Your Tax Dollars At Work

Normal as these things go, the announcement came late Friday afternoon as Washington was empty except for the cleaning crews and crime reporters. Fannie Mae issued a press release announcing it lost $72 billion in 2009. Billion.

Guaranteed by the United States Treasury. Guaranteed.

By comparison the mortgage giant's little brother, Freddie Mac, seems like a slacker in losing only $21 billion in 2009. Also guaranteed.

Fannie and Freddie operated until 2008 as "Government Sponsored Entities," or GSE's. While publicly traded companies with stocks on the NYSE and upper management pulling down the requisite million dollar plus bonuses. But they were also under the supervision of a government regulator to ensure they were following their charters and enabling American families homeownership and investors mortgage backed securities in a safe and fair series of markets.

This relationship changed in 2008 when the government took over both Fannie Mae and Freddie Mac. This was done to prevent them from collapsing and completely wiping out over half of the mortgage financing in America. Since the takeover the Federal Reserve and U.S. Treasury have made moves to try to ensure the flow of mortgage funds to allow Americans to pursue homeownership and refinance or modify their existing mortgages to lower monthly mortgage obligations and perhaps stave off foreclosure.

Now it starts to get a bit expensive for you. Yes, you. You pay taxes? While the media and debates have been clearly focused on the health care debates and how many Trillions of dollars may be shoved, pushed, crammed through Congress to allow President Obama to smile and say, "I did it," while this has been going on, in other sectors of the government billions are being spent with only a handful of Wall Street Journal readers noticing. So far over one Trillion dollars has been spent by the government on Fannie Mae, Freddie Mac and the mortgage markets.

At the time of the GSE takeover the Treasury pledged to back limited losses to ensure Fannie and Freddie could operate with liquidity needed to buy and sell mortgages. In early 2009 the Federal Reserve announced a plan to purchase $1.2 Trillion in mortgage backed securities to ensure liquidity in the mortgage markets and facilitate low mortgage rates to assist current homeowners with refinancing and prospective homeowners with lower payments. The Fed's mortgage purchase plan will end March 31st and on its exit will leave a gaping hole in the mortgage securities market. Or will it?

Now that it will own $1.2 Trillion of mortgages the Fed will need to start to unload those assets. After all wasn't it an overburden of mortgages that unbalanced the balance sheets of brokerage houses and banks? Of the mortgages funded in the past year, almost all of them have been purchased in the form of mortgage backed securities by the Federal Reserve. Not a very diversified portfolio. As the Fed looks to dump the mortgage holdings it will be competing with the new mortgages hitting the market as well as the U.S. Treasury that is issuing another Trillion in U.S. debt in the form of Treasury bills.

Not to worry however because we still have Fannie Mae and Freddie Mac and you are making sure they will be able to operate with business as usual, which means lose money. Remember the movie "Arthur" where Dudley Moore played the trust fund multi-millionaire who walked around drunk all the time? That is about where Fannie and Freddie are today after Christmas Eve.

As businesses closed early on Christmas Eve and Americans scrambled to find that last minute gift for Aunt Caroline or horseradish for the Prime Rib, any news on the radio and television was focused on the Senate and the bare passage of Majority Leader Harry Reid's health care bill. This culmination of months of debate, bribes and arm twisting was the perfect cover for the Treasury Department.

On December 24, 2009 the U.S. Treasury announced that it was covering all of Fannie Mae and Freddie Mac's losses for the next three years--no limit. Lose as much as you want and the United States Treasury (taxpayer) will pick up the losses. Now don't get too excited because after the three years then the Treasury will become very strict and limit loss coverage to $400 billion.

Part of the reason for the loss guarantees are the programs that have been brought forth by the Obama Administration to "help" homeowners in mortgage trouble. The Administration has enacted a mortgage modification program that has gone nowhere as it is ill conceived. Trying to force lenders into cramming down principle balances and interest rates on mortgages, the Administration is essentially forcing billions of dollars of losses on the banks. With the loss guarantees banks have been able to sell billions of dollars of mortgages back to Fannie Mae and Freddie Mac and let them take the losses that federal programs require.

Banks do not have to modify legal contracts. The government wants them to. Borrowers call their lender and say, "what about the Obama modification plan?" Lenders now say, "need to check with the mortgage owner." And it sits for months as the communication goes from borrower to lender to investor. With the loss guarantees the hope is that more mortgages come under direct control of Fannie and Freddie, especially delinquent mortgages, so homeowners can work directly with the investor to modify their mortgages.

With over $3 Trillion in mortgages on Fannie's balance sheet there is an tremendous opportunity for greater losses as unemployment continues to grow and homeowners see the opportunity to lower their mortgage balances and payments by missing a few payments and then negotiating a loan modification. More and more Americans are making their credit card payments and skipping mortgage payments--you can use a credit card to buy your kid a pair of shoes or some hamburger meat but you can't use negative equity.

Already into the Treasury for almost $100 billion the GSEs are on the looking to substantial increase that number in 2010. Between absorbing new mortgages on the market from the exit of the Fed and their purchase program, absorbing delinquent mortgages from lenders, loan losses through modifications and on top of that foreclosures, the losses will mount quickly as the Administration uses taxpayer funds to support the GSEs.

What is happening is the Administration's policy is to try to guarantee as many American homeowners as possible maintain their homes, and if possible see their mortgage payments go down. Regardless of whether their mortgages in default or that are above their homes' values are because of cash-out refinances or where well above common sense qualifying standards, Obama wants you to help these people out and subsidize their mortgages.

Between the mortgage assets held by the Fed, the losses that will rack up through the GSEs and the philosophy of the Administration to subsidize as many mortgages as possible at a loss to the lender (U.S. taxpayer) I feel the final tab to the U.S. taxpayer will surpass two Trillion.

By the way, Treasury Secretary Timothy Geithner has announced that any reform of Fannie and Freddie will not be considered until sometime next year. I can save the Treasury Secretary some time. Put Fannie and Freddie on the auction block and sell to the highest bidder, let the open market take care of them.


DCS03032010

Hall Pass

In the past few days I have been sent links, articles and found on my own several articles and opinion pieces on the housing/mortgage crisis, Fannie Mae and Freddie Mac. In particular was a piece from my Dad from the Wall Street Journal, "The Fed Crisis: A Reply to Ben Bernanke" (subscription may be required), by John B. Taylor who created the "Taylor Rule". The Taylor rule is a model by which central banks can determine whether to increase or decrease rates and by how much. Taylor takes Bernanke and the Fed to task claiming the primary factor in the housing crisis was rates that were too low and created an expanding housing bubble with really cheap credit.

Bernanke is being grilled in the media and on Capitol Hill regarding rates and how Fed policy in the early to mid-2000s created the housing bubble and ultimate crashes of housing, mortgage and credit industries. In reading these articles and opinions one thought kept resonating with me: Fannie Mae and Freddie Mac are getting the biggest hall pass in economic history by a majority of politicians, media and pundits.

Sure Fannie and Freddie are taking some heat now for huge bonuses being paid to executives, for essentially unlimited credit from the Treasury after being given lines of credit in excess of $100 billion each, but the roles of Fannie and Freddie in the housing and credit crisis is being deflected to blaming low interest rates. Sure low rates were a factor, but from the inside of the business I still assert not the factor. Low rates expand the availability of credit, loose underwriting standards explode the availability of credit.

In July I wrote about the Automated Underwriting Systems (AUS) of Fannie Mae and Freddie Mac (How Fannie Mae and Freddie Mac Crashed An Economy) detailing how the systems work. For those who missed it, don't remember it or do not want to read about it here is a summary. Essentially starting in late 1990's Fannie/Freddie developed software that would read mortgage application packages and provide loan approvals that lenders would follow. As more and more mortgages went through the system they had statistical ability to read foreclosure and default data and tweak the guidelines. Of course from 2000-2007 there were almost no foreclosures because housing prices increased and anyone in trouble could pretty much sell and get out of it--or get a sub-prime loan from New Century or other lender.

As we headed into 2005 and 2006 the guidelines became so loose that we would see loan approvals for borrowers with debt-to-income ratios of 65% of their gross income, for 100% financing. That means a borrower could have dedicated 65% of their gross income for their mortgage payments, property taxes, hazard insurance and any debt such as credit card payments, auto loans, student loans, etc. That would leave 35% of their gross income for state and federal withholdings and taxes, health insurance premiums, retirement contributions, clothing, entertainment, food, gas, water. Further, many of these approvals did not require full verification of income.

I stand very firm in stating that this, the loose standards of Fannie and Freddie, were far more contributory to the housing bubble and ultimate collapse than low rates. Let me provide and example using real numbers from 2005 and real numbers from 2010. First, note that in December Fannie Mae tightened criteria for lending to require a minimum FICO score 640 for purchase transactions (680 for cash out refinances) and a hard debt-to-income limitation of 45% of adjusted gross income.

In looking at interest rates from 2005, the were higher than they are today spending most of the year above 5.5% for 30 year conventional (Fannie/Freddie) fixed rate mortgage. Prior to 2005 rates hit 5% or came close, but never pierced the 5% barrier. Since December 2008 rates have been consistently below 5%.

For my example I am going to use a borrower making $63,000 per year, or $5250 per month. I am going to assume the borrower has a debt load of 10% of gross income--about average for most borrowers.

In 2005 this borrower would have had available 100% financing using "piggy-back" financing with a 1st trust deed covering 80% of the sales price and a 2nd trust deed (usually a home equity line of credit) for 20% of the sales price. Both mortgages would be approved using the Fannie Mae Desktop Underwriter. Both mortgages would be underwriting using interest only minimum payments for qualifying. The interest rate on the first would be 5.5% and on the second 6.5%.

This borrower would have been approved and funded for the purchase of a $500,000 home. The interest only payments on the two mortgages would be $2800 per month, over 50% of the borrowers gross income with taxes, insurance and every other expense still left to be paid with the remaining $2450 of gross income.

Flash forward to January 2010 with the same borrower. Today there is no piggy-back 100% financing available, so at a minimum the borrower will need 5% down payment. The interest rate on the 1st will be 5% and the borrower will have to pay for private mortgage insurance.

In 2010 the same borrower making $63,000 per year qualifies for a purchase price of $260,000. Same borrower, same income, debt, credit record and a lower interest rate and he qualifies for $240,000 less in home value. Oh, and the borrower needs $13,000 for down payment.

The largest contributing factor to the housing bubble was not low interest rates, it was low qualifying standards set forth by Fannie Mae and Freddie Mac. Qualifying standards that got looser and looser as the decade progressed until finally the system collapsed starting in 2007.

Further contributing to the financial mess was that Fannie and Freddie would package the 2005 borrower with the loose underwriting standards as an "A paper" loan and sell it on the secondary market as such. Investors were purchasing billions of dollars of Fannie and Freddie mortgage backed securities where the investment was in fully leveraged borrowers with debt to income ratios exceeding 50% of their gross income. Because they were sold as A-paper, or prime, mortgages there was little risk associated compared to the sub-prime mortgages that are blamed for collapsing some financial houses. In fact the Fannie and Freddie mortgages were as risky as those labelled and securitized as "sub-prime." Will there be any lawsuits from investors?

While certainly not every loan in the Fannie and Freddie portfolios from the period had debt to income ratios up to 65% many did; and a significant amount of the portfolios had borrowers with debt to income ratios in excess of 50-60%. With everyone wanting to be a homeowner as prices started to spike Fannie and Freddie underwriting criteria loosened seemingly in proportion to demand. Lesser and lesser qualified borrowers were buying homes with higher and higher prices.

Interest rates do not account for being able to qualify for almost twice as much loan and home value for the same borrowers, underwriting criteria do. Every time I hear someone opining on the Fed and low interest rates as the cause of the housing bubble I shake my head, knowing that someone is taking blame and someone is avoiding blame for the root cause of the housing price run up. The proof is in doing the math using the guidelines of the period.

I will repeat, Fannie Mae and Freddie Mac have gotten the biggest hall pass in economic history from politicians, media and pundits. Until they are put under investigation and their underwriting standards examined and questioned they will continue to be over-looked for their contribution to the housing bubble and crisis.

How Fannie Mae and Freddie Mac Crashed An Economy

Much has been written and spoken about the housing crisis that led our economy into the current recession. Finger pointing abounds and victims and villains are presented to be cuddled or hounded. Early on the media attacks went after the easy targets, swarmy mortgage brokers, greedy Wall Street brokers, etc. I touched on this in my post last week "Curing The Foreclosure Crisis". One major factor in the housing market collapse that has not been mentioned in any reports or stories that I have read is the use of Automated Underwriting Systems (AUS) by Fannie Mae and Freddie Mac and their contribution to an industry writing weaker and weaker loans.

Automated Underwriting Systems came into the mortgage industry in the late 1990's. Fannie and Freddie in an effort to streamline their processes, facilitate the transfer of mortgages from originators to lenders to the GSEs (Government Sponsored Entities: Fannie and Freddie are both private companies with government charters, they can make a profit but are regulated by Congress), and to have their mortgages more uniform in their approval processes, conditions and evidence required for purchase and sale as Mortgage Backed Securities.

To perhaps further your understanding a very quick overview of the path of a mortgage: a mortgage application is taken by an originator, the application package is approved by a lender and if all the conditions are met it is funded, the loan package including the note and grant deed or mortgage depending on state is forwarded to the lender, the lender puts the loan package into a bundle with tens of millions of other mortgages and the bundle is sold to one either Fannie or Freddie depending on how it was underwritten, Fannie or Freddie then bundle this bundle with other bundles and has an offering for investors of bonds or securities, an investor can purchase an investment in Mortgage Backed Securities and receive interest payments and repayment of principal as the mortgagees pay their monthly payments and pay off their mortgages. Someone in Iowa can and does invest in a bundle of mortgages from Wyoming, Hawaii, Vermont, etc.

In the old days....before the advent of the Automated Underwriting Systems in the late 1990s those of us in the mortgage industry used age old methods of obtaining loan approvals for clients. We would meet with the client and fill in an application package by hand, collect W2s, tax returns, paystubs, bank statements, letters of explanation for any blemishes on the credit report and what ever else we felt the clients financial profile needed. We would package these items with an appraisal, title report, credit report and send them to an underwriter. The underwriter would open the file, review all the paperwork we had submitted, and if we did our job correctly would approve the loan for funding using the credit policies and guidelines of Fannie, Freddie, FHA or VA. Every file had proof of income, assets and explanations from the borrowers for any credit dings.

Seeing that perhaps this process could be streamlined and made more efficient using emerging technology, the GSEs developed their AUS, Fannie Mae rolled out Desktop Originator/Underwriter and Freddie Mac brought Loan Prospector to market. Now instead of sending a complete loan package for approval, an originator could input the loan application information into the software program and the program would analyze the data against the guidelines and issue an approval or decline. If the application received approval it would detail what items would needed to be submitted with the loan for final approval and in order for the GSE to purchase the mortgage from the lender (see steps above in the path of a mortgage). We might input the information for a borrower and receive an approval that requires a paystub, most recent year W2, one month of statements to verify funds for closing and reserves and a credit report. Having experience in the industry we knew that borrowers need to have income to debt ratios no higher than 40-42% (percentage of gross income for current debt obligations like credit cards and auto payments plus the new housing obligation).

As with all technology the more it was used the more efficient it became. By 2002 every lender was requiring an AUS approval on loans before they would fund conventional mortgages for sale to GSEs, this happened because the GSEs were requiring an AUS certificate in order to purchase the loans. No more traditional underwriting. So if the AUS approval required one W2 then the underwriter would call for one W2, if the AUS approval called for no W2 and only a paystub then the underwriter would call for only a paystub and no W2. The more transactions and mortgages funded throughout the country with the AUS approvals the more tracking history the system had for credit defaults and foreclosures under certain credit profiles and the more the system was able to adjust documentation requirements for loan approvals. Problem is during this period when the AUS were becoming more and more prevalent in the loan underwriting process, early 2000s on, the economy was starting to grow and home prices started rising--fewer foreclosure risks as troubled borrowers found they had equity and could sell their homes.

Around 2004-2005 we saw a dramatic change in the AUS approvals, coinciding with lenders offering 2nd trust deeds to 100% of the total value of the property. The industry had been using second mortgages to bridge ten percent down payments to reduce the amount of the first or primary mortgage below the magic 80% value level to avoid mortgage insurance, now the lenders with approval from Fannie and Freddie were offering second mortgages covering the entire down payment. As these mortgage products became more prevalent in the industry we saw a loosening, a significant loosening, of the credit guidelines from the GSEs. Because of the purchase agreements between the lenders and the GSEs, if the Automated Underwriting System approved a loan and the lender supplied the documentation required by the AUS then the loan would be purchased.

By this time the technology had advanced to the point that the industry software developers integrated origination processing software, credit reporting companies and the GSEs software so that within fifteen minutes I can complete the necessary information on a loan application, pull a credit report with all three major agencies, submit the information to Fannie Mae and receive an approval listing what items I would need to fund the loan. And the list of those items became less and less. As the credit guidelines from the GSEs became easier and easier more people could qualify to purchase a home. Many originators and lenders were not analyzing whether it made sense for a family to purchase the home they were buying based on their actual financial ability, but rather were inputting information into the AUS to get an approval and close the loan. And houses flew off the market. Borrowers would shop originators to find one that would approve them. Real estate agents knew which originators were "loose" and which were more strict and analyzing and refer accordingly. Borrowers, originators, agents, all over the industry with prices exploding people were chasing homes and commissions, and they were aided and abetted by Fannie and Freddie.

At the height, or depth, of the loose guidelines it was astounding the mortgages being approved through Fannie and Freddie. Borrowers with no money down, a seller paying closing costs and little to no reserves would be approved and the approval would require no income verification, merely a phone call to the employer to verify the applicant was still employed, no verification of assets and NO appraisal! Yes, the AUS technology evolved to the extent that they also included sales data and for most areas the system would pull comparable closed sales and if the price on the application was within the market range no appraisal, or perhaps a drive-by to make sure the house was there, would be required.

Further with no income verification borrowers with income to debt ratios in excess of 60% (sixty percent) would be approved; this means for a family they would have 40% of their gross income after paying their mortgage payment, car payment(s), student loans and credit cards to pay for shoes, groceries, electricity, income taxes...Applicants with below median FICO scores and no downpayment would be approved with verbal verification of income and no assets--individuals who have shown a history of difficulty managing their credit obligations would be given loans for a home in which they had no equity stake. Oh, and one more thing most of these loans were interest only mortgages with the interest only payment used for the qualifying guidelines--no equity at closing and no equity in the mortgage payments.

As the technology and the efficiency it allowed became more ingrained in the system lenders on "jumbo" mortgage products--those with loan amounts above the Fannie and Freddie guidelines--also used the AUS approval findings for their mortgage products, expanding the loose standards through more of the mortgage products being funded. Lenders on second trust deeds and home equity lines of credit also jumped on the AUS bandwagon--the entire industry was basing their approvals and fundings on the ever loosening guidelines established by Fannie Mae and Freddie Mac. Guidelines we know were loosened at the behest of Congress and in particular the two most vocal and ardent supporters of Fannie and Freddie Rep. Barney Frank from New York and Senator Christopher Dodd from Connecticut. Their desire to expand homeownership down the income and economic scale so more Americans could participate required looser and looser credit standards to fit those with below median incomes into a housing market where the median prices were soaring.

All of these mortgages were approved by the Automated Underwriting Systems, guaranteed for purchase by Fannie Mae and Freddie Mac and sold to investors as Mortgage Backed Securities. Well to no surprise when the credit markets tightened with the first domino being a sub-prime lender failing to obtain credit on Wall Street, investors began to look at their mortgage portfolios and those who held securities backed by Fannie Mae and Freddie Mac approved mortgages began to see that what they were invested in were actually sub-prime mortgages packaged as conventional, traditional mortgages. Uh-oh. What investors and investigators found was what those of us in the industry knew--a tremendous percentage of the "conventional" mortgages funded were actually sub-prime mortgages packaged by Fannie and Freddie as "A+" paper approved by either Desktop Originator or Loan Prospector.

Fannie Mae and Freddie Mac, and their leaders through the time period, have not received near enough credit for their role in the housing and credit crisis that began in 2007. An overwhelming number of foreclosures on the market are loans that were funded under Fannie and Freddie guidelines with AUS approvals. An overwhelming number of foreclosures had no down payment when purchased, or were refinanced up to or over 95% of the then value of the home using AUS approvals. If every mortgage for every home that has been foreclosed upon or is currently going through foreclosure is analyzed one would see that every one that was a Fannie or Freddie mortgage has an AUS approval in the file and the documentation matches what the approval called for when it funded: verbal verification of employment, drive-by appraisal, nothing more.

Congress is big on investigating, or threatening to investigate, their political enemies or those who they feel will make for good television (think of the baseball steroid hearings). If Congress truly wanted to investigate what led to our current economic cycle that was started by a collapse of the credit and housing markets they should start with a detailed investigation of Fannie Mae and Freddie Mac and who was responsible for loosening credit guidelines to the extent they were loosened. Until they do this, any measures or policies they impose, any statements they make laying blame on others, any investigations they do of any part of the industry that is not Fannie or Freddie is grandstanding. But we know that is what those in Washington do best.

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Congress Cap and Trades Homeownership

A major component of the American Dream is homeownership. Having worked for more than two decades helping families purchase their homes I know first hand how important homeownership is to many Americans. There is a strong emotional commitment to owning our own piece of dirt, our own walls and the roof that protects our children from the elements. Two amendments in our Bill of Rights protect our homes from the government. The third amendment protects us from troops quartering in our homes without our consent. The fourth amendment protects us from unreasonable searches of our homes.

The current Congress has aided President Obama in passing bills and legislation to protect homeownership, or encourage more Americans to purchase homes. Of all the legislation passed the greatest impact, by far, has been the raising of the loan limits for Fannie Mae, Freddie Mac and FHA mortgages; in particular the lifting of the FHA limits. While hindering the closing of purchase transactions with the Home Value Code of Conduct--which hopefully will be repealed or suspended soon--Congress perhaps unwittingly by passing the loan limit increases opened up real estate markets across the country to first time buyers who were waiting to enter and become homeowners.

Most first time buyers are working with a limited amount of funds for down payment and closing costs, this has been true historically which is why when President Franklin Roosevelt created the Federal Housing Administration to assist with mortgages to Americans, the program was created with long term mortgages and low down payments. FHA mortgages could be obtained wtih borrowers putting down 3% of the purchase price until about a year ago, now FHA borrowers must put at least 3.5% of the purchase price into the transaction as down payment. Every FHA borrower pays into a mortgage insurance pool to protect lenders' losses should there be foreclosure--a insurance pool that has worked well through the current crisis.

Until Fannie Mae and Freddie Mac loosened their lending guidelines and began allowing 100% financing, with very high debt to income ratios (and minimal income verification), FHA was the primary loan for most first time buyers. The guidelines allowed family members to co-sign for the borrowers, allowed parents to assist with funds to close and was a bit more lenient on credit analysis. The purpose of the program was and is to promote responsible homeownership, and it has worked. FHA loans became very scarce in California and many other parts of the country once the 21st Century began for two main reasons: 1) As mentioned the increase in loan products available through Fannie and Freddie that allowed 100% financing, combined with 2nd trust deeds borrowers could purchase a home with no down payment and no mortgage insurance 2) FHA loan limits were well below the market medians and could not keep pace with the booming home prices.

In 2007 Congress passed a temporary increase in loan limits for FHA, Fannie Mae and Freddie Mac. FHA limits were raised to match the conforming limits and a new "high-balance" limit was created for facilitating higher transaction prices. As mortgage insurance companies pull out of California and other states, and/or severely restrict their criteria for issuing insurance on mortgages with less than 20% down payment, the FHA mortgage product has become critical to keeping our housing markets on life support, and in many areas begin a reversal of the downturn.

Since last fall the housing industry has seen a huge influx of first time buyers. With low prices and low rates, many families are finding they are able to obtain homeownership--the old fashioned way using FHA financing. Fully qualifying applicants' income, credit, and assets, FHA underwriters are approving thousands of mortgages for new homeowners. Across the state and across the country we see data where these homebuyers are stabilizing prices, or at least slowing the decline. In the past year our industry has seen the highest number of FHA mortgages funded in perhaps decades. Congress, by lifting the loan limits, contributed to this positive economic trend; if Congress went home after passing the loan limit increases they would have done all they needed to do to let the markets begin to revive.

But Congress being Congress and Obama being Obama there was more on their agenda. At the end of June by a slim margin, the bill passed due to the support of eight Republicans, the House of Representatives passed H.R. 2454, the Waxman-Markey bill, also known as Cap and Trade. I will not go into the details of the entire bill and how damaging it is to the United States economy, increases our dependence on foreign oil and the many other fallacies of the bill. What I want to highlight is one aspect of the bill that is discriminatory to many first time buyers, those who need to use FHA financing to purchase a home.

Included in the bill is an amendment that will require all home transfers that are using an FHA mortgage to have a federal "energy audit" performed on the home. An inspector will go through the property and check insulation, water flow, heaters, air conditioners, all appliances, to see if they meet new federal standards for lowering the energy efficiency of American homes. The seller will have to pay for the audit and pay for any necessary corrections before the mortgage can be approved and the transaction closed.

Imagine an elderly couple who purchased their home in 1973, have upgraded their appliances in the early 1990s and now are selling their home to move into Leisure World or somewhere else. Several local real estate professionals have told them their home value is approximately $425,000 and they should expect offers between that number and $400,000. Imagine two families wish to purchase the property: one is offering $405,000 and will be putting 20% down and getting conventional financing; the other is offering $425,000 but will be using FHA financing. Sounds easy, take the offer with $20,000 more to the seller. But wait! We must first spend several hundred dollars for an energy audit, then we must comply with the findings: install insulation, redo the windows, replumb the home, replace the appliances, and trade out the toilets.

Twenty plus years experience in the housing industry tells me that if the energy audit for home transfers is left in the Cap and Trade bill as it goes through the Senate it will put an end to most FHA financed transactions, will lead to lower home prices due to less demand and severely slow down the real estate revival that is slowly occuring around the country. "But just sell the house for more money to compensate the seller for the repairs," some will say. Sure raise the price just for FHA buyers, then tell me how it will get an appraisal at that value--especially with the Congress imposed HVCC appraisal process that has been killing sales across the country.

Cap and Trade is a bad bill, the energy audit clause makes a bad bill horrible. Sunday "Anonymous" in providing answers to several of my "Just Questions" indicated a no comment on my question as to whether members of the House knew they were voting to discriminate against first time homebuyers with the Cap and Trade vote. I hope this provides the information s/he, and you, need to see how poorly this legislation was put together and yet another example of our Congressional Representantives not reading legislation but just casting votes.

UPDATE: I believe this is my first past-posted update. The Washington Times has an excellent editorial on Congress passing unread legislation. The 300 page amendment mentioned in the editorial contained the "energy audit" language I address in this post. The Times is calling on all members of Congress to sign a pledge not to vote on a bill, particularly any health care bill, until the have personally read the bill and it has been posted for at least 72 hours to give the public time to read it. Sounds too reasonable for Congress, I wonder who will sign? As I write this at 10:00 a.m. Pacific only two Senators and two Representatives have signed. Follow it here: www.pledgetoread.com