Jan292015

Republican lawmakers warn of housing bubble 2.0

The Republicans are correct and appropriate to point out that the policies of the GSEs have potential to put the American taxpayer at risk.

popped_housing_bubbleNobody wants to see a repeat of the previous housing bubble. Lenders, loanowners, and the politicians that pander to them all celebrate the reflation of the old bubble, but they hope it’s done on stable terms this time around to prevent a major crash.

In the aftermath of the housing bust, lawmakers correctly identified the causes of the housing bubble and crafted the Dodd-Frank law to restrict or ban the lending practices that lead to the housing bubble.

Interest-only and negative amortization loans are restricted (effectively banned) because these loans don’t qualify for the safe-harbor provisions of the new legislation. These unstable loan products were largely responsible for inflating house prices.real_estate_bust

Further, debt-to-income ratios in excess of 43% were also effectively banned because debt service burdens in excess of 43% are only sustainable by Ponzi borrowing, a behavior guaranteed to bring financial ruin to both borrowers and lenders alike.

As with everything in Washington, the narrative surrounding the legislation gets warped by political spin machines and special interest groups hoping to influence future legislation. The housing bubble is no exception.

The most egregious lie in Washington today is the spin from the political right.

FHFA hearing: GOP fear housing policy headed for Crash 2.0

Democrats say affordable housing, more lower-down policies needed

Trey Garrison, January 27, 2015 11:12AMAmerican_Excess

…Democrats said policies in the past year are necessary to expand housing opportunities to lower income and challenged borrowers.

Republicans, meanwhile, said the administration is adopting dangerous policies that risk another housing crash that will put taxpayers on the hook for billions.

Democrats have long contended this is true, but it’s more likely political pandering for government handouts. The Republicans are right to point out that the US taxpayer is now explicitly liable for trillions (not billions) in mortgage loans.

Committee Chairman Jeb Hensarling, R-Texas, said the FHFA and housing policy is heading back down the path that led to the housing crash.“Memories are clearly short among Washington’s ruling class because they are repeating the same mistakes that caused the 2008 financial crisis in the first place,” he said. “Contrary to the fable told by the left, the root cause of the financial crisis was not deregulation but dumb regulation. Regulations and statutes that either incented or mandated financial institutions to loan money to people to buy homes they ultimately could not afford to keep. Exhibit one, Fannie and Freddie’s affordable housing goals. 70% of all troubled mortgages were backstopped by Fannie, Freddie and other federal agencies.

Exhibit 1 in the right-wing housing bubble lie:

blog_fannie_freddie_peak_2

The GSEs were not the entities responsible for the housing bubble. Starting in 2002, Fannie and Freddie began losing significant market share to private securitizations. This was not mandated by the government, and it was not in response to any government program; these were private loans without government guarantees funded by Wall Street investors chasing yield.

The worst part is that Republicans who peddle this lie know it’s a lie. They rely on the ignorance of the masses who willingly accept whatever nonsense Republican leaders throw at them — not that the Democrats pandering to the poor are any better, but the brazen lie peddled by the Republicans offends me. 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.clinton_bubble

And the Wall Street Journal even congratulates Republicans for promulgating the lie. According to the WSJ, “The Republican Party made a mistake when it let the political left blame the 2008 housing crash on big banks, free-market competition and “deregulation.” House Financial Services Chairman Jeb Hensarling is doing his best to correct the historical record, and if his GOP colleagues want to push serious financial market reform, they would be smart to support him. ”

Perhaps it is good politics, but it’s a bold-faced lie, pure and simple.

“And contrary to the fable of the left, it ultimately wasn’t Wall Street greed that brought down the system.

Actually, as the chart above clearly shows, it was Wall Street and not the programs of the political left that caused the housing bubble. Any statements to the contrary are demonstrably false.bush_bubble

Of course, there is greed on Wall Street.  When hasn’t there been? But there is also something known as Washington greed; greed for power to command and control huge swaths of our economy. Greed to have Washington allocate credit within our society as opposed to ‘we the people’ in a free and competitive, transparent and innovative market.”

Statements like that warm my heart. I would be even more enthusiastic if some politician or political party actually believed it.

The Republicans used to believe that many years ago, but they now pander to financial interests, corporate oligarchs, and the super wealthy, and they have no problem doling out huge subsidies to their constituents, killing restrictive legislation, and blocking agency actions that protect ordinary people.power_to_the_bankers

Hensarling said that within the last 12 months FHFA has announced three different policies that are harmful to transitioning us to a sustainable housing finance system that protects both homeowners and taxpayers – suspending a g-fee increase, adopting 97% LTVs and funding what he called housing slush funds.

Each of his accusations are true.

“FHFA is leveraging the taxpayer balance sheet – one that is clearly awash in red ink – to lock in a near government monopoly,” he said. “Next, in a race to the bottom with FHA to become the nation’s largest subprime lender, FHFA has announced that it will begin to allow the GSEs to buy mortgages with as little as 3% down. As history repeats itself, historically prudent underwriting standards are yet again being thrown out the window.

That is my favorite line from his speech. The FHA and the GSEs are competing to become the replacement for subprime, so when the business model blows up next time, the US taxpayer will bear all the losses.GSE_explicit_backing

“Finally and most recently, FHFA has announced it will begin siphoning off taxpayer funds from Fannie and Freddie in order to begin filling government housing slush funds. All the while Fannie and Freddie remain ridiculously leveraged and continue to threaten hard working American taxpayers,” he said.

The GSEs are funneling money to a variety of special interest groups, most of which support Democratic lawmakers.

Hensarling argued that the best affordable housing program is a healthy economy, not a doubling down on what he called “failed Obamanomics.”

He is correct that the best affordable housing program is to improve the economy and allow the working poor to make more money. The failed Obamanomics quip is spin to entertain fellow Republicans (I giggled too).167995992MW004_PRESIDENT_OB

Rep. Scott Garrett, R-N.J., and chairman of the subcommittee on capital markets and GSEs, said that while it’s unlikely, he wants housing to be a priority in the new Congress, and he sees the FHFA moving into risky territory with loose lending standards, government subsidized home prices and other risky practices, the kind which led to the housing crisis in 2008.

“Lowering down payments, preventing risk-based guarantee-fee pricing and funding the housing trust fund will only make it harder to reform these entities and quite possibly lead us down the path of another multi-billion dollar taxpayer bailout, Garrett said. “These decisions bring to mind the old saying, ‘those that don’t learn from history are doomed to repeat it.;  Subpar underwriting standards, taxpayer-subsidized pricing and encouraging people to buy homes that couldn’t afford them were the main causes of the last crisis; please don’t let these decisions lead to the next one.

He is correct, and we have every reason to be concerned. Maxine-Waters

Rep. Maxine Waters, D-Calif., the ranking minority member of the committee, said she is pleased with Watt’s directorship, and that efforts to lower LTV ratios and fund affordable housing funds are moves in the right direction.

If Maxine Waters supports it, the policy must be bad.

“With Fannie Mae and Freddie Mac now having paid the government $225 billion dollars – which is $38 billion dollars more than the Treasury invested during the crisis – I think it’s fair to say that our actions to prevent a total collapse of our housing market has been a resounding success.

There it is: a politician claiming the manipulations of the housing market were a huge success. These are the same politicians who support affordable housing subsidies, but when the market moves to make housing affordable, they resist lower house prices and support efforts to make housing unaffordable — probably so they can continue advocating affordable housing policies that buy them votes.

I’m not sure which I find more offensive: the Republicans housing bubble lie, or the Democrats housing policy hypocrisy.obama_heloc

If we closed the GSEs without putting in place a viable alternative – as my Republican colleagues would do – we would likely re-enter a recession,” Waters said. “And Director Watt, your actions demonstrate that you are fulfilling your statutory mandate to preserve a liquid, competitive and national housing market.

“Similarly, the FHFA has finally abided by another statutory mandate – to fund the Affordable Housing Trust Fund. This one action will help improve – especially in my district – the availability and affordability of rental housing. There are 7.1 million American households for whom safe and decent housing is neither affordable nor available – a situation made worse due to Republican attacks on public housing and voucher programs,” she said. “But by complying with your statutory obligation to allocate a tiny percentage of Fannie Mae and Freddie Mac’s profits to these Funds, we have the chance to improve the lives of millions of American children, families, people with disabilities and the elderly.”

The thoughtless nonsense this woman spouts is truly mind-numbing.

NA-BY170_OUTLOO_G_20130922182710

The Republicans are correct and appropriate to point out that the policies of the GSEs have potential to put the American taxpayer at risk. Offering 3% down mortgages is a recipe for default and large taxpayer-backed losses. The politics and ridiculous spin aside, I’m glad Republicans resist the race to lower lending standards while taxpayers are liable for the losses.

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