Contempo Magazine Blog

 By Dr. Tony Magana

Recent reports of the inadequacy of the Treasury Department in assisting troubled homeowners serves once again as an example of how the care taker model of government cannot succeed. A review of this is timely at a time when many progressives are clamoring for a new government care taker health program. While Treasury struggled to help only 180,000 out of 4 million homeowners with troubled mortgages about 53 percent were able to find their own solutions without any government “assistance”.

The onset of the financial crisis last year in the months preceding the Presidential election lead to an impetuously contrived program schemed by Congress which debited billions of dollars of taxpayer’s future earnings for stimulus payments to financial institutions who had been the cause of the crisis by allowing the extension of credit to otherwise poor risk borrowers which subsequently artificially inflated the value of domestic residential real estate in many states.

An examination of recent General Accounting Office (GAO) reports on the management and success of the Treasury Departments program to assist home loan borrowers in distress is troubling. The GAO was asked by Congress to study the evolution and the current state of the home loan market.

Their focus was the time period which was the heyday for nonprime loans which are divided into Alternative-A and subprime divisions. Alt-A paper loans which were given to borrowers with lower credit scores, multiple existing properties already under loan, and/or the lack of documentation for things like proof of long term income that prevented qualification for a prime loan. The subprime loan was seen as a even greater credit risk with FICO scores usually less then 640. None of these loans would have ever been made had it not been for laws passed by Congress like the Community Reinvestment Act which mandated that banks and other lenders must offer loans to individuals who would otherwise not meet the standard criteria for a mortgage.

The nonprime mortgage market had its heyday from 2000 to 2007 with a peak in 2006. The total value of loans in this category went from $100 million to $600 billion. According to the GAO the percentage of home owners who held a mortgage of this type went from just 12 percent in 2000 to 34 percent in 2006 with 2/3 participating in a subprime loan that was adjustable. Between the years of 2000 and 2006 the number of subprime loans actually multiplied in number by a factor of five. These nonprime loans were usually used by borrowers to refinance their homes rather then to purchase a new home. Because borrowers often had multiple loans in force the number of loans is well in excess to the number of borrowers. Thus the government was encouraging people who had suitable housing already to use their home like a credit card discouraging personal responsibility and thrift.

During the period from 2000 to 2007 about 14.4 million of nonprime loans were made of which 80% were subprime. As of March 31, 2009 about 11 percent or 1.6 million of those loans that failed had completed foreclosure. There remains about 5.2 million subprime loans left in the United States of which 80 percent are subprime. Out of these loans still outstanding about 23 percent or 1.2 million are at risk for serious default. Almost 2.5 million nonprime loan holders are in default or in the foreclosure process.

The GAO said there were indications “ that hundreds of thousands of additional nonprime borrowers are at risk of losing their homes in the near future.”Very few mortgages made since the implementation of new credit guidelines was made in 2007 have failed as 93 percent of loans currently in foreclosures were originally made between 2004 and 2007.

The Congress created the Home Affordable Modification Program which received $50 billion from the Troubled Asset Relief Program to assist struggling homeowners who were “victims” of inappropriate nonprime loans. The HAMP was supposed to act in four ways to help homeowners including modifying first-lien mortgages for those in danger of foreclosure, encourage the modification of mortgages in areas suffering severe property value depreciation, reduce or pay-off second-lien mortgages, arrange the sales of properties where the debt was more than then the homes value as an alternative to foreclosure, and provide incentives for at risk borrowers to get refinancing.

The GAO published an assessment this week of the progress of the HAMP. The Treasure Department was found to not be “fully meeting its goals”. Estimates were that about 3 to 4 million borrowers would be in need of assistance but as of July 20, 2009 only about 180,000 have began the process of loan modification.

The main impression one gains from reading the report was that the Treasury was overwhelmed and apparently this is an opinion shared by the Congressional Oversight Panel and Federal banking regulators.

The good news in this report is that 53 percent of the homeowners without any help from the government were able to find a way to refinance their homes with a better loan or arrange an alteration of their loan with their private lender.

The bad news is that the government program to help those who could not help themselves or perhaps were induced to wait for government help rather than seek their own solution has only helped 180,000 out of 4 million.

The ugly is that this is what can be expected to happen when the American public becomes too dependent upon government. The current culture of the Obama administration that all problems will be solved by government is a false promise with a high price. The high price occurs because the government’s pledge of support stymies the individuals initiative to help himself .

Government programs need to encourage individual responsibility and individual initiative in dealing with the necessities of our lives. We too often forget the American spirit which separates our nation and culture from the rest of the world is greatly due to the contribution of rugged individualism and individual responsibility. Government needs to be about giving people options and opportunities to find ways to help themselves rather then making narrow mandates.

We should not hesitate to step in, support, and guide those who are unable to help themselves as our Christian values demand but simultaneously we should expect that each individual will bear responsibility for themselves as they are able.

Americans should see this failure of the Treasury as a warning about will happen if we let the government take over the health care system.

Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Review. Follow him on twitter http://twitter.com/contempomagazin

Copyright 2009, Dr. Tony Magana. Some rights reserved.
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