Tag Archives: GSE

New housing bubble: Obama proposes lowering mortgage-lending requirements

I must have blogged a million times about how the Democrats caused the recession by forcing banks to make bad loans to people who couldn’t pay them back. Although the Republicans got blamed for the crisis, they were the ones who tried to regulate Fannie Mae and Freddie Mac, but they were shut down by Democrats. Well, guess what? The Democrats didn’t learn their lesson the first time, and they want to start another housing bubble, just like the first one that gave us the recession.

Take a look at this article in the leftist Washington Post. (H/T ECM)

Excerpt:

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

[…][A]dministration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps.

Obama pledged in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery, but critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars.

“If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

And if that was not enough,the Democrats also have another bubble being inflated. They nationalized the student loan industry, and now taxpayers are going to have to bail out those risky unpaid student loans as well.

Excerpt:

America’s now-nationalized student loan industry just reached a value of $1 trillion, according to Citigroup, growing at a 20 percent-per-year pace. Since President Obama nationalized the industry (a tacked-on provision of the Obamacare bill), tuition has gone up 25 percent and the three-year default rate is at a record 13.4 percent.

[…]With many young people unable to pay their loans (average graduating debt is about $29,000), Citigroup and others are speculating that this industry might be ripe for a bailout.

To pay off all the current defaults, Citigroup says it would cost taxpayers $74 billion. However, this number doesn’t include those who will default in the coming years, and, when the government rewards the defaulters, it will encourage more borrowers not to pay their debts.

And liberals in Congress have proposed forgiving all student loans via “The Student Loan Forgiveness Act 2012,” costing taxpayers $1 trillion.

Adding another $1 trillion dollars to the national debt isn’t exactly “forgiveness” for young people—it’s prolonging the payoff. In fact, student loan bailouts are a catch-22 for young people because they’re going to be held accountable for paying off the national debt and interest payments.

At least the young people who voted for Obama are going to be the ones to get the bill for his socialist economic policies.

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After causing the first recession, Democrats plant seeds of the next recession

From the Competitive Enterprise Institute. (links removed, please see original article for links)

Excerpt:

The Wall Street Journal today writes about how the Obama administration is repeating the “mistakes of the past by intimidating banks into lending to minority borrowers at below-market rates in the name of combating discrimination.” Assistant Attorney General for Civil Rights Thomas Perez has argued that bankers who don’t make as many loans to blacks as whites (because they make lending decisions based on traditional lending criteria like credit scores, which tend to be higher among white applicants than black applicants) are engaged in a “form of discrimination and bigotry” as serious as “cross-burning.” Perez has compared bankers to “Klansmen,” and extracted settlements from banks “setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit,” treating welfare “as valid income in mortgage applications” and providing “favorable interest rates and down-payment assistance for minority borrowers with weak credit,” notes Investors Business Daily.

Under Perez’s “disparate impact” theory, banks are guilty of racial discrimination even if they harbor no discriminatory intent, and use facially-neutral lending criteria, as long as these criteria weed out more black than white applicants. The Supreme Court has blessed a more limited version of this theory in the workplace, but has rejected this “disparate impact” theory in most other contexts, such as discrimination claims brought under the Constitution’s equal protection clause; discrimination claims alleging racial discrimination in the making of contracts; and discrimination claims brought under Title VI, the civil-rights statute governing racial discrimination in education and federally-funded programs. Despite court rulings casting doubt on this “disparate impact” theory outside the workplace, the Obama administration has paid liberal trial lawyers countless millions of dollars to settle baseless “disparate impact” lawsuits brought against government agencies by minority plaintiffs, even after federal judges have expressed skepticism about those very lawsuits, suggesting that they were meritless.

Fearing bad publicity from being accused of “racism”, banks have paid out millions in settlements after being sued by the Justice Department, even though they would probably prevail before most judges if they aggressively fought such charges (although doing so would probably cost them millions in legal fees).  A Michigan judge called one proposed settlement “extortion.” These settlements provide cash for “politically favored ‘community groups ” allied with the Obama Administration, and the Journal’s Mary Kissel predicts that “many” of the loans mandated by these settlements “will eventually go bad.”

This is exactly what caused the first recession.

Who caused the first recession?

Here’s a summary of how we got into the first recession – it was caused by the Democrats, and the Republicans tried to stop them.

First, watch this video of Barney Frank obstructing regulators and defending Fannie Mae and Freddie Mac. (H/T Verum Serum)

Now look at this Boston Globe article.

Excerpt:

When US Representative Barney Frank spoke in a packed hearing room on Capitol Hill seven years ago, he did not imagine that his words would eventually haunt a reelection bid.

The issue that day in 2003 was whether mortgage backers Fannie Mae and Freddie Mac were fiscally strong. Frank declared with his trademark confidence that they were, accusing critics and regulators of exaggerating threats to Fannie’s and Freddie’s financial integrity. And, the Massachusetts Democrat maintained, “even if there were problems, the federal government doesn’t bail them out.’’

Now, it’s clear he was wrong on both points — and that his words have become a political liability as he fights a determined challenger to win a 16th term representing the Fourth Congressional District. Fannie and Freddie collapsed in 2008, forcing the federal government to buy $150 billion worth of stock in the enterprises and $1.36 trillion worth of mortgage-backed securities.

Frank, in his most detailed explanation to date about his actions, said in an interview he missed the warning signs because he was wearing ideological blinders. He said he had worried that Republican lawmakers and the Bush administration were going after Fannie and Freddie for their own ideological reasons and would curtail the lenders’ mission of providing affordable housing.

“I was late in seeing it, no question,’’ Frank said about the lenders’ descent into insolvency.

This is not in doubt – this is a known fact. Democrats caused the recession by meddling in the free market.

Democrats caused the recession and Republicans tried to stop them

Here is Barney Frank in 2005 claiming that fears of a housing bubble are unfounded.

Here’s the timeline showing who wanted to regulate Fannie and Freddie, and who blocked their attempts.

Here’s video from a hearing showing Democrats opposing regulations:

That’s right – Republicans wanted to regulate Fannie Mae and Freddie Mac, and Democrats said Fannie Mae and Freddie Mac are “doing a tremendous job”.

Fannie Mae and Freddie Mac had paid the Democrats off handsomely during multiple election cycles, but I’m sure that the Democrats’ opposition to regulations had nothing to do with those political contributions.

The only ones to try and stop the Democrats were George W. Bush in 2003 and John McCain in 2005. Both attempts were blocked by Democrats.

What was the real cause of the financial crisis?

From the American Spectator.

Excerpt:

I believe that the sine qua nonof the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans — half of all mortgages in the United States — which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path — fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high-risk residential mortgages — the great financial crisis of 2008 would never have occurred.

In this article, I will outline the logical process that I followed in coming to the conclusion that it was the U.S. government’s housing policies — and nothing else — that were responsible for the 2008 financial crisis.

The inquiry has to begin with what everyone agrees was the trigger for the crisis — the so-called mortgage meltdown that occurred in 2007. That was the relatively sudden outbreak of delinquencies and defaults among mortgages, primarily in a few states — California, Arizona, Nevada, and Florida — but to a lesser degree everywhere in the country. No one disputes that the losses on these mortgages and the decline in housing values that resulted from the ensuing foreclosures weakened financial institutions in the U.S. and around the world and were the precipitating cause of the crisis.

[…]Researcher shows that the turning point came in 1992, with the enactment by Congress of what were called “affordable housing goals” for Fannie Mae and Freddie Mac. These two firms, which were shareholder-owned, had been chartered by Congress more than 20 years earlier to operate a secondary market in mortgages. The original idea was that they would buy mortgages from banks and other originators (Fannie and Freddie were not permitted to originate mortgages), standardize the mortgage document, resell those mortgages to institutional and other investors, and in that way create a national market for U.S. mortgages.From the beginning, Fannie and Freddie’s congressional charters required them to buy only mortgages that would be acceptable to institutional investors — in other words, prime mortgages. At the time, a prime mortgage was a loan with a 10-20 percent down payment, made to a borrower with a good credit record who had sufficient income to meet his or her debt obligations after the loan was made. Fannie and Freddie operated under these standards until 1992.

The 1992 affordable housing goals required that, of all mortgages Fannie and Freddie bought in any year, at least 30 percent had to be loans made to borrowers who were at or below the median income in the places where they lived. Over succeeding years, the Department of Housing and Urban Development (HUD) increased this requirement, first to 42 percent in 1995, to 50 percent in 2000, and finally to 55 percent in 2007. It is important to note, accordingly, that this occurred during both Democratic and Republican administrations.

At the 50 percent level, Fannie and Freddie had to acquire at least one goal-eligible loan for every prime loan that they acquired, and since not all subprime loans were goals-eligible Fannie and Freddie were in effect required to buy many more subprime loans than prime loans to meet the goals. As a result of this process, by 2008, Fannie and Freddie held the credit risk of 12 million subprime or otherwise risky loans — almost 40 percent of their single-family book of business.

But this was not by any means the full extent of the problem. HUD took Congress’s enactment of the affordable housing goals as an expression of a congressional policy to reduce underwriting standards so that low-income borrowers would have greater access to mortgage credit. As outlined in my dissent, by tightening the affordable housing goals, HUD put Fannie and Freddie into competition with the Federal Housing Administration (FHA), a government agency with an explicit mission to provide credit to low-income borrowers, and with subprime lenders such as Countrywide, that had pledged to reduce underwriting standards in order to make more mortgage credit available to low-income borrowers. Moreover, all these organizations were joined by insured banks and S&Ls, which as noted above were required under the CRA to make mortgage credit available to borrowers who are at or below 80 percent of the median income in the areas where they live.

Of course, it is possible to find borrowers who meet prime loan standards among low-income families, but it is far more difficult to find such loans among these borrowers than among middle-income groups. And when Fannie, Freddie, FHA, subprime lenders like Countrywide, and insured banks and S&Ls are all competing to find loans to borrowers in the low-income category, the inevitable result was a significant deterioration in underwriting standards.

So, for example, while one in 200 mortgages involved a down payment of 3 percent or less in 1990, by 2007 it was one in less than three. Other credit standards had also declined. As a result of this government-induced competition, by 2008 19.2 million out of the total of 27 million subprime and other weak loans in the U.S. financial system could be traced directly or indirectly to U.S. government housing policies.

I’ve read Thomas Sowell’s “The Housing Boom and Bust” and this article is a snapshot of that book. It mentions Department of Housing and Urban Development, Fannie Mae, Freddie Mac, the Community Reinvestment Act, the Federal Housing Administration, and so on.

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Thomas Sowell on the root causes of the mortgage lending crisis

Here’s a 33-minute video of Thomas Sowell explaining what caused the current recession.

He blames everybody, but Barney Frank and Chris Dodd most of all.

For those who cannot watch a big long video, here’s an article from Reason magazine.

Here’s a summary from the article:

Now, in The Housing Boom and Bust (Basic Books), Sowell contemplates the greatest expansion of government power in a generation, which was itself occasioned by the greatest economic crisis in as long. A quick but thorough guide to the causes of the crises, Sowell’s book shows how government policies led to a huge increase in highly risky housing loans. As he notes, the immense local variability in housing prices and failed loans reveals that the government mistook a set of local problems for a national one, and then imposed a single troublesome national solution. Sowell argues that while foolish decisions to indulge in complicated investment vehicles affected the specifics of how the financial contagion spread, at its root the housing problem is one of bad mortgages. And those came from bad decisions by government and by borrowers themselves.

And an excerpt:

reason: You parcel out some share of responsibility for the specific way the housing bust broke down to borrowers, lenders, financial markets, and the government. What was the borrowers’ share?

Sowell: There are those who borrowed to buy a place to live and speculators who borrowed to speculate, and did enormously well for a number of years. Then there were people who simply don’t understand complex mortgages, particularly people who never owned a home before and whose educations were limited. But the people I would blame the most in the sense that without their interference other problems would have been within manageable means are the politicians—people in Congress and the president and regulators—who pushed the lenders and the banks and Fannie Mae and Freddie Mac into lending and buying mortgages based on people who didn’t meet standards that evolved in the marketplace and which had worked. Those politicians, in addition to that initial mistake, ignored all sorts of warnings from all sorts of sources. As I list in the book, the Economist in London, Fortune, Barron’s, people at the American Enterprise Institute, all over the map, saw that this policy of encouraging homeownership at all costs was leading to trouble.

But the politicians clearly had as their political goal homeownership as “a good thing” and persisted—and for that matter persist to this moment in pushing it. The Federal Housing Administration last I checked was promoting supporting mortgages that have less than 4 percent down payment. We all make mistakes, but politicians have persisted in their mistakes, and in the pointing of fingers in other directions.

“Affordable housing” covers a number of things. There was this sense in Washington that the cost of buying a house had become a nationwide major problem which would require a federal answer as opposed to a local answer. All the data say that was not true. People weren’t paying a higher percent of their income nationwide for housing than they had a decade earlier. In fact, it was a somewhat lower percentage in some areas. Now in some areas, including California—coastal California—people were paying half their family income to put a roof over their head. That in turn was a result of local political people putting all sorts of restrictions on building.

Implicit in the idea of “affordable housing” is the notion that third parties know what people can afford better than those people know themselves. If you spell it out it sounds so absurd you wonder how anyone could have believed it. But for politicians the question is not, is it absurd? The question is whether or not the public will buy it.

reason: How much weight do you place on the notion that Federal Reserve expansionary money and credit policies primed the bubble, and bust, in housing?

Sowell: I find it hard to accept. I’m sure if the interest rates had been at 8 percent the boom would not have gone as far and the bust would not have been as big. I’m not saying monetary policy had no effect. But I am struck by the fact that Federal Reserve policy is nationwide, and in places like Dallas the increase in housing prices was in single digits and the decrease has been in single digits. So while Fed policy undoubtedly aggravated circumstances, it can’t be the fundamental cause because the defaults were so heavily concentrated. 60 percent of all defaults nationwide were in five states, and I suspect if you broke down the data even more you’d find specific regions in those five states very heavily implicated in defaults.

For more on the specific laws that caused the prices of homes to skyrocket in those 5 states, read this article.

Excerpt:

Let us go back to square one to consider the empirical consequences of policies in the housing market. Politicians in Washington set out to solve a national problem that did not exist — a nationwide shortage of “affordable housing” — and have now left us with a problem whose existence is as undeniable as it is painful. When the political crusade for affordable housing took off and built up steam during the 1990s, the share of their incomes that Americans were spending on housing in 1998 was 17 percent, compared to 30 percent in the early 1980s. Even during the housing boom of 2005, the median home took just 22 percent of the median American income.

What created the illusion of a nationwide problem was that, in particular localities around the country, housing prices had skyrocketed to the point where people had to pay half their income to buy a modest-sized home and often resorted to very risky ways of financing the purchase. In Tucson, for example, “roughly 60% of first-time home buyers make no down payment and instead now use 100% financing to get into the market,” according to the Wall Street Journal. Almost invariably, these locally extreme housing prices have been a result of local political crusades in the name of locally attractive slogans about the environment, open space, “smart growth,” or whatever other phrases had political resonance at the particular time and place.

Where housing markets have been more or less left alone — in places like Houston or Dallas, for example — housing did not take even half as big a share of family incomes as did comparable housing in places like the San Francisco Bay Area, where heavily hyped political crusades had led to severe restrictions on building. It was in precisely these extremely high housing-cost enclaves that the kind of people for whom the national housing crusade expressed much concern — minorities, low-income people and families with children — were forced out disproportionately.

Few things blind human beings to the actual consequences of what they are doing like a heady feeling of self-righteousness during a crusade to smite the wicked and rescue the downtrodden. Statistical studies about disparities between blacks and whites in mortgage loan approval rates might be said to have “jump-started” the housing crusades that began in the 1990s. Politicians and the media led this crusade, with many community activists following in their wake, much like scavengers, able to extract large sums of money from banks and other institutions by raising claims of discrimination, whose power to delay government approval of bank mergers and other business decisions made pay-offs to these activists the only prudent course for those accused.

I’m pretty sure that the San Francisco Bay area is run by leftists. And not moderate leftists – radical leftists. And I’m pretty sure that Dallas and Houston are not run by radical leftists. This crisis was local to areas that were dominated by Democrats who were passing all kinds of regulations and restrictions on the real estate market in order to drive up the price of their own properties and keep the “undesirable” minorities out.

I really recommend that everyone buy Thomas Sowell books and read them. I just finished “The Housing Boom and Bust” and am now working on “Economic Facts and Fallacies” and next up is “Intellectuals and Society”.

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