the Squeeze wouldn't touch them? This time, we can't plead ignorance: Edward Pinto, former chief credit officer at Fannie Mae spoke for many when he wrote in a 2009 Wall Street Journal article that "...I've never seen an entity successfully outrun a situation like this."
Well, there's "fairness." It just isn't right that all those folks who put themselves so far in hock they couldn't buy daylight on the installment plan are frozen out of the housing market because of a silly little credit rating, is it?
There are beneficiaries. Realtors, developers, builders, and lenders all stand to gain big from easy money and loose lending standards, so they lobby like crazy to insure that the party continues to roll.
And there are tools: politicians get a big bump when housing sales and starts begin to rise, so they're not about to say no to the carnival.
It's a perfect example of moral hazard: access to money on easy terms regardless of past history of mismanagement, profligacy or bankruptcy, with taxpayers picking up the tab for any default. You, too, can be Lehman Brothers.
And that isn't all. If one is over 62, there's another deal, and we're not talking Social Security. For an "empty-nester" who decides to downsize, the FHA's HECM4P program will not only provide the means to purchase a new residence, it offers a reverse mortgage which provides monthly payments for one's lifetime - even after equity in the home is exhausted. The program also indemnifies one's estate and heirs against having to cover the cost of a short sale, in case the residence can't be sold for the amount owing. Who's liable for the difference? According to the Department of Housing and Urban Development, "FHA insures HECM loans to protect lenders against loss..." In other words, taxpayers are holding the bag.
Should they be? The above are relatively small programs on the "entitlement" side of the federal budget, but to paraphrase senator Everett McKinley Dirksen, a billion here and a billion there, and pretty soon we're talking about real money. Those advocating for these programs should do so publicly and willingly, beginning with an explanation of what in the Constitution mandates that money should be taken from successful Americans to cover the debts of the spendthrift, the reckless, the squanderite or the merely unlucky. This is one among many relevant questions as we move "Forward" toward the edge of the abyss.
If minor annoyances like the Constitution even matter any more.
Summit County resident Morgan Liddick pens a Tuesday column. Email him at firstname.lastname@example.org.