Wednesday, October 20, 2010

How Government Home Loans Screw The Public.

When in the process of growing up, people buy houses. As this is the case, 2 of my friends, who are happily married, decided that it was the time to take the plunge and buy a house. Since that is the sort of thing that I have done more than a few times (buy a house), I had various conversations with them about the whole process. They ended up with a really nice, newer, 3BR 2BA ranch house, which sits on just under an acre of land. Not only did they get a pretty good deal, but, they also got my envy, as, I wouldn't mind living there myself!

When our conversations went to financing, the loan package that they described basically amounted to 100% of the sale price, with a 30 year amortization, at an interest rate that was less than 4.5%, which was to be provided by the US Department of Agriculture. I think that this is a GREAT financing package for my friends to take advantage of; if I could borrow money on terms like that, I would borrow, quite literally, as much as I could. I am pretty sure that I can grow just about any amount of money at 2% more than what has historically been about our inflation rate...

The situation got me to thinking though. Where is this money coming from? The government. Is this a good deal for tax payers? NO.

Lets assume that for simplicities sake, that it is coming directly from debt that the government is issuing. A 30 year treasury (the same as the term of their loan), on the rough date of their offer, was a whopping 3.75%.

Put another way... the spread on this loan, if it cost no money to service, originate, or administer (i.e. 100% efficient, with no costs) is UNDER 75 BASIS POINTS.

A bank (which, by definition, needs to earn money), on the other hand, is buying money for ~2.5% and lending it out at over 6% to investors, IF they will actually lend it out. This is a spread of well more than 3x that of the governments...

Additionally, the government is losing tax revenue from my friends and their former landlord. This is because they will be able to deduct their mortgage interest from their income taxes, and, had they not bought the house, they would have been paying rent and their landlord, who would have more of a tax liability.

In light of this, I have to ask: "is the government really that much more efficient than a bank? Are they that much better at assessing the risk of loan impairment? Can they predict the price fluctuations of the real estate market? Are they really looking to keep tax payers off the hook for a bad mortgage?"

The only answer that I can come up with, is a resounding "NO."

Lastly, it seems pretty obvious to me that the FDIC would shut down a bank that had the lending practices of the US Department of Agriculture- and really, the greater federal government.

Disclosure: None. Always do your own research. This is not advice in any way shape or form.


Jacob said...

Interesting way to look at things...

Saj Karsan said...

Totally agree. Our society is poorer because of government intervention such as this. Not only is there a wealth transfer here, which is what most people see, but as economists know this results in a mis-allocation of capital and resources, which makes our society poorer on the whole.