Borrower SOS

In 1976, the average first-time homebuyer down payment was 18%. According to the National Association of Realtors, from mid-2005 to 2006, the median down payment was TWO PERCENT, with almost half of first-time buyers putting down nothing at all. In essence, that is the crux of our problem today: buyers and lenders alike got caught up in the housing euphoria and became lazy.

Yesterday, the Senate Banking Committee wanted answers: Did banks know how much risk they were taking? Did they know how much capital would be needed if things went downhill in a hurry? Did they prepare for the possibility that the esoteric mortgage-backed products that were created might not be easily convertible into cash when things got ugly? The answer to these questions is that of course banks understood risk in the abstract, but the reality is that few can fully project what will occur when the risk comes home (sorry for the pun!) to roost.

But that’s the past and now this country faces some difficult choices about the future: with an estimated 15 million homeowners owing more on their mortgages than their homes are worth, lawmakers contend that we may not be able to afford to wait for the ugly process to play itself out without intervention. Is this fair to the folks who patiently waited to accumulate a 20% down payment before jumping into the real estate market? Not really, but the housing problems of a few have the potential to drag all of us down, so its time to come up with a game plan. To some extent, the Senate hearings are supposed to help with the process.

I get a sinking feeling in my stomach when I consider a government bailout, but Sen. Chris Dodd, chairman of the Banking Committee, seems intent on creating a federally financed rescue effort for the nation’s housing woes. It is unclear what form the effort would take, but Mr. Dodd claims that the voluntary industry plan backed by the White House isn't going to do the job. “Hope Now (the industry plan) does not have the resources or capacity to deal with the sheer size of the problem that has millions of Americans in financial dire straits.”

Treasury secretary Paulson has resisted a major bail-out, noting that “our efforts are best focused on helping homeowners who want to stay in their homes.” Meanwhile, Fed Chairman Ben Bernanke, speaking at the Independent Community Bankers of America conference yesterday said the current turmoil in the housing market "calls for a vigorous response…Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done." Like it or not, I think we are headed towards more government meddling. After all, I can’t help but get the feeling that the guys who created Sarbanes-Oxley after the tech bubble burst are not going to sit idly and wait for a market-based solution.