Economic Stimulus Package, Part 2
Posted by Mike Sylvester - 2/18/08 @ 11:08 pm - Filed Under National Politics
The “Economic Stimulus Package” (ESP) is supposed to “spur” the economy and help ease the sub prime loan “crisis.”
Our real estate and financial markets have been negatively effected because a large number of homes are in various states of foreclosure and many Americans have purchased houses that they cannot afford. This in turn has caused our banks and those who hold these loans to lose money and “write down” their profits since the loans they hold have decreased in value.
Over the last couple of decades it has become easier and easier to buy a house. Home buyers no longer have to pay a 20% down-payment, interest only loans are common, and many people are borrowing more money then their home is worth.
With this in mind our politicians in Washington (From both political parties) have decided to intervene in the housing markets and “help” homeowners.
Believe it or not; here is what our politicians have come up with to help “resolve” the sub prime loan “crisis:”
1. The Federal Housing Authority (FHA) currently provides Federally backed loans to homeowners who are low income, credit risks, or are both. Our politicians have increased the limits so that low income home buyers and home buyers with poor credit can now purchase a house that is worth up to 125% the median home price in the home buyers area. Logic would dictate that this will cause the foreclosure rate to increase since people already have purchased more house then they can afford; however,the Federal Government is going to encourage people to purchase even larger houses.
Can you imagine a low income person or a person that is a credit risk being encouraged to purchase a home that is worth 25% more then the median home in their area? Well, that is exactly what our politicians in Washington have decided to do!
2. The plan increases the size of the loans that Freddie Mae and Freddie Mac can purchase. Currently Freddie Mac and Fannie Mae can only purchase loans that are $417,000 or less. The ESP changes that (at least until December 31st, 2008) so that the limit is 125% of the area’s median home value with a maximum ceiling of $729,750. (This law change only effects 20 Metropolitan areas in the USA). These loans granted by Freddie Mac and Fannie Mae are known as “conforming” loans. Loans on houses above the limits set by Freddie Mac and Fannie Mae are known as “jumbo” loans. A jumbo loan currently averages an interest rate that is 1.125% higher than a “conforming” loan.
The logic behind this is that a large number of homeowners (Mostly those in California, New York, and Hawaii) will be able to refinance their current “jumbo” loans as a “conforming” loan through Freddie Mac and Fannie Mae and they will be able to decrease their payments due to the decrease in interest rate. Since they will decrease their payments fewer of these homeowners should go into foreclosure.
There is more logic to this portion of their plan then the previously mentioned portion. The only bad thing about this is that it will cause Freddie Mac and Fannie Mae to get even larger then they currently are and they are a quasi government organization.
I do not plan on voting for many, if any, incumbents this election. The ESP should be renamed a “Pandering Politician Package!”
Mike Sylvester
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2 Responses to “Economic Stimulus Package, Part 2”
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The question, Mike, is what are YOU going to do?
Do you feel so strongly that you will return the check to the Govt.?
Fort Wayne Resident:
No I am not going to return the check to the Government; that would be really dumb.
As the Federal debt increases over the next few years taxes will increase to pay for the ever increasing interest payments on the debt our politicians are creating. As the debt increases the dollar will continue to fall and our purchasing power will decrease.
I will take the Government check and invest it. I will then use this money to pay the higher and higher taxes I will pay down the road.
Mike Sylvester