Barney Frank, the prominent Massachusetts congressman, is sponsoring a bill that he feels will help the recovery of the real estate industry. I, on the other hand, find it flawed in oh-so-many ways. The biggest giveaway is the last part of the bill that provides money to protect lenders from the lawsuits that will be coming from the first part of the bill. I do not even like the middle of the bill, but my hat is off to Barney Frank for at least trying something. The prevailing thought in this country is to simply let the system “work things out.” The trouble with this thinking is those who would “work things out” are also the ones that caused the problem. It is the old fox-guarding-the-henhouse situation.

Mr. Frank is looking for the Federal Government to buy loans from the lenders, making Uncle Sam the new home financier of the people in the United States. (As a small aside, I do not believe that if the government held the mortgage, it would make people more or less interested in paying it back. Those who will, will; those who won’t, won’t.) The plan starts to fall apart when it is noted that the government will only buy these loans if the lenders reduce the stated property value to 85% of its current appraised value.

Example:

House is worth $300,000; loan is currently $325,000.
85% of $300,000 is $255,000. The loss to the loan holder would be $70,000.

Would you like to be holding the loan, and wouldn’t you sue if they reduced the value of your note without your permission?

The theory behind Barney Frank’s idea is that the bank wouldn’t receive $255,000 if they had to foreclose on the borrower. Maybe, or maybe not. It depends on the property, the location, the condition of the property, the economic condition of the community, etc.

Fannie Mae has a better idea that isn’t destructive at all. They will refinance any loan that they hold at up to 120% of the value of the property, to conforming loan limits, as long as the borrower is not delinquent.

Example:

House is worth $300,000, loan is currently $325,000
120% of the value of the property is $360,000.
The loan can be refinanced to any loan that they offer.
Nobody takes a loss, no one sues!

Part of Frank’s new proposal stipulates educating borrowers about the loans they are considering to take to finance their house. I do not believe that the American public is that ignorant or naïve; therefore, some straight-talk on the complex and important subject of home finance can do some real good, coupled with some much-needed honesty and restraint from the mortgage industry.

There are only really two types of loans: fixed and variables. It would take about four minutes to explain a fixed rate, and one line can sum up variables: If it seems too good to be true, it is! What is needed is the regulation of the advertising of the lenders. Therein lies the problem. The only real regulation is if you state an interest rate in the advertisement, you must indicate an APR. Less people in this country can tell you what APR stands for than can name the current Secretary of State. (Annual Percentage Rate. Condoleezza Rice.) For the most part, those who do know the term can’t calculate the figure. Continued...