Sep192014

The big right-wing housing bubble lie

The political right is revising housing bubble history and fostering a blatant lie to support its own political agenda.

Scales_of_justice2I try not to be political on this blog. My posts have been picked up from both Tea Party blogs and Progressive blogs, so partisans embrace my pillory of both sides foibles. My burning desire is to know and expound the truth, and it angers and offends me when either side spins facts and promotes an inaccurate interpretation of financial history.

My latest ire for revisionist history is directed at the political right as they incorrectly blame the policies of the political left for inflating the housing bubble. Interestingly, I support what the political right wants to do, prevent the political left from expanding credit to deadbeats with government backing; however, I can’t support the lies they tell in order to bolster their position. Fighting bad policy by promoting lies may be good politics, but I can’t support rewriting history in order to do it.

The 1999-2008 Housing Mess: A Diagnosis and Prescription

By Michael Booth, September 14, 2014

As any physician will tell you, insightful diagnosis must precede effective prescription. Stated simply, you can’t fix problems you don’t understand or refuse to recognize. So, to the point of this essay, in purely economic terms where one’s ideological faith or partisan political prejudice overrides and dominates a dispassionate grasp of reality (bad diagnosis), one can’t establish policies that work (bad prescriptions).

I totally agree with his contention that people need to set aside their partisan prejudices and embrace a dispassionate grasp of reality in order to discover what works and what fails in the public policy arena. Much of my writing is devoted to that end. Unfortunately, what follows from Mr. Booth is a dismal failure to accomplish that lofty goal.

The 2008 housing market collapse and the congenitally weak economy that has followed since then are the disease. To cure both requires an honesty and clarity which will not cast redistributionist progressive actions in good light. It was, in fact, precisely progressive policy that caused this horrendous state of affairs.

No, it wasn’t. This nonsense springs up on the political right periodically. Last time it appeared, a blogger named Kevin Drum beat this idea into submission, and it disappeared for about two and one half years until just recently coming up again. As el O, one of our esteemed astute observers notes, “Facts are stubborn.”

blog_fannie_freddie_peak_2

The housing bubble began to inflate in the early 00s, but it didn’t really take off until late 2003 and early 2004 when private investors began buying low-quality subprime mortgages with interest-only and negative amortization terms. And it wasn’t primarily the degradation of borrower quality that was the problem: it was the toxic nature of the loans they made.

If the loans would have been limited to conventionally amortizing 30-year mortgages, the degradation of lending standards from subprime wouldn’t have caused a housing bubble and price crash. But even the subprime problem wasn’t a response to government mandates; it was a private-sector embrace that lead to a huge decline in market share for the GSEs. If this had been a problem caused by government mandates, the market share for the GSEs would have gone up, not down. It wasn’t until 2005, at the tail end of the bubble, that Fannie and Freddie got heavily involved in buying toxic garbage, and that wasn’t in response to government mandates, that was private-sector greed.American_Excess

… Blame must be deflected from the guilty. Guilt must be transferred.

Which is what this author is attempting to do by shifting blame from an unregulated private-sector disaster.

Here’s the reality. In addition to redistributing wealth and income (welfare) and redistributing outcomes (affirmative action), Democrats sought to redistribute home mortgage loans, which I call “affirmative credit”.

With the naming in 1999 of long-time Democrat operative Franklin Raines as its CEO, Democrats turned Fannie Mae into a campaign machine. They redistributed hundreds of billions in mortgage credits by undercutting traditional credit standards… reducing down payments to zero, weakening income and credit score requirements; creating “Liar’s Loans” and “No Docs”. The goal was to make credit available to people who could never have qualified for a mortgage before, and it succeeded.

Complete and utter bullshit. While Democrats embraced the concept of affirmative credit, they did none of the things this author accuses them of. Liar loans, no-doc loans, no-money-down loans, and elimination of lending standards were all accomplished by the private sector with no encouragement from the government at all. In fact, it’s the government’s failure to properly regulate this activity that allowed a housing bubble to occur. There was a failure of government here, but it’s not what this author says it is.

This created a huge swell of new housing demand, which drove the housing market into the bubble we all recall. Weak borrowers, however, always create delinquencies, then foreclosures, which destroyed the mortgage derivatives those “Alt-A” and “Sub-Prime” loans underwrote, which in turn destroyed the financial institutions that held the derivatives.

It blew up in the Democrat’s faces. “Banksters” and George W. Bush, naturally, got the blame.

This was neither a Democrat or Republican failure. It was a failure of regulators at the federal reserve and inside the government to curb the abuses occurring on Wall Street. If people want to assign partisan blame, I would probably place more at the hands of Conservative Republicans who typically resist government regulations, even good ones.

For-the-Good-of-Mankind

Those under-qualified buyers were given loans by political decree. Any “bankster” refusing to make these economically stupid and financially deadly loans was subjected to Congressional and regulatory assault for “discriminatory credit practices”. No rational banker refused.

bush_housing_bubbleThat is really irritating bullshit. No private-sector banker was ever called in front of a Congressional commission and assaulted for discriminatory credit practices during the housing bubble. The Republican-controlled Congress would never have allowed such a thing. Apparently, this author forgot that the Republicans controlled Congress during the housing bubble.

George W. Bush tried three times to stop this corrosion through Congressional action and each time was crucified by Democrats, led, you will recall, by Barney Frank in the House and Chris Dodd in the Senate.

While I have no doubt the minority party resisted Republican action, that’s what the minority party does. The majority party, in this case Republicans, controlled the Congress and the Presidency. Short of a Democratic filibuster, Republicans could do what they wanted during the housing bubble era.

If you wanted to see crucifixion during the housing bubble, they could have put a pro-regulation Democrat in front of the Republican-controlled Congress suggesting they regulate credit default swaps or other forms of private-sector abuses that really did cause the economic disaster of 2008; that would have been ugly — correct policy, but a strongly negative reaction to its implementation for sure.

forsaken_housing

An honest diagnosis is that the bastardization of the mortgage credit system was done for progressive political purposes; extending loans to people who would never have qualified for them previously in order to buy votes. When that “affirmative credit” lending stopped in early 2007 housing demand died. The bubble popped. Prices collapsed. Foreclosures soared.

There is no link between the poor policies of the Democrats and the collapse of the housing bubble. None.bullshit_4

The symptoms of this disease are the collapse of an entire tier of investment banks, the TARPing of most commercial banks, massive job losses, and the weak recovery we’ve experienced to this day.

With all of this being inarguably, historically true,

This is inarguably historically revisionist bullshit of the highest order. I have to give this author credit: It takes balls to tell a lie and suggest it’s inarguably true.

the prescription is obvious: return to pre-1999, traditional credit standards.

Here is where we get to irony of this post: I support everything this man advocates. I reject his revisionist-history arguments, but I embrace his policy prescriptions.Kamala_D_Harris

End post-1999 redistributionist “affirmative credit” policy. Don’t try to force-feed housing demand.

Having convinced just about everyone left and right, however, that all of this was the fault of “banksters”, of Wall Street greed and of “1%” crony capitalism, progressives are already back, demanding a rerun of the policies that caused the damage. …

The drumbeat for a return to the sub-prime credit policies that so dramatically failed from 1999 to 2008 will only get louder as progressive political need to redistribute grows.  Conservative resistance to this renewed demand must be persistent, subtle, and firmly anchored in reality.

He’s right that progressives will try to bring back these bad policies. I was greatly concerned when Mel Watt was put in charge of the GSEs, but so far he hasn’t begun forgiving principal or encouraging more loans to deadbeats.Frank Ponzi

In the post, Bankers’ refusal to make bad loans hinders housing recovery, I made the following lament:

Lenders steadfastly refuse to make loans to under-served borrower groups to provide the “escape velocity” of previous housing booms because lenders are unable to pass these losses on to investors or the US government.

The real estate industry and a compliant financial media portrays this behavior as a hindrance to the housing recovery, but that’s dangerous spin. The reality is that lenders are unwilling to make loans they know will go bad, causing them losses, in order to generate transaction income to realtors and homebuilders and to placate left-wing housing advocates who, despite the failure of federal home ownership policies, continue to push for more bad loans to minorities who can’t sustain the payments.

The housing policies embraced by the political left are a failure. Home ownership rates are back at mid 90s levels, right where they were before subprime took off, and extending credit to “underserved” borrower groups resulted in millions of foreclosures and even lower home ownership rates than before.

I totally agree with political Conservatives that don’t want to see the Progressive housing policies that failed so miserably to come back; however, I can’t support telling ridiculous lies in order to do it. I would rather have the truth and bad policy than I would good policy based on a lie. Call me crazy.

loan_arranger

[listing mls=”OC14199295″]