Cross-posted from Newsbusters.org
“U.S. Government Shutdown Threatening Housing Recovery,” screams the Oct. 2 headline of a shutdown scare screed in Bloomberg BusinessWeek.
Wade into the story, however, and we see that what’s really at hand is a mere delay of processing of mortgages because of some employees furloughed at the Federal Housing Administration.
Furthermore, as the article explains, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac will remain completely open because ” the government-controlled mortgage aggregators fund operations through fees collected from private lenders”
Actually, it’s unfortunate that the shutdown won’t hit Fannie and Freddie. The GSEs fueled the housing boom and bust that led to the financial crisis we have been living through the past five years, and are on track to fuel another financial crisis. But readers wouldn’t know that from Bloomberg BusinessWeek or other establishment media outlets.
Politicians and the establishment media are weaving an epic tale of the events that froze the markets five years ago this fall and led to massive bailouts of the biggest financial firms. Yet, their retelling of the financial crisis, to use a filmmaking analogy, leaves a lot on the cutting room floor — namely, the role of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac in fueling the subprime boom.
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The government has spent vast sums of money promoting homeownership through subsidies, tax exemptions, and bailouts. For example, in prosperous Alexandria, Virginia, certain people who never saved up enough money for a down payment received interest-free loans from the federal government to enable them to make a down payment. They do not have to repay those loans until they sell their home. Thrifty people with savings were not eligible for such a handout, penalizing them for their thrift.
Supporters of taxpayer subsidies for homeownership falsely claim it promotes political stability and prosperity. But As George Mason University’s Michael Greve notes, “there’s actually very little support that home ownership correlates with—let alone promotes—democratic stability. If anything, the data suggest that ownership rates are inversely correlated with political stability and the rule of law.” Bankrupt, unstable Greece has a much higher homeownership rate than does the United States. Stable, prosperous Germany and Switzerland have much lower homeownership rates than the U.S. does. European countries facing fiscal crises, like Italy, Spain, and Portugal, have higher homeownership rates.
Similarly, The Washington Post reports that a recent study found that “higher levels of homeownership can kill jobs”:
Andrew Oswald and Dartmouth’s David G. Blanchflower have a brand new working paper (pdf) suggesting that homeownership has an even bigger and wider effect on unemployment than anyone has realized. Here are the key points:
“We find that rises in the home-ownership rate in a US state are a precursor to eventual sharp rises in unemployment in that state. …A doubling of the rate of home-ownership in a US state is followed in the long-run by more than a doubling of the later unemployment rate.”
. . .the authors argue that homeownership has a much broader — and negative — impact on the labor market as a whole.
Why is that? The authors find that higher levels of homeownership in a state appear to be associated with lower levels of labor mobility, higher commute times, and fewer new businesses created. Taken together, those three factors tend to increase the unemployment rate.
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Reason’s Jim Epstein has an article up that does a nice job debunking a National Transportation Safety Board study, prompted by a 2011 bus crash in the Bronx that killed 15 people, that led the Federal Motor Carrier Safety Administration to shut down a number of supposedly unsafe small bus companies:
In 1997, Chinese-born entrepreneurs began regularly scheduled long-distance bus services that picked up passengers on the street. Tickets were priced so low that it was hard to figure how the operators could be breaking even, much less making a profit. Faced with declining market share, Greyhound and Peter Pan imitated the Chinatown model by teaming up to create a new venture called BoltBus. Then Coach USA got into the game with Megabus. Today, “curbside” buses—lines that begin and end their routes at the sidewalk as opposed to a traditional station—make up the fastest growing form of intercity travel in the U.S.
But over the past two years, the government has forced 27 bus companies based in Chinatown to close. The regulatory clampdown was fueled by a government study that found curbside carriers were disproportionately killing their passengers. Released by the National Transportation Safety Board, a federal agency, the study concluded that curbside bus companies were “seven times” more likely to be involved in an accident with at least one fatality than conventional bus operators. That finding was reported by The New York Times, the Los Angeles Times, Businessweek, USA Today, the New York Daily News, WNYC, and Reuters, among others. Although the study did not single out Chinatown bus companies the headline in Businessweek read, “Chinatown Buses Death Rate Said Seven Times That of Others.”
The study is bogus. Not only is the “seven times” finding incorrect, the entire report is a mangle of inaccurate charts and numbers that tell us virtually nothing meaningful about bus safety. There’s no evidence that curbside or Chinatown buses are any less safe than any other kind of bus.
How did the study authors figure curbside bus companies are “seven times” more prone to fatal accidents? For starters, they counted 37 accidents during the study period involving curbside buses in which there was at least one fatality. When I rebuilt the study data and contacted the companies involved, I found that, in 30 of those 37 accidents, curbside buses were not involved. In fact, 24 of those 30 misclassified cases involved Greyhound’s conventional bus fleet. (Greyhound’s curbside subsidiary BoltBus had no fatal accidents during the study period.)
The National Transportation Safety Board denied my requests for the study data, even though it was a taxpayer-funded report with an impact on policy. After my Freedom of Information Act request also failed to return the information following a six-month wait, I began reconstructing the study data from other sources.
Proceeding on the time-honored hunch that people who are hiding something have reason to do so, I generated a list of the 37 fatal crashes using a database obtained from a federal contractor that collects nationwide accident data. I analyzed that data with help of Aaron Brown, a quantitative analyst with the hedge fund AQR Capital Management. Brown was the first to point out major flaws in the NTSB’s methodology in an article published by Minyanville.com, accusing the study authors of “statistical malpractice.” I also consulted with Ed George, a professor of statistics and department chair at the University of Pennsylvania’s Wharton business school, who examined the study for the purposes of this article.
“When I first read the NTSB report, I thought this is just terrible statistics,” says Brown. “But it goes way beyond that. It’s almost as if someone took some random data and shook it together.”
Read the whole thing over at Reason for an overview of the NTSB’s incredibly sloppy study methodology. Cato’s Randal “The Antiplanner” O’Toole has more.
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AEI’s James Pethokoukis says that the mass-refinancing plan proposed by President Obama in his State of the Union address would “result in higher financing costs going forward.” It’s designed to create a short-term “boost for the economy going into the election.” The plan would also harm bank shareholders and people approaching retirement (most mutual funds that people hold in their 401(k) plans have holdings in banks and thus would be harmed, reduced the size of people’s retirement plans, over the long run). Pethokoukis quotes a financial analyst at Guggenheim Washington Research Group who notes that “that a mass refinancing could permanently drive housing finance costs higher. This is a real threat as investors are likely to demand a premium if government policy materially accelerates prepayment rates.” Pethokoukis calls this mortgage bailout proposal Obama’s “January surprise.”
The Obama administration is also harming the housing market by pressuring banks to make risky loans to minorities with bad credit, using the threat of massive Justice Department lawsuits. The Assistant Attorney General for Civil Rights, Thomas 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,” and treating welfare “as valid income in mortgage applications,” noted Investor’s Business Daily.
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In a recent letter in The New York Times, I noted the role played by the government-sponsored enterprises, Fannie Mae and Freddie Mac, in spawning the financial crisis and burdening taxpayers to the tune of hundreds of billions of dollars. The two mortgage giants bought up risky sub-prime mortgages partly in order to satisfy government affordable-housing mandates, as even the liberal Village Voice found in its investigative reporting. Even Fannie Mae’s 2006 10-K form with the SEC noted the role of HUD’s affordable-housing mandates as a factor in its purchase of mortgages it would once have avoided as too risky:
[W]e have made, and continue to make, significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet HUD’s increased housing goals and new subgoals. These strategies include entering into some purchase and securitization transactions with lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by HUD’s goals and subgoals, which could increase our credit losses. [emphasis supplied]
Some commentators at liberal newspapers, like The New York Times‘ Joe Nocera, have argued that Fannie and Freddie bought up risky mortgages in order to maintain their market share, not to satisfy affordable-housing mandates, and that this somehow minimizes their role in the mortgage crisis, contrary to the arguments of Peter Wallison, who prophetically predicted that Fannie and Freddie would someday have to be bailed out by taxpayers, and argued in his opinion at the Financial Crisis Inquiry Commission that Fannie and Freddie were a major contributor to the financial crisis.
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“One of the regular claims from Fannie Mae and Freddie Mac apologists . . . is that the two entities were blameless” for causing the mortgage meltdown and financial crisis, as these two “Government-sponsored enterprises” (GSEs) supposedly “weren’t involved in subprime” mortgages and were forbidden to buy them. This false and dishonest claim has now been refuted. In charging the former heads of Fannie and Freddie with fraud, “the Securities and Exchange Commission has decided that not only could the GSEs buy subprime, but they did in fact do so and, even worse, they lied about it.”
As Cato Institute economist Mark Calabria notes, “Back in 2008, Paul Krugman went so far as to say, ‘they didn’t do any subprime, because they can’t.’ Just taking 10 minutes to read the actual statute and regulations would have revealed to him that they actually could. Krugman went on to say, ‘Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.’ Of course, just reading Fannie’s 10-K would have revealed that claim to be false. But why let facts get in the way?”
In the Wall Street Journal, Peter Wallison, who prophetically warned against the risky practices of mortgage giant Fannie Mae, earlier described the key role that government-sponsored entity played in spawning the recent financial crisis, in an article entitled “Government-Sponsored Meltdown.” He cited the findings of a recent book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, a book called “Reckless Endangerment,” which chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.” Earlier, a top investment manager at JP Morgan Private Bank reached a similar conclusion, noting that “new research” showed that “US Agencies played a larger role in the housing crisis than we first reported,” and thus were a “primary catalyst for the US housing crisis.”
(Even now, the Obama Justice Department is pressuring banks to make risky loans to people with bad credit, relying on a strained interpretation of fair lending laws, and the threat of massive lawsuits.)
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“U.S. is set to sue dozen big banks over mortgages,” reads the front-page headline in today’s New York Times. The “deck” below the headline explains that that the Federal Housing Finance Agency, which oversees the government-sponsored enterprises Fannie Mae and Freddie Mac, is “seen as arguing that lenders lacked due diligence” in the loans they made.
A more apt description would probably be that Fannie and Freddie are suing the banks for selling them the very loans the GSEs helped designed and that government mandates encourage — and are still encouraging them to make. These conflicted actions are just one more of the government’s contributions to the uncertainty that is helping to keep unemployment at 9 percent.
Strangely the author of the Times piece, Nelson Schwartz, ignores the findings of a recent blockbuster book by one of his colleagues that Fannie and Freddie took the lead in creating the shoddy loans. “Reckless Endangerment” by Pulitzer Prize-winning Times reporter and columnist Gretchen Morgenson and financial analyst Joshua Rosner write that the GSEs “led both the private and public sectors down a path that led directly to the financial crisis of 2008.”
In the Times, Morgenson has written that Fannie and Freddie were the “biggest and most steadfast collaborators” of the notorious Countrywide Financial. Fannie “assiduously … pursued Mr. Mozilo and 14 of his lieutenants to make sure the company continued to shovel loans its way,” according to Morgenson. In 2004, Countrywide “sold 26 percent of the loans Fannie bought,” she reported.
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Last Thursday, before the House Oversight and Government Reform Committee, Consumer Financial Protection Bureau architect Elizabeth Warren insisted that her priority was not to ban certain products, but just require better disclosure. While she refused to renounce the power the mammoth Dodd-Frank financial legislation signed into law almost a year ago gives the bureau to ban products deemed “abusive” as well as deceptive, she indicated that limiting choices should through bans or interest rate caps be a last resort.
“There’s a lot of space between banning a product and making a product clearer to consumers,” she said at the hearing as quoted by The Hill. “Let’s get out there and try some real disclosure … I believe in markets.”
But Richard Cordray, who was just nominated for the top spot at the bureau that many thought Warren would get, doesn’t subscribe to this belief. As Ohio’s attorney general, his philosophy was ban first, ask questions later. He seemed to never meet a price control, interest rate cap, or product ban he didn’t like. The former Jeopardy! champion would constantly express the belief that less intelligent beings should not be burdened with deciding what product is best for them in the marketplace.
He was a driving force in Ohio’s efforts in putting price controls interest on small, short-term loans. Ohio instituted one of the lowest interest caps in the country, driving legitimate small lenders out of the state, and Cordray would have gone even further. He championed outlawing basic fees that small-loan providers had been able to charge in the state since the ’50s.
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In the Wall Street Journal, Peter Wallison, who prophetically warned against the risky practices of mortgage giant Fannie Mae, describes the key role that government-sponsored entity played in spawning the recent financial crisis, in an article entitled “Government-Sponsored Meltdown.” He cites the findings of a recent book about the causes of the crisis by New York Times business reporter Gretchen Morgenson and financial analyst Josh Rosner, a book called “Reckless Endangerment,” which chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.” Earlier, a top investment manager at JP Morgan Private Bank reached a similar conclusion, noting that “new research” showed that “US Agencies played a larger role in the housing crisis than we first reported,” and thus were a “primary catalyst for the US housing crisis.”
As Wallison notes, Government-Sponsored Enterprises (GSE’s) like Fannie Mae played a central role in precipitating the financial crisis:
After James A. Johnson, a Democratic political operative and former aide to Walter Mondale, became chairman of Fannie Mae in 1991 . . . it became a political powerhouse, intimidating and suborning Congress and tying itself closely to the Clinton administration’s support for the low-income lending program called “affordable housing.” This program required subprime and other risky lending, but it solidified Fannie’s support among Democrats and some Republicans in Congress, and enabled the agency to resist privatization or significant regulation until 2008. “Under Johnson,” write Ms. Morgenson and Mr. Rosner, “Fannie Mae led the way in encouraging loose lending practices among banks whose loans the company bought. . . . Johnson led both the private and public sectors down a path that led directly to the financial crisis of 2008.”. . .Far from being a marginal player, Fannie Mae was the source of the decline in mortgage underwriting standards that eventually brought down the financial system. It led rather than followed Wall Street into risky lending. . .Edward Pinto (a former chief credit officer of Fannie Mae) . . . presented . . . evidence . . . showing that by 2008 half of all mortgages in the U.S. (27 million loans) were subprime or otherwise risky, and that 12 million of these loans were on the books of the GSEs.
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The Environmental Protection Agency is 40 years old. It came into being under a Republican president, Richard M. Nixon, and opened its offices on December 2, 1970. In January of that year, Nixon had signed the National Environmental Protection Act, and on the last day of December 1970, he signed the Clean Air Act of 1970.
Fast forward to the year 2010, with an EPA now with almost limitless powers in the environmental arena — regulating greenhouse gas emissions, policing carbon dioxide as a pollutant, and expanding the purview of the Clean Air Act, without congressional approval. As CEI’s Marlo Lewis wrote,
. . . EPA has positioned itself to determine the stringency of fuel economy standards for the auto industry, set climate policy for the nation, and even amend provisions of the Clean Air act–powers Congress never delegated to the agency. The Endangerment Rule is both trigger and precedent for sweeping policy changes Congress never approved. America could end up with a pile of greenhouse gas regulations more costly than any climate bill or treaty the Senate has declined to pass or ratify, yet without the people’s representatives ever voting on it.
Here’s more from a coalition letter trying to roll back these expanded powers:
Is climate policy to be made by the people’s representatives or by politically unaccountable bureaucrats, trial lawyers, and activist judges?
Only one answer to that question passes constitutional muster. EPA has no authority to do an end-run around the democratic process. Climate policy is too important to be made by an administrative agency without new and specific statutory guidance from Congress.
Republicans are now in control of the House, and with six additional seats in the Senate, they, working with moderate Democrats, should be able to pass legislation suspending or overturning EPA greenhouse gas regulations. We, the People, can “take back our government” only if our representatives stop administrative agencies from legislating.