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Saturday, June 20, 2009

Regulatory reform: unnecessary and doesn't even do what it intends

Two major bills are currently being proposed. One is finance oversight regulation, the other is health care reform.

1: Finance oversight.

The major financial problems we've had over the last year was, and most people know this, due largely to Fannie Mae and Freddie Mac. They encouraged, financed, and in many cases even required, lenders to make home loans to "underqualified buyers".

"Underqualified" means that the people couldn't afford them, like someone who makes $20k/year getting a $200k house. How could they even work that? Simple. Give them a low-interest, interest-only loan for the first five years. They don't have to pay on the $200k at all, only the 3% interest. They know that in five years they'll have to start paying principal too, and the interest will go to 9%. They pay $500/month for now. But in five years, that will go to $2028. Why would they even do that? They probably plan to either sell the house at a profit in five years, with a side thought of refinancing into a 30-year fixed at 6% ($1200/month) on an increased income. Problem is that housing values went down. They couldn't sell at a profit. They are "upside-down" in a house they couldn't afford. The bank should never have even lent to them. But Fannie Mae required that they make a certain number of these loans, or else risk losing access to financing sources.

The problem with the proposed legislation?

The new regulation DOES NOT APPLY TO FANNIE MAE OR FREDDIE MAC! AT ALL! The area that actually needs oversight doesn't get it!

2: Health care reform.

President Obama has pushed for this reform, in large part using General Motors as an example. The union "legacy costs", primarily health insurance, is too high, and has greatly contributed to their bankruptcy.

The problem with the proposed legislation? (Ignoring many other issues, like estimated costs of $1 trillion with no funding, and expectations that many employers will dump their current better insurance since the new stuff won't cost them anything...)

The new regulation grandfathers in the union plans! If you have a union, YOU CAN'T GET INTO THE NEW PLAN EVEN IF YOU WANT TO! The industries that need the reform most aren't allowed to use it!

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