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.
Nobody 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.
According to the Conveyancers Inner West Sydney experts, 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 11:12AM
…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:
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.
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.
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.
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.
“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).
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. 
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.
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.
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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All the manipulation and cronyism leads to economic bubbles. I think we’ve reached the point were there are no more free markets. Everything, including the things we buy in the stores everyday is manipulated.
Example: http://youtu.be/z45OvU08ts8
Do you think this has potential to curb the manipulations and cronyism?
New ‘Audit the Fed’ Bill Calls for Full Transparency from Central Bank
U.S. Senator Rand Paul (R-Kentucky) has reintroduced bipartisan legislation that calls for more transparency from the U.S. Federal Reserve Board of Governors, according to an announcement on Paul’s website.
The Federal Reserve Transparency Act of 2015, or S. 264, commonly known as Audit the Fed, calls for elimination of the restrictions placed on the Government Accountability Office (GAO)’s audits of the Fed. The bill also mandates that several divisions of the Fed be subject to Congressional oversight, including credit facilities, securities purchases, and quantitative easing activities.
“A complete and thorough audit of the Fed will finally allow the American people to know exactly how their money is being spent by Washington,” Paul said. “The Fed currently operates under a cloak of secrecy and it has gone on for too long. The American people have a right to know what the Federal Reserve is doing with our nation’s money supply. The time to act is now.”
One of the provisions of the bill calls for an audit of the review of the loan files of homeowners in foreclosure: “The Comptroller General of the United States shall conduct an audit of the review of loan files of homeowners in foreclosure in 2009 or 2010, required as part of the enforcement actions taken by the Board of Governors of the Federal Reserve System against supervised financial institutions.”
Conservatives have criticized the Fed’s methods of attempting to stimulate the economy since the 2008 financial crisis and have repeatedly called for more transparency from the central bank.
“At long last, it’s time for a complete audit of the Federal Reserve, so the American people can fully understand the scope and consequences of the agency’s extraordinary monetary policy since 2008,” Cruz said in a prepared statement. “The Fed has expanded its balance sheet fivefold, yet economic growth is still tepid, businesses are sitting on cash, and median income and household wealth are depressed. . .Enough is enough. The Federal Reserve needs to fully open its books so Congress and the American people can see what has been going on. This is a crucial first step to getting back to a more stable dollar and a healthy economy for the long term.”
“Americans are living with near-zero interest rates on their savings while entrepreneurs and small businesses report credit is still hard to get,” Cruz said. “Quantitative easing has contributed to the dollar’s volatility in recent years, which destabilizes the financial system and distorts investment. Other than elevating the stock market and key prices such as oil until lately, the Fed’s policies have not resulted in a long-term cure for our sick economy.”
Democrats have repeatedly resisted any legislation that calls for further scrutiny of the Fed’s activity. Last month, Fed Chair Janet Yellen said she would “forcefully” oppose any type of Audit the Fed bill, telling reporters that “I do think central bank independence is very important. . . to make sure we can make the decisions we think are best.”
Last one was a bubble.This one will be a Zeppelin !
I thought you might enjoy this article. Here is your Zeppelin:
Meet The New Bubble: The U.S. Dollar
The U.S. dollar is the single most powerful herd dynamic in global financial markets today. And financial markets are unlikely to let a good bubble go to waste, emerging market asset manager the Ashmore Group said in a report on Monday.
Between now and the return of inflation in 2016, investors are likely to continue to pour into dollar assets — from securities to real estate. Meet the new bubble: the American greenback.
“The current strength of the dollar is evidently a bubble,” says Jan Dehn, an economist with the Ashmore Group, a fixed income manager with around $70 billion under management. The dollar obeys short-term flow dynamics, while ignoring fundamental arguments. ”If you doubt that the dollar is a bubble, ask yourself this question: when was the last time you met someone who was not bullish the dollar?”
The interest rate on a 10 year Treasury bond is just 1.87%. It hasn’t been that low since May 16, 2013. Even when the dollar looks weak, it is strong. The dollar has gained around 8% against the euro, which is now trading at around 1.12 to the dollar. It was in the 1.30s, on average, for over seven years.
What has brought us – once again – to the bubble point?
Strong preference for liquidity is certainly part of the answer. Treasurys provide that by being the largest investment grade market in the world. Of course, liquidity is mercurial once everyone is long the dollar and the trade must be unwound in a market composed solely of sellers, Dehn notes.
Another reason for the rise is European central banks printing limitless amounts of money – so much that no individual investor can realistically bet against the European Central Bank, or the Federal Reserve. Follow the Fed, or Don’t Bet the Against Fed, has been a Wall Street mantra since 2009. In the old days it was a virtue not to print. In today’s world that only makes you less liquid and therefore less interesting to investors.
“ALL fiat money is toilet paper… it’s just that the dollar is 2-ply”.
INDEED !
http://finviz.com/futures_charts.ashx?t=CURRENCIES&p=w1
The metals charts follow a similar trajectory as the currency charts (ex-US dollar).
LOL!
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/01/20150129_gold.jpg
Peace out!
Is that chart indicative of MR’s proclamation, “What has changed is that we’ve entered the acceleration phase of the decline.”
Yes. Notice he had to switch from a 12 month to a 2 month chart to make the data fit his narrative. Why not just switch to a one day chart and only post it when gold shows a positive daily return?
I’m the only one focused on the long term because the long term data indeed indicates “we’ve entered the acceleration phase of the decline.“
Dude, you’re like the Peter Schiff of gold bears 😉
Daily, 2-month chart
http://finviz.com/futures_charts.ashx?t=CURRENCIES&p=d1
Ha! I hope the last one was the zeppelin and the next one is merely a bubble.
Judge rules Fannie, Freddie lawsuits can continue
John Carney at the Wall Street Journal is reporting that a federal claims judge has ruled against the federal government, saying that a lawsuit brought by investors over the treatment of Fannie Mae and Freddie Mac can proceed.
Here’s the latest:
A judge in the U.S. Court of Federal Claims denied the government’s motion to stay proceedings in that court, according to two people familiar with the decision. Lawyers for the government had asked the Court of Claims to put the lawsuits on hold pending the appeal of a decision by a judge in the U.S. District Court for the District of Columbia that dismissed a similar group of cases last September.
Shares of Fannie jumped by more than 8% Wednesday morning. Shares of Freddie rose by more than 4%.
Wednesday’s decision means the plaintiffs, who include Fairholme Funds, will be able to continue to collect information from the government in hopes of bolstering their argument that the Court of Claims has jurisdiction over the cases.
Investors Unite and others are suing over the Treasury Department’s sweep of shareholder profits after Fannie and Freddie were put in conservatorship.
Nomura Said to Balk at Settling Mortgage Bond Suit Filed by FHFA
Did justice department overreach?
(Bloomberg) — Nomura Holdings Inc. is balking at following 16 other banks in settling a U.S. regulator’s allegations that Wall Street sold flawed mortgage securities during the housing boom, according to two people with knowledge of the matter.
Nomura’s resistance is less about the size of a penalty, which one estimate says won’t exceed $300 million, than its belief that the U.S. unit sued by the Federal Housing Finance Agency did nothing wrong, said the people, who asked that they not be named because the negotiations are private. Nomura also asserts Fannie Mae and Freddie Mac might not suffer losses on the $2 billion of bonds it sold them, the people said.
Nomura still has time to settle before a trial that’s scheduled to start in March. The Japanese investment bank’s willingness to fight so far shows how it stands out from big U.S. lenders that were eager to get past the multiple investigations they faced following the 2008 financial crisis.
“Maybe this isn’t as big a deal for them because they’re not as big in the U.S.,” said Peter J. Henning, a law professor at Wayne State University who has been following the cases. “You look down that list, and you see Goldman on there, Bank of America. Those are banks that have to care about headlines.”
Today’s post mentions slush funds supported by the FHFA. Republicans take direct aim at these programs with this legislation.
Lawmaker Introduces Bill To Prohibit GSEs from Funding Housing Groups
U.S. Representative Ed Royce (R-California), a senior member of the House Financial Services Committee and a member of the Capital Markets and GSE Subcommittee and the Housing and Insurance Subcommittee, has introduced the Pay Back the Taxpayers Act of 2015, according to an announcement on Royce’s website.
The bill prohibits the diversion of Fannie Mae and Freddie Mac funds into the Housing Trust Fund and Capital Magnet Fund. Royce and other Republicans have been highly critical of Federal Housing Finance Agency Director Mel Watt’s decision last month to lift suspension of the allocation of GSE funds into the housing groups, saying it violates the language of the Housing and Economic Recovery Act of 2008 and puts taxpayers at further risk. Progressives have praised Watt’s decision, saying it creates more homeownership opportunities, especially for low-income Americans.
Royce was in Washington, D.C. on Tuesday for the House Financial Services Committee hearing entitled “Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency,” where he questioned Watt for five minutes on the subject of diversion of GSE funds into the housing groups. After presenting data that showed Fannie Mae and Freddie Mac to be overleveraged and undercapitalized, Royce told Watt during his five-minute questioning period that it was “difficult to see how you can argue that as it is required by law, the GSEs are financially stable enough to begin the transfer of money to housing groups.”
“We heard directly today from Fannie and Freddie’s regulator that while they remain under-capitalized and over-leveraged, it is the right time to start siphoning money away from these taxpayer-backed GSEs to questionable housing groups,” Royce said. “Anyone who witnessed the financial crisis knows exactly how this will play out. A larger government presence in housing distorts the market and promotes a boom-and-bust cycle that leaves taxpayers holding the bag. Coupled with the recent decision by the FHA to reduce mortgage premiums, it appears that the Administration is taking us in the complete wrong direction when it comes to stabilizing housing markets. The Pay Back the Taxpayers Act will preempt payments from the GSEs to housing advocacy groups and instead reroutes them where they belong: with the taxpayers.”
“I’m not sure which I find more offensive: the Republicans housing bubble lie, or the Democrats housing policy hypocrisy.”
And this here is the problem I have with US politics. Not just on housing, but on virtually every issue I’m offended by both sides. Usually it is one or the other side lying, but sometimes their both lying. It’s sad.
It is in both parties interest the truth never be revealed. Both sides tell people only what they want to hear.
Fed Commits to Patience in Interest Rate Hikes
Anyone, anywhere who thought the fed might raise rates sooner was crazy
Coming out of their first Federal Open Market Committee (FOMC) meeting of 2015, Federal Reserve officials gave no sign of straying from their likely path of slowly bringing interest rates up later this year.
In its post-meeting statement, the committee expressed considerably more optimism about the direction of the economy than it has in recent years, pointing to the “solid pace” of economic expansion and “strong job gains” reported since last month.
Also encouraging, the statement says, is the recent rise in household spending as energy prices have declined.
Nevertheless, policymakers are apparently in no hurry to start hiking interest rates just yet, bringing back language from the last FOMC statement: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”
Projections from economists and Fed leaders largely indicate the central bank will wait until June or later before starting to push rates up.
Part of what’s slowing the group down is a decline in inflation, though the statement writes it off as a temporary factor brought on by falling energy prices.
Also rating a (very) brief mention is the ongoing economic crisis in the eurozone, which the Fed says it will take into account in further policy discussions.
No voting members dissented to the statement, though that could be due to the fact that the recent dissenters—including Dallas Fed President Richard Fisher, Philadelphia Fed President Charles Plosser, and Minneapolis Fed President Narayana Kocherlakota, all of whom dissented in December—were cycled off the ranks of voting members.
Anyone who thinks or hopes that a comprehensive tax reform bill is possible, eliminating most exemptions, deductions, and credits in favor of lower rates across the brackets, is fooling themselves. It took Obama fewer than two days to back away from his 529 tax proposal:
http://www.washingtonpost.com/opinions/charles-lane-obamas-529-college-savings-plan-debacle-offers-lessons/2015/01/28/5ba02814-a712-11e4-a2b2-776095f393b2_story.html
This wasn’t even much of a tax hike. The gains in the 529 would be taxed at the student’s income level in the year withdrawn. So, a kid could have $400K in a 529 withdrawing $50K each year of college. If half of that “income” is from gains in the fund, then the kid would report $25K in income. The federal income tax, if any, would be tiny. At lower levels than $25K, this might actually allow the EITC to subsidize the student’s income!
Oh, and on the Net Investment Income Tax discussed the other day, those AGI levels are not adjusted for inflation, intentionally!
$250,000 Married filing jointly
$125,000 Married filing separately
$200,000 Single
$200,000 Head of household (with qualifying person)
$250,000 Qualifying widow(er) with dependent child
Taxpayers should be aware that these threshold amounts are not indexed for inflation.
http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs
Failing to adjust these thresholds for inflation is a stealth tax. Politicians can let inflation raise taxes without them getting any heat from doing so. It’s a sham.
+1 The AMT was originally targeted at 155 high net worth households and now it applies to millions of middle class Americans thanks to inflation.
Don’t get me started on the AMT! One annoying fact many don’t know, is that if you’re paying the AMT, or if exercising options pushes you into the AMT, you cannot exercise and hold incentive stock options without paying 26%/28% in AMT in the exercise year. In other words, you will never be able to pay the long term cap gains tax on your options.
If interest only loans are effectively banned, then why are lenders originating jumbo interest only 2nd lien 10/1 ARM’s up to 90% CLTV? :O
IOs won’t qualify as QMs, so the originator is taking on greater litigation risk should the loan default. So long as the originator documents a strong borrower’s ability to repay the IO, they just have to add the rate premium necessary to compensate for this additional risk.
So the loan simply needs to be priced for:
Jumbo risk
Interest Only risk
2nd lien risk
10/1 ARM risk
90% CLTV risk
and…
Litigation risk
I’m sure Wallstreet will get the models right this time. 😉
Right. I’ve been thinking about this structure a lot. The benefit in the first being a GSE loan, is the eighth to quarter lower rate (effectively less due to mortgage interest deduction). It’s possible the GSEs will have more modification options should the worst case scenario occur. And finally, it locks a low rate (3.75%) on a low base ($625,500). So you could payoff the second during the 10-year IO period, and have a low payment guaranteed.
Of course, at 5.25% on the second, you’ll have to pay if it off quickly to have a net savings over, say, just putting an extra 5% down.
MSM Article: Peter Schiff says QE 4 will send gold toward new highs
http://finance.yahoo.com/news/peter-schiff–qe-4-will-send-gold-toward-new-highs-193301148.html
Gold has had a solid January – up close to 10% as measured by the SPDR Gold Shares ETF (GLD). It’s not unlikely territory for the yellow metal. 2014 started out in much the same way, up more than six percent that month before closing the year a few percentage points lower than where it began.
Peter Schiff thinks while the start of 2015 is similar, the end will be quite different.
“All the Wall Street strategists are all bearish on gold. They’re bearish on gold stocks and I think instead of giving up the early rallies that happened last year, I think we’re gonna build on the gains throughout the year.”
He notes that the price of gold in just about every currency but the dollar has shot up even faster this year, though he’s not completely ready to discount the precious metal’s standing here at home.
“I think gold is going to go up in all currencies – it is rising faster in euros and some other currencies than it is in dollars but it’s still rising in U.S. dollars…I think it’s breaking out – now is a good time to buy….In fact this year I believe gold prices are going to hit all time record highs in just about every major currency except the U.S. Dollar. We might have to wait until 2016 before gold prices hit a record high in dollars.”
Schiff believes the strong dollar has no where to go but down, another catalyst for gold as the year plays out. Still, he says the biggest move in gold in dollars will come at the hands of the Fed.
“When the Fed announces QE 4, that’s gonna be a big game changer. It’s gonna catch everybody by surprise.”
On a weekly chart gold has to break out over 1320 for a long term buy signal. Golg will have its day. One more ugly leg to the downside !
When oil was $90 per barrel, production costs were $1200 per ounce. I don’t what production costs are now, but they are a lot lower than $1200.
That means we should get more supply of gold to the market which could potentially drive prices down further.
[…] Republicans have been spinning this issue hard with bold-faced lies, but the truth is the failure was a bi-partisan effort. […]
I seriously doubt that “Offering 3% down mortgages is a recipe for default and large taxpayer-backed losses.” is accurate in general.
On one hand, while pretty much every elected official panders to their constituents, I agree with the assertion that low income individuals need low down payment homes offered through GSEs. It would be great if private enterprise offered these (And built roads, provided for national defense, health research for new antibiotics, etc…), but they don’t, and in that context a GSE steps in to provide a beneficial service because the private sector has failed to or refused to provide this service.
Having said that, 3% across the board is foolish in terms of supporting home ownership for individuals w/o large down payments because it puts individuals in areas with expensive homes at risk of default if they loose their jobs. It’s fine in areas with lower home prices because things besides a house associated with that debt can likely be let go. If someone loses their job in the midwest, they can let the bank take their $30k SUV back and buy a $5k beater to free up several hundred dollars per month. That won’t help as much if someone has a $2500 monthly in a coastal CA community, which is where the risk for the HO comes from. In either case, F/F can foreclose and it’s unlikely that they’ll lose money since we aren’t talking about NINJA or negative loans.
Is it great that the fair value of Fannie/Freddie’s balance sheets is a negative ~$70 billion combined? No. But does that matter? Probably not. That negative balance represents 1% of their mortgage holdings, and there’s a good chance it will be slightly positive in the next couple years.
http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/FHFA_2013_Report_to_Congress.pdf
http://www.forbes.com/sites/trulia/2015/01/14/bubble-watch-home-prices-still-2-undervalued-and-slowing-toward-smooth-landing/
There’s this accusation the the Republicans are “lying” that the affordable housing act caused this but it’s at best (or worst) that the Republicans are simply exaggerating. Most pundits I’ve read who are neutral politically on the issue agree that loans based upon politically correct race/gender groups (non-white males) rather than financial merit certainly did not HELP to produce reliable buyers but the greed of wall street then pushed it over the edge. Why not make bad loans if the government is saying to do so AND you’re making money? It’s like saying that a policy to give banks crack doesn’t produce drug abuse because the banks ultimately became hooked on it on their own.
This brings up a larger question as to whether the white male bashing policy of the left makes a lot of sense economically as well as culturally. Bashing white guys doesn’t solve all the problems of the world. This is a radical concept, but it also happens to be true.