Posted in Due Jan. 5 – 3 posts
Post 1.Ed –
3. The American Recovery and Reinvestment Act of 2009 (providing federal funds for at-risk homeowners).
The federal government has a vested interest in Americans owning their own homes. Homeownership is part of the “American Dream” and many Americans strive toward that goal. The government has various programs to assist citizens and protect them from predatory lending. The government also protects people from themselves from avoiding a home purchase they can’t afford. Because I lived through the housing crash as a homeowner I have chosen The American Recovery and Reinvestment Act of 2009 as my topic. Fortunately, my own house in Alabama was less impacted by the bursting housing bubble. It only decreased in value by 10 percent and I was never upside down on my mortgage. A military friend in DC was not as lucky. His house value plummeted and he faced foreclosure. He had bought a house outside his means and the DC area saw a large drop in home value during the crash. I wonder if he could have taken advantage of this 2009 Act?
This Act was part of the greater stimulus package in response to the Great Recession. Since private spending was down this was an attempt to stimulate the economy with public spending. The bill provided extended unemployment benefits which assisted struggling homeowners. There was also a tax credit for homeowners. There was a repeal of the requirement to pay back the tax credit over time. The ultimate goal of the Act was to preserve and create jobs and promote the economic recovery. While money went to many areas, housing alone counted for $14.7 billion. Looking at the details the $14.7 billion is spread out over various programs to assist the most at-risk Americans. Only a portion was aimed at actual homeowners. Much of the money went toward non-homeowners to keep them from becoming homeless. It appears to be a case of the government genuinely trying to assist struggling Americans.
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Post 2.Brandy –
3. The American Recovery and Reinvestment Act of 2009 (providing federal funds for at-risk homeowners).
Like any regulatory body the purpose of them is to protect one party from another. Similar to a states local real estate commission the purpose of the federal government in real estate finance is to protect the public. Although there are many roles the Fed pays in regulating real estate transactions I feel one of the most important act established to protect the public would be Truth in Lending and its partner Regulation Z. Even if one has never purchased a house they have come into contact with Truth in Landing and Regulation Z on nearly a daily basis. Every car sales commercial, any credit card pre-approval mail out, or every home purchase through use of a mortgage has contained such information.
With Truth in Lending it is required that any and all costs associated with a financial transaction is disclosed before the transaction can be completed. This can include any loan fees, finder's fees, service charges, points, interest and APR. This is to protect from the dishonest practice of "bait and switch" in which a specific price is advertised only to have it change drastically right before close. If you have ever seen a car commercial offering a specific price on a car or promotional low interest rate you will notice there is quite a lot of information at the bottom of the screen and read very quickly by the announcer what the exact requirements are to attain that price.
This leads in to Regulation Z which more specifically pertains to advertising. Any real estate advertising on any media (newspapers, flyers, signs, billboards, webpages, TV, or radio) that gives any specific financing terms must be fully disclosed. General statements are ok such as "rates are at an all time low!" but more specific phrases like "rates are as low as 6%!" without further information such as actual APR would be in violation or regulation Z. Any lender that fails to comply with Truth in Lending or Regulation Z could be fined a minimum of $100 to a max of $1,000 plus court costs.
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Post 3. Lewis
There is an old adage that no good deed ever goes unpunished. The U.S Government is a good example and how its attempt to help make housing affordable to more Americans actually contributed to one of the worst economic disasters.
In 1977, President Jimmy Carter signed the Community Reinvestment Act (CRA). The legislation required lending institutions that wanted Federal Deposit Insurance Corporation (FDIC) protection to meet the financial needs of mortgage borrowers in their area. This act did not require these institutions to purchase subprime (higher risk) loans but required institutions mortgage portfolios to have a percentage of loans coming from low-income neighborhoods (Forbes). In essence, these institutions were expected to approve mortgages for individuals that were at risk for repayment if the institution wanted FDIC coverage.
As a result of the CRA, the Salomon Brothers, a Wall Street investment bank, developed the CDO, which gave birth to the mortgage-centric MBS whereby multiple mortgages were grouped together with the majority of the debt being placed on the stronger loans and the least amount of debt on the subprime loans. CDOs are grouped into tranches based on the level of risk to default. Investors bought the safer tranches because they trusted the AAA credit ratings assigned by agencies such as Moody’s and Standard & Poor’s. This was a mistake. Without the appropriate government oversight to monitor for fraudulent activity, these agencies were paid by, and so supported the lending practices of the banks that created the CDOs.
In 1995, President Clinton revamped the CRA, which then required banks to buy subprime loans. Under this new requirement, banks expected to assume some losses when risky loans failed for non-payment. But when enough homeowners failed to make their payments because adjustable interest rates went up the subprime loans defaulted and contributed to the housing market crash.
