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Obama’s Mortgage Reform Plan: A Bitter Pill
February 19th, 2011 categories: Loans / Financing, The Economy, Viewpoint
Many years ago, another agent in my office shared a great little saying with me.
It was one that really cut to the chase with a seller who wanted to hold out 
for a better offer when the one they had in front of them was clearly the best they were ever going to get.
She would say: I know it’s a bitter pill to swallow…but do you want that pill now or do you want it later?
And that little saying of hers resonated with me the moment I heard about the White House’s proposed mortgage reform plan, which was announced just over a week ago.
I wrote about that plan a few days ago. In a nutshell, the Obama administration has proposed sweeping mortgage policy changes that would:
- Require higher down payments
- Drop the maximum loan amounts for conventional loans in many areas
- Raise loan fees to borrowers
- Do away with mortgage giants Freddie Mac & Fannie Mae
Making all these changes would definitely be a very bitter pill for the mortgage and housing markets to swallow right now. But if we really want to make sure we don’t have a repeat of the recent mortgage meltdown, there’s no doubt some changes have to take place.
Mortgage Reform Is Needed…But Now or Later?
We have to make sure the riskiest borrowers really have the means to own a home before letting them slip through the cracks and buy something they clearly can’t afford. And we need to get back to where the private sector is fueling the money supply machine rather than government.
Maybe not exactly as Obama’s plan proposes, but some changes definitely are in order to make sure we prevent careless live-only-for-today lenders and home buyers from again bringing the rest of us into their Den of Doom.
Whether we do it the way the White House plan suggests or another way, no one can quarrel that mortgage reform is just what the doctor ordered. And it will be a bitter pill. The big question, though, is Do We Swallow It Now Or Later?
The housing market and our overall economy are both still VERY fragile. So if we implement too much too soon, we run the risk of undoing all the progress we’ve made over the past 2 years.
The Patient Is Still Healing
The housing market is kind of like the patient who just had major surgery. It’s starting to heal, but if we take out the stitches too soon, we could undue everything and be right back in surgery tomorrow.
So while the premise of Obama’s plan makes sense — reducing the housing market’s dependency on the government and safeguarding the mortgage industry from a repeat of the recent mortgage market meltdown — introducing major mortgage changes like these could take a lot of the steam out of a still fragile housing market and cause yet another downward spiral.
I think we need to make sure the patient’s incision is fully healed before we making big sweeping changes like these. And lord knows, the economy still has plenty of healing to do.
Too Much Too Soon?
Premature policy changes will likely cause the housing market to sputter, which likely would curtail our economic recovery and renew cries for more government assistance — the very thing Obama’s plan is trying to curtail.
In my mind, the sensible approach is to wait until the housing market and overall economy is convincingly in a robust recovery mode before making sweeping changes. Over the past few years, underwriting and appraisal rules have tightened, which already has helped prevent the riskiest borrowers and shady investors from buying.
I’m not saying the job is finished. We need reform, but not in one big gulp and certainly not while the economy and housing market are both still so weak and fragile.
The right dose of medicine can can work wonders, but as we all know, an overdose can be lethal.
So let’s not swallow that bitter pill just yet.
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