Saturday, May 26, 2012

How Government Home Loans Screw The Defaulter.

A while back, I wrote a piece called "How Government Home Loans Screw The Public." I used a home loan that my friends received as an example and then openly wondered how the federal government could ever economically justify lending out money at rates that a bank could never really compete with, thus, likely making the loans unprofitable for taxpayers. This recent article in the WSJ points it out how they can manage getting their principle back in the event of default...

Apparently, when a borrower defaults and the house is sold, the USDA can bypass the legal system AND state consumer protection laws in order to garnish wages and government entitlements that the borrower receives. Since the loans that the USDA makes are often made in poorer, impoverished, rural areas (like Mt Sterling where my previously mentioned friends bought their home) it raises the certainty that the borrower is on a form of government assistance, thus, making repayment of the delinquent amount a virtual certainty. While it is a good thing that the taxpayer is is likely to be made whole as a result of losing money that was lent out, it is terrible that the agency uses such an iron fist in getting their way or even guaranteed/originated the bad loan in the first place. Not only do borrowers have no idea that this is a risk of something that could happen to them, but it puts the 'privatish' lending sector (referencing Taleb) on a completely different playing field than what is essentially their competition- the USDA lenders. It almost seems like there is one branch of the government saying "you really need this assistance to buy (insert program here), because you are so poor." Then, another branch of what is essentially the same entity, comes to them and says "because you are so poor and can't afford this house that we lent you the money to buy, we are going to take what we are giving you, making you even poorer."

If Mr. Market is a manic depressive, then the dueling federal agencies are the embodiment of multiple personality disorder...

1 comment:

Anonymous said...

The real question is how to promote home ownership "the american dream", without resorting to the proverbial carrot and "iron fist" approach.