Déjà Vu All Over Again

December 16, 2009 by · Leave a Comment
Filed under: Bond Regulation 

The $8,000 first time homebuyer tax break is set to expire.  There are many who believe that it should be extended so it can continue to motivate new buyers and to help restore the hard-hit housing market.

The question is whether this incentive is good for the long term. As has been the case for decades, the loans being written for these first time buyers are usually bundled, rated and sold as a security. One should to hope that these homebuyers are being more carefully vetted than those who bought using “exotic” mortgages that they couldn’t afford. But human nature being what it is, there is an excellent chance that sellers, real estate agents and mortgage brokers are doing everything possible to close a deal.  And well, if you’re overreaching a little?  Not to worry.  Everyone is reaching when they buy their first home.

A healthy skepticism pervades that we may be getting ourselves into the same default scenario 3-4 years from now that we have today. Poor underwriting is a big part of what put us into this mess.” Offering people a short-term incentive for a long-term purchase — whether it takes the form of a discounted mortgage rate that “resets” or tax incentives — has already proven itself to be a bad idea.  There is no reason to believe the results are going to be any different this time around. Unqualified buyers lead to delinquincies, which then tend to default. Substandard collateral will always lead to a substandard security in total.

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