Predictions for Obama’s Next Four Years – Right or Wrong? - Updated 11/28/2012

In a November 11, 2012 blog, I outlined my predictions for Obama’s second term.  I intend to revisit these predictions as significant events occur.  These will be dated and presented in reverse chronological order for easy reading.

·         Prediction: Obama’s second term will be characterized by more bailouts.

o   11/28/2012 – FEDERAL STUDENT LOAN PROGRAM TROUBLED – The President pushed for the expansion of Federal Government involvement in financing student loans.  Last year 93% of these loans came directly from the Government.  As usual this program is a disaster waiting (not long) for disaster.  The program does not consider the borrower’s ability to pay and does not assess the “value” of the borrower’s education.  Student loans outstanding are now nearly a trillion dollars (up 56% in real terms since the end of 2007).  Delinquency rates (non-payment for 90+ days) have increased from 8.9% in June to 11% in September of 2012 alone.  The New York Fed researchers claim that these figures will become much worse because many recent borrowers are still in school or have been granted postponements for various reasons.  Imprudent borrowers are likely to become “indentured servants” for life.  Bankruptcy is not an easy answer because it is nearly impossible to discharge education loans via Bankruptcy.  The endgame is either a bailout of the program itself or “relief” for individual borrowers.  In any case, the taxpayer will be on the hook.

o   11/21/2012 – FHA BAILOUT REQIRED - So you thought all of the foolish underwriting requirements that led to the housing crisis were remedied.  Wrong – The foolishness continued with another Government culprit – The FHA.  The FHA does not originate or buy loans from other financial institutions.  It simply insures the loan – So if a bank follows the FHA guidelines and originates a loan with FHA insurance, then if the loan goes bad the FHA (the American Taxpayer) is on the hook.  The down payment required by FHA is only 3.5%.  Is it a wonder that so many of its insured loans went bad?  With no “skin in the game” and many states with non-recourse laws the buyer can in essence default with impunity.  Sure, the buyer’s credit will be damaged but the loss of the down payment is minimal.  On November, 16, 2012, the Government announced that FHA liabilities exceed assets by $16.3 billion.  Some estimate that the debacle will ultimately exceed $90 billion.  Are we crazy to allow borrowers to mortgage a home with only 3.5% down?