Obama proposes allowing banks to dump bad private loans on taxpayers

President Obama made a speech on housing yesterday full of great rhetoric about doing the right thing. Not detailed in his speech were a number of specific proposals the Administration hopes Congress will enact. One of these proposals in the list would allow banks to dump their bad loans on the US taxpayer through an expanded HARP-like program:

Expand eligibility for refinancing to many hundreds of thousands of eligible borrowers who do not have government-backed mortgages by creating special programs through the Federal Housing Administration (FHA) or Fannie Mae and Freddie Mac.

If you take a non-government-backed loan and refinance it through the FHA, it becomes a government-backed loan. The liability for future losses — and there will be future losses — get transferred from private banks and investment funds to the US taxpayer.

Do any of you think that’s a good idea? Do you want to be on the hook when these loans go bad?

I imagine the banks love this idea. It won’t be the bank’s best customers who take advantage, it will be the bank’s troubled loans. Any borrowers who weren’t underwater, whether government-backed or not, have already refinanced. The only people still paying high rates are those who could not refinance, and the main reason they couldn’t is because they were underwater. This is a really bad idea, but it’s likely to make its way into a Congressional bill because Republicans owned by financial interests will support it.

To me this is the last shoe to drop. Didn’t we all know this was coming? The banks are still exposed to $1 trillion in unsecured mortgage debt. The desperately need to transfer as much of this potential liability to the US taxpayer as possible. So far the Administration has wisely avoided allowing this, but with the public numb to potential new bailouts, and with as well as this one is disguised, it’s time to slip in a massive taxpayer bailout and hope nobody notices.

The actual speech Obama delivered is full of great rhetoric and some ideas worth examining. For sake of brevity, I am editing out the parts not directly related to housing. If you want more information on the specifics of his proposals, please see FACT SHEET: A Better Bargain for the Middle Class: Housing.

Text of Obama Speech on Homeownership

August 6, 2013, 4:02 PM

… today, I’ve come to Phoenix to talk about that second, most tangible cornerstone at the heart of middle-class life: the chance to own your own home. A home is supposed to be our ultimate evidence that in America, hard work pays off, and responsibility is rewarded.

Home ownership was only attainable by people who demonstrated fiscal responsibility. To become a homeowner, the prospective buyer needed to save for a down payment, most often acquired after a lengthy period of sacrifice and saving. The prospective buyer also needed to pay all their bills on time to establish creditworthiness. The discipline of fiscal responsibility was usually a sign of superior character traits making homeowners a special class of honorable people.

That was destroyed during the housing bubble by the elimination of down payment requirements and the further elimination of all loan qualification standards. Suddenly people who didn’t have good character were admitted to the home ownership club, but few recognized this fact. During the housing bubble, renters were looked down upon as sub-standard human beings. After all, there must be something really wrong with them considering all barriers to home ownership were removed.

I think of my grandparents’ generation. After my grandfather served in World War II, this country gave him the chance to go to college on the GI Bill, and buy his first home with a loan from the FHA.

I think 20% down payments should be the norm, but there is a place for the FHA. Low down payment programs can provide access to home ownership several years sooner allowing families to obtain homes of their own before their children grow up. However, it should have stringent qualification standards, and the limit of borrowing should be much lower than it is today. We have no business subsidizing the purchase of homes with $729,750 mortgages.

To him, and to generations of Americans before and since, a home was more than just a house. A home was a source of pride and security. It was a place to raise children, put down roots, and build up savings for college, or a business, or retirement. And buying a home required responsibility on everyone’s part – banks were supposed to give you a fair deal, with terms you could understand, and buyers were supposed to live within their means.

The housing bubble demonstrated a complete abdication of responsibility on both sides. In my opinion, Lenders Are More Culpable than Borrowers, but both parties were reprehensible.

In my grandfather’s America, houses weren’t for flipping – they were for living in.


But over time, responsibility too often gave way to recklessness – on the part of lenders who sold loans to people who couldn’t afford them, and buyers who knew they couldn’t afford them.

The character of homeowners was degraded to near zero.

And when the housing bubble burst, triggering the recession, millions of Americans who had done everything right were hurt badly by the actions of others.

This is the sad reality of the housing bubble.

… we’ve helped millions of Americans save an average of $3,000 each year by refinancing at lower rates, and we’ve helped millions of responsible homeowners stay in their homes.

And where Congress wouldn’t act, we did. Over the past few years, the Department of Justice stood up for buyers who were discriminated against or conned by predatory lenders, winning more money for victims of discrimination last year alone than in the previous 23 combined. We worked with states to force big banks to repay more than $50 billion dollars to more than 1.5 million families – the largest lending settlement in history.

This was great political theater, but everyone hates the mortgage settlement, except the banks.

We’ve extended the time folks who’ve lost their jobs can delay payments on their mortgages while they keep looking for work.

That sounds great, but who pays for that? We do. And I don’t recall any such benefit being extended to renters, do you?

And we’ve cracked down on the bad practices that led to the crisis in the first place – because if something is called a “liar’s loan,” it’s probably a bad idea. …


We give to more hard-working Americans the chance to buy their first home.

How exactly have they done that? It is through expanding elegibility for FHA loans. Perhaps that explains the 11%+ delinquency rate on FHA loans.

We have to help more responsible homeowners refinance their mortgage.

Why? They agreed to pay under the terms of the contract when they bought the house. Is refinancing at lower rates now an entitlement?

And above all, we have to turn the page on the bubble-and-bust mentality that created this mess, and build a housing system that’s durable and fair and rewards responsibility for generations to come. …

That sounds great. I hope it happens. I’m not holding my breath.

But like the other actions we’ve taken, these will not help the neighbors down the street who bought a house they couldn’t afford, then walked away and left a foreclosed home behind. It won’t help speculators who bought multiple homes just to make a quick buck.

Therein lies the crux of the problem. Far too many ordinary citizens were speculators. Worse, they were Ponzis. If those people are flushed from the system — and they should be — it still creates an enormous problem with bad loans.

Step one is for Congress to pass a good, bipartisan idea, and allow every homeowner to save thousands of dollars a year by refinancing their mortgage at today’s rates. Let’s get that done.

No. Let’s not get that done. I see no public good that comes from giving loanowners a break and transferring those liabilities to the US taxpayer. The benefits accrue to a small segment of undeserving borrowers at everyone else’s expense.

Step two: now that we’ve made it harder for reckless buyers to buy homes they can’t afford, let’s make it easier for qualified buyers to buy homes they can.

Specifically, how do we separate the wheat from the chaff? Realistically, it is pretty easy for qualified buyers to buy homes, there simply aren’t that many of them.

We should simplify overlapping regulations and cut red tape for responsible families who want to get a mortgage, but who keep getting rejected by banks. And we should give well-qualified Americans who lost their jobs during the crisis a fair chance to get a loan if they’ve worked hard to repair their credit.

How does on “work hard” to repair their credit? If they have been making payments according to their agreements, then their credit scores are improved, and they need no further government assistance. The “red tape” he is talking about are the qualification standards which must be maintained to prevent more bad loans like the ones that took down the housing market.

Step three is something you don’t always hear about when it comes to the housing market – and that’s fixing a broken immigration system. It’s pretty simple: when more people buy homes, and play by the rules, home values go up for everybody.

Tying immigration reform to housing is a stretch. Immigrants who have good jobs and “play by the rules” are already qualified to buy homes.

Step four: we should address the uneven recovery by rebuilding the communities hit hardest by the housing crisis, including many right here in Arizona. Let’s put construction workers back to work repairing rundown homes and tearing down vacant properties. Places facing a longer road back from the crisis should have their country’s help to get there.

Workfare for construction workers? Give me a break.

Step five: we should make sure families that don’t want to buy a home, or can’t yet afford to buy one, have a decent place to rent. In the run-up to the crisis, banks and the government too often made everyone feel like they had to own a home, even if they weren’t ready. That’s a mistake we shouldn’t repeat. Instead, let’s invest in affordable rental housing. And let’s bring together cities and states to address local barriers that drive up rent for working families.

I think we can safely add realtors to the list of those who tried to make everyone feel like they had to own a home.

But as home prices rise, we can’t just re-inflate a housing bubble.

Unfortunately, all the policies of this administration and the federal reserve have served to reflate the housing bubble.

That’s the second thing I’m here to talk about today: laying a rock-solid foundation to make sure the kind of crisis we just went through never happens again.

That begins with winding down the companies known as Fannie Mae and Freddie Mac. For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was “heads we win, tails you lose.” And it was wrong.

No kidding.

The good news is that there’s a bipartisan group of Senators working to end Fannie and Freddie as we know them. I support these kinds of efforts, and today I want to lay out four core principles for what I believe this reform should look like.

First, private capital should take a bigger role in the mortgage market. … I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market, including community-based lenders who view their borrowers not as a number, but as a neighbor.

The FHA has historically served this function. Their market share declines when times are good and increases when times are bad. Eliminate the GSEs and let the FHA function as it always has, and the problem is largely solved.

Second, no more leaving taxpayers on the hook for irresponsibility or bad decisions. We encourage the pursuit of profit – but the era of expecting a bailout after your pursuit of profit puts the whole country at risk is over.

This sounds great, but his proposal puts more taxpayers on the hook for bad decisions, not less. Further, if he was serious about ending future bailouts, why have they done nothing about the too-big-to-fail banks?

Third, we should preserve access to safe and simple mortgage products like the 30-year, fixed-rate mortgage. That’s something families should be able to rely on when they make the most important purchase of their lives.

I like the 30-year fixed rate mortgage, but this product won’t go away without government subsidies.

Fourth, we have to keep housing affordable for first-time homebuyers and families working to climb into the middle class. We need to strengthen the FHA so it gives today’s families the same kind of chance it gave my grandparents, and preserves that rung on the ladder of opportunity….

If they really wanted to keep housing affordable, then THEY SHOULD QUIT TRYING TO REFLATE THE HOUSING BUBBLE! Affordability cannot be manufactured by financial engineering, nor can it be created by artificially lowering interest rates. Lower prices are what makes housing affordable.

Now I want to be clear: no program or policy will solve all the problems in a multi-trillion dollar housing market. The heights the housing bubble reached before it burst were unsustainable, and it will take time to fully recover. But if we take the steps I put forward today, then I know we will restore not just our home values, but our common values. We’ll make owning a home a symbol of responsibility and a source of security for generations to come, just like it was for my grandparents, and just like I want it to be for our grandchildren. …

I have opined that Housing subsidies are detrimental to America. Nothing in his proposals addresses reducing these subsides. Further, there has been a largely unacknowledged Titanic failure of American housing policy. Perhaps we could start there.

I do think we will get some kind of housing finance reform. I’m afraid it will not be good reform that accomplishes many of the goals he outlined in his speech, and that’s unfortunate for all of us.