American Home Mortgage Files Bankruptcy
The article below speaks to the loosened credit standards put in place by American Home Mortgage for higher risk borrowers which worked out to be a lose-lose situation for a high percentage of loans that were issued.
American Home Mortgage took a gamble, just as many of its customers did, and lost. And just like many of those customers, the company found itself in a bankruptcy court last week.
The difference is that it will be up to the court and creditors to decide if the company survives. It appears, however, that a government bailout may be in the offing for individual homeowners who thought they could outrun their poor credit histories and ratings.
In the wake of last week’s bankruptcy filing by American Home Mortgage, presidential candidate Hillary Clinton wants to mount a federal bailout.
As reported by The Associated Press, Clinton is calling for penalties on unscrupulous mortgage brokers who engage in predatory lending and a $1 billion federal fund to help homeowners avoid foreclosure.
Clearly, as news reports have shown, some would-be homeowners were taken advantage of — some innocently, some intentionally and some of their own accord. The problem is telling the difference between those hoodwinked and those who knew they were taking a risk (putting aside momentarily whether the government has any obligation beyond the bankruptcy and criminal court system to get involved).
The primary reason American Home Mortgage and individual homeowners have been forced into bankruptcy is that they took too great a risk.
AHM officials thought they could make home loans to credit-questionable consumers. Consumers, many of whom knew they were taking a chance, played the long shot and lost at the rail.
Company officials staked their fortunes on the bet that enough customers would buck their credit histories and insufficient incomes. The equation was simple. If enough mortgagees made their payments at inflated rates, they would cover those who would default.
You win some; you lose some. But in the end there is a net gain — or so the theory goes.
It’s much like credit card companies which charge 20-plus percent in order to cover losses of customers the company statistically knows will default.
But all the blame does not rest with AMH. With all the emphasis placed on credit ratings today, a potential mortgagee would have to be living in a cave without a radio or television to not know enough to check their credit report when applying for a loan.
It is these credit reports that determine whether a borrower gets favorable rates or has to pay more because they are a financial risk to the mortgage company and themselves.
Clinton implies that a significant portion of those with these high-risk loans were taken advantage of — a questionable hypothesis.
But even if she is right, establishing a government slush fund that sidesteps the judicial system is not the way to go. Democrats have been like flies on flypaper in criticizing the Bush administration for fraud and waste in the wake of Hurricane Katrina and federally funded recovery efforts.
How in the name of all that is holy, does anyone expect Uncle Sam to get it right this time?
And what about Clinton’s call for tougher laws that will draw and quarter offending mortgage brokers? While some may be needed, no proof is offered that stronger enforcement of existing laws won’t accomplish the task.
Are there individuals who need help? Yes. Are there families whose life savings went up in smoke due to no fault of their own? Probably.
But a $1 billion government bailout is hardly the answer.
There is a court system in place to do much, if not all, of what Clinton wants done. And there are laws that apply, injunctions that can be filed, and class action lawsuits. Fraud is a prosecutable offense. If local district attorneys need more resources, then perhaps the public coffers should be tapped. Ditto, if more criminal investigators are needed.
But to open the candy jar and let anyone with a complaint stick their hand in is to do a disservice to those with good credit ratings and who borrow responsible amounts.
But then, there is a presidential election just around the corner, and nearly everyone loves candy.
Tags: Stop Foreclosure
