They are waking up in Washington... on drugs maybe?

Why is it that when the high rollers feel a pinch, the politicos step in and throw a bone to the little guys as an afterthought?

The foreclosure and sub-prime meltdown problem is bad. It is affecting the poor, especially those who were put into loan packages with low interest teaser rates (just about anybody can qualify for a loan at a 2% interest entry level) and adjustable rates after the teaser wore off (usually 18-24 months, which is why the loans that were taken out in 2005 are just now priming for default).

BUT ... the poor were not the only people who got sucked into the whirlpool. You see, the two giants of the secondary mortgage market, Fannie and Freddie (both GSEs), have CAPS on the amount of loan they will insure. Currently that is at $417,000. An 80% loan under those caps will allow you to buy a $521,250 house. This reduces the risk for F/F and the possibility that Uncle Sam will have to ride to the rescue to bail them out.

If you need to borrow more than the Fannie/Freddie cap amount, you can play a little moneymagic game. Get the first mortgage under the cap, and have that one insured by F/F at prime rates for 30 years, with the second mortgage secured by a sub-prime loan with a low initial rate and adjustments as prescribed. Millions of Americans have done this. Many of them bought homes in New York and New England; in fact, the main reason why the high end housing market is so slow is that the sub-prime lenders are now starting to require that their underwriters look at the deal more like F/F's underwriters do. The cost of sub-prime borrowing is skyrocketing, and it is hurting the high rollers (who are really middle managers who want to live like royalty).

Or, maybe you are not such a high roller, but you want to buy a house with no money down. F/F like to see 20% down. That is easy, too. Borrow the 80% from F/F, and borrow the 20% down payment from a sub-prime lender. Maybe this helps to explain how our housing market got into this mess.

The problem is the second mortgage. When that loan's rates increase, and the borrower defaults, the whole project goes in the dumper with both loans being called.

What about the 90%, 95%, or 99% 30-year fixed conventional mortgages that were out there? Many of those were prime, but not insured by F/F and required that Private Mortgage Insurance be purchased for the loan amount over 80%. PMI is expensive (yeah, I would charge a high premium if I were the insurer, too). The borrower had to be qualified at the time of closing to be able to afford the whole ball of wax; these people generally do not hit trouble unless they have job loss problems. OR -- they had a government grant that helped them qualify but later left them in the lurch.

Seems like Mr. Chris Dodd (D-CT) wants some action in the mortgage arena. He would like to lift the caps on Fannie and Freddie. That would allow his high dollar buddies to continue their lifestyle with government insurance.

Mr. Charles Shumer (D-NY) would like to have about $1 BILLION set aside to help bail out the sub-prime lenders. The idea there is that investors would then look upon sub-prime as favorable again, pump their money into buying those securities, and, behold!, the interest rates would drop again to where millionaires and paupers alike could afford them. Unfortunately, the estimates for the cost of the bailout are now running in excess of $120 BILLION (don't gasp, honey, the S&L bailout cost over $150 BILLION).

And, Mrs. Hilary Clinton (D-NY) would like to have $1 BILLION set aside to help low income buyers fund their home purchases. (As if that would somehow help them buy a house like hers??? Naaaa. The po' need to feel like they are getting equal treatment with the rich, or they won't vote properly.)

Where will the money for this come from? Mr. Shumer and Mr. Sherrod Brown (D-OH) want to amend the Truth in Lending Act , SB 1299 (129-A-4), requiring appraisers to be bonded --

" (4) the term `qualifying bond' means a bond equal to not less than 1 percent of the aggregate value of all homes appraised by an appraiser of real property in connection with a home mortgage loan in the calendar year preceding the date of the transaction, with respect to which--

(A) the bond shall inure first to the benefit of the homeowners who have claims against the appraiser under this title or any other applicable provision of law, and second to the benefit of originating creditors that complied with their duty of good faith and fair dealing in accordance with this title; and

(B) any assignee or subsequent transferee or trustee shall be a beneficiary of the bond, only if the originating creditor qualified for such treatment; and for 1% of their gross valuation total each year."

Let's do some math. Suppose an appraiser appraises five $100,000 homes per week, with 2 weeks off for vacation per year. His aggregate valuation amount is $25,000,000. One percent of that is $250,000. Let us assume that he gets paid $500 per appraisal (California Dreamin!!!!). His gross income is then $125,000 per year. Does anybody have a problem with this math, senators excepted? By my numbers, he would have to charge $1,000 per appraisal just to be able to renew his license each year, and more if he wanted to eat. Please remember that it is unethical for appraisers to charge for their work based on the amount of the valuation.

The cost of the bonds would then be used for bail-out purposes. The appraiser will be the goat if the borrower loses the home in foreclosure. While appraisers usually carry E&O insurance, the insurers generally make every effort to settle without trial. Once the appraiser's deductible has been used, he rarely has a chance to defend his appraisal without the insurer walking away.

Oh, yeah, under that bill, the lender gets an additional set of instructions for qualifying borrowers. That's all.

I have a better idea. Actually two of them. One, require all home mortgage lenders to conform to the Fannie/Freddie requirements and then require ALL borrowers that exceed the 80% LTV ratio to purchase PMI. Two, make the HUD-1 settlement statement a public record, disclosing to all the world exactly who got paid what in the real estate transaction, and require that the actual appraiser who did the appraisal be named on the HUD-1, with the appraised value. It wouldn't solve all the problems, but it would be a step in the right direction.

Don't tell me it won't happen. I know that already. It's too simple, and it would keep people too honest.