housing bubble

Government Promoted the Risky Non-Traditional Mortgages that Triggered the Financial Crisis

by Hans Bader on July 26, 2011 · 1 comment

in Bailout Watch, Economy, Politics as Usual, Regulation, Zeitgeist

Ed Pinto, who was an executive at Fannie Mae long before it went into the toilet and nearly took the financial system down with it, notes that “the financial crisis resulted from an unprecedented accumulation of weak and risky Non-Traditional Mortgages (NTMs)” promoted by both the government and the government-sponsored mortgage giant Fannie Mae. “Each type of NTM featured increased borrower leverage and risk.”

In Government Housing Policy: The Sine Qua Non of the Financial Crisis, he describes in detail how government housing policy explicitly promoted massive increases in leverage and moral hazard by both borrowers and investors and chronicles the central role played by Fannie Mae and Freddie Mac as the clearly-acknowledged kings of moral hazard and leverage. As he points out, government involvement included the facts that (1) Congress, at the behest of community advocacy groups, forced Fannie and Freddie to replace conservative underwriting with flexible underwriting knowing that banks would follow suit; (2) Fannie vowed to transform the housing finance system using flexible underwriting, in an effort to protect its charter privileges bestowed by Congress; and (3) HUD, after a decade of effort, proudly took credit for a revolution in affordable lending. This revolution then led directly to the 2008 financial crisis, which precipitated a $160 billion bailout of Fannie Mae and Freddie Mac, the nation’s two government-sponsored mortgage giants.

(Unlike the private banks, which repaid their bailouts with interest, Fannie Mae and Freddie Mac are not expected to repay taxpayers, and their bailout tab may rise to $1 trillion, according to Bloomberg News. The Obama administration earlier lifted the $400 billion limit on bailouts for Fannie Mae and Freddie Mac, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation. In May 2010, the administration and its congressional allies blocked efforts to reform Fannie Mae and Freddie Mac.)

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Fannie Mae Backers Unrepentant Despite Its Fraud and Colossal Bailout

by Hans Bader on January 29, 2011 · 4 comments

in Bailout Watch, Economy, Politics as Usual, Sanctimony, Zeitgeist

Fannie Mae and Freddie Mac were bailed out at a cost to taxpayers of between $148 billion and $363 billion. Their recklessness and wrongdoing was so obvious that even Treasury Secretary Geithner admits that “Fannie and Freddie were a core part of what went wrong” in the financial crisis. The two government-sponsored mortgage giants engaged in massive accounting fraud, and their allies in the Obama administration have now spent $160 million in taxpayer money defending them against various charges.

Yet, their longtime defenders, like the Washington Post’s Steven Pearlstein, are completely unrepentant. They continue to suggest that only right-wing ideologues could want to eliminate scandal-plagued Fannie and Freddie. Pearlstein long dismissed warnings from conservatives like the Wall Street Journal’s Paul Gigot about the dangers these mortgage giants posed to our financial system.

Incredibly, Pearlstein still believes that what’s good for Fannie and Freddie is good for America. In the January 23 Washington Post, Pearlstein showed he has learned nothing from the financial crisis.  Pearlstein called House Republicans “free-market ideologues” for wanting to rein in the two companies. He praised “low-income-housing advocates and the Obama administration” for opposing this reform effort.  He suggested that access to mortgages (and thus, homeownership) would suffer without Fannie and Freddie, ignoring the fact that homeownership rates are higher in countries like Chile and Italy that have nothing like Fannie or Freddie.

The last thing America needs is to keep Fannie and Freddie around to help spawn the next financial crisis. Fannie and Freddie helped spawn the current mortgage crisis by buying up risky mortgages and repackaging them as prime mortgages, thus creating an artificial market for junk: “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.” As Government-Sponsored Enterprises, they were not subject to the sort of capital requirements that apply to private entities, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Congressional Democrats last year blocked a GOP amendment that would have reformed the  government-sponsored mortgage giants, Fannie Mae and Freddie Mac.  The Obama administration lifted a $400 billion limit on bailing them out and showered their executives with $42 million in pay.

At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom had high incomes. Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.

Obama received $125,000 in contributions from Fannie Mae and Freddie Mac executives as a senator, second only to the Senator Chris Dodd, who was forced to retire last year over financial improprieties (such as his real estate gift from a lobbyist and “sweetheart mortgage from Countrywide Financial“), yet was the chief drafter of the Dodd-Frank financial “reform” law.  (Dodd-Frank harms the economy, and violates both the Constitution’s separation of powers, and private property and equal-protection rights).

Despite the devastating financial impact of Fannie Mae and Freddie Mac’s mistakes, their defenders are as unrepentant, and perhaps as influential, as ever.  Don’t expect their allies in the Obama administration to endorse any meaningful reforms.

More Burdensome to Pay Rent Than to Be a Mortgage Deadbeat

by Hans Bader on November 28, 2010 · 1 comment

in Bailout Watch, Economy, Politics as Usual, Zeitgeist

Under government mortgage bailout/modification programs, the mortgage payments of many delinquent borrowers were cut to 31 percent of income, even for borrowers with high incomes and big houses. That cut was based on the false assumption that anything over that percentage was unaffordable (and perhaps even predatory lending). But people often pay far more than that in rent and mortgage payments, especially in prosperous regions like Washington, D.C. So mortgage deadbeats are sometimes getting their payments cut well below what their responsible neighbors have to pay — not merely getting relief from a bad deal.

“One in five renters and one in seven homeowners in the Washington area spend more than half their income on housing, according to census figures,” notes a recent Washington Post story.  Much of the population in the counties surrounding Washington, D.C. spent more than 30 percent: “In Fairfax County, for example, more than half the renters with household incomes of $50,000 to $75,000 spent more than 30 percent of their income last year to keep a roof over their heads,” as did “more than six out of 10 homeowners in that income bracket in Prince George’s and Prince William counties,” and “more than half” in Washington, D.C. itself.

Senior government officials, who mostly purchased their homes long ago, long before the housing bubble (and thus often have mortgage payments that are just a tiny fraction of their income), seem oblivious to this reality.

Many borrowers aren’t making any payments at all. They’re just defaulting on their mortgages, knowing that it will take years for the bank to evict them for non-payment: 492 days is the average number of days since the typical borrower in foreclosure last made a mortgage payment.  As law professor Glenn Reynolds notes, this all “seems calculated to make people who are struggling to make their payments feel like suckers.”

These mortgage bailout programs are harming the economy, say some economists and real estate experts.

I understated things a bit when I noted earlier that some mortgage deadbeats had their mortgage payments cut to just 31 percent of income. Actually, it’s lower than that. That 31 percent figure includes not just mortgage payments but also real estate taxes.  So if a delinquent borrower has a mortgage that’s 20 percent of income, and property taxes that are another 15 percent of income (for a total of 35 percent of income), that borrower could have gotten a reduction in mortgage payments under the 31 percent test, despite having a modest mortgage.

You Were a Sucker If You Were Responsible, Thrifty, and Saved Money for a Down Payment

by Hans Bader on September 7, 2010 · 4 comments

in Bailout Watch, Economy, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

The Obama administration will launch today a new $14 billion program to bail out some people who are underwater on their mortgages.  During the housing bubble, hundreds of thousands of people made such small down payments on their home that their mortgage was almost as big as the price of their home.  When the housing bubble ended, their home value fell to less than their mortgage.  Thousands of these people will now receive taxpayer bailouts (although a majority of underwater borrowers won’t — read this Wall Street Journal article for some of the details).

So if you saved money for a down payment, you were a sucker.  If you’d spent your money instead, the government might give you a bailout.  But since your down payment reduced the size of your mortgage, your mortgage is smaller than the value of your house, and you don’t qualify for a bailout.

This bailout comes exactly two years after federal regulators took over the government-backed mortgage giants Fannie Mae and Freddie Mac, which were bailed out at a cost that may ultimately reach $400 billion.  The government took them over in order to stop their risky practices, but after Obama took office, he did the exact opposite.  Obama made them increase their losses by ordering them to bail out irresponsible mortgage borrowers, at a cost of $30 billion to Freddie Mac alone.  The Obama administration rewarded Fannie Mae and Freddie Mac executives for carrying out these foolish bailouts by showering them with $42 million in pay.  The bailouts benefited even irresponsible borrowers with high incomes.

Another Obama mortgage bailout program that cost taxpayers $75 billion actually harmed the real estate market and the economy, according to economists and real estate experts cited in the New York Times.  On first glance, it seems like the Obama administration is incapable of learning from its mistakes.  But the purpose of this new bailout is probably not to help the economy, but rather to buy votes in the upcoming election in states like Nevada, Florida, and California, which had the biggest housing bubbles.  It is a desperate form of political pandering.

Liberal politicians spawned the mortgage crisis through misguided policies such as affordable-housing mandates.  The mortgage crisis was also caused by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac. But the new Dodd-Frank financial “reform” law backed by Obama does absolutely nothing to reform Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.“ The Dodd-Frank law also creates a new bureaucratic agency to enforce the Community Reinvestment Act CRA without regard for banks’ safety and soundness.  The CRA, which pressures banks to make risky loans, was previously expanded through regulations in the 1990s, regulations often cited as a cause of the financial crisis.

Facing rising criticism of his economic policies, the president whined Monday about the way people  ”talk about me.”

Congress Moves to Reinflate the Housing Bubble That Caused the Financial Crisis

by Hans Bader on October 19, 2009

in Bailout Watch, Economy, Features, Politics as Usual, Precaution & Risk, Sanctimony, Zeitgeist

Veteran political commentator Michael Barone reports that liberal congressional leaders are pushing policies to “inflate the housing bubble again,” even though “our financial system broke down because we had, thanks to government policies, a housing bubble.”

Congressional leaders are ignoring warnings from experts across the political spectrum, such as conservative Peter Wallison’s October 16 piece in the Wall Street Journal, titled “Barney Frank, Predatory Lender,” and liberal Charles Lane’s recent piece in the Washington Post, “Doubling Down On the Wrong Housing Policy.”  (Wallison, a banking expert, prophetically warned for years about the risky practices of the government-sponsored mortgage giants, Fannie Mae and Freddie Mac, which were at the core of the financial crisis, and later had to be bailed out by taxpayers at a cost of around $200 billion.)

The Obama administration is also busy promoting the junky, risky mortgages that fueled the housing bubble, showing that it has learned nothing from history.

In the Washington Examiner, Meghan Cox Gurdon explains how housing policies affected two sisters, one responsible and one irresponsible.  The financially-irresponsible sister, who was unable to manage her own finances, and had recently defaulted on a small car loan, ended up getting a taxpayer-subsidized mortgage.  Meanwhile, the responsible sister and her husband were unable to obtain a mortgage loan, despite having an “excellent credit rating” and money for a large downpayment.

Markets vs. Special Interests

by Ryan Young on October 12, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Environment, Global Warming, Healthcare, Insurance, Politics as Usual, Regulation, Stimulus to Nowhere

Detractors of capitalism decry that it caters to special interests. The opposite is actually true. Just look at what’s happened in the last year.

Most of Wall Street came to government asking for a bailout when the government-created housing bubble popped.

The Big Three automakers also went to Washington for largesse when their customers came to prefer Toyotas and Hondas.

Health insurance companies stand to make a killing if Obamacare passes.

T. Boone Pickens and Al Gore would make millions from environmental legislation.

Ludwig von Mises explained the reason for all of this corrupt behavior with a single sentence back in 1949: “It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference.”
-Human Action, 4th Edition, p. 337.

Federal Budget Deficit Skyrockets; $163,000 More in Taxes

by Hans Bader on April 10, 2009 · 3 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Stimulus to Nowhere

“The budget deficit increased by $192.3 billion in March, and is near $1 trillion just halfway through the budget year.”

It’s going to get worse. The Obama Administration’s proposed budgets would produce $9.3 trillion in red ink, more than double the $4.4 trillion in red ink that would have been produced by Bush’s already huge budgets. Economist Michael J. Boskin estimates that Obama’s plans will result in $163,000 in increased taxes in the future for the typical tax-paying family.

Balanced budgets won’t return even in the long run. Obama claims that a revived economy will eventually cut the deficit. But the Congressional Budget Office says his $800 billion stimulus package will actually cut the size of the economy in the long run, contradicting Obama’s claims that it was needed to avert “irreversible decline.” That was just one in a long line of broken promises and false claims from Obama, like his claims that he would enact a “net spending cut” and not raise taxes on people making less than $250,000 a year.

Economists and scholars explain some of the government mistakes that created this recession.

Obama is spending $250 billion to bail out irresponsible mortgage borrowers across the country, some of whom have high incomes and modest mortgage payments. Law professor and financial expert Todd Zywicki argues that Obama is misguided to use taxpayer money in a vain effort to to keep the housing bubble from popping. He notes that the bubble was the product of artificially low short-term interest rates promoted by the federal government, and that the mortgage crisis is concentrated in just 9 states.