The Government's At It Again With The Loan Candy
Hans Bader writes at FEE that everything old and mortgage crisis'y is new again. As the headline puts it, "Your Taxes (Once Again) Are Underwriting Bad Mortgage Loans":
Making risky loans to people with bad credit in the name of "affordable housing" fuels housing bubbles and drives up the cost of housing, but it doesn't increase homeownership rates in the long run, as a Wall Street Journal article explains. Indeed, homeownership rates are higher in many countries that lack such risky "affordable housing" lending. That includes countries that are much poorer than the US (like Chile), or much more crowded, and thus might be expected to have lower homeownership rates than the US.Banks and mortgage companies have also been under pressure from lawmakers and regulators to give loans to people with bad credit in order to provide "affordable housing" and promote "diversity." That played a key role in triggering the mortgage crisis, judging from a story in the New York Times. For example, "a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source."
The executives of government-backed mortgage giants Fannie Mae and Freddie Mac "eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out." But they realized the risk: "In 2004, Freddie Mac warned regulators that affordable housing goals could force the company to buy riskier loans." Ultimately, though, Freddie Mac's CEO, Richard F. Syron, told colleagues that "we couldn't afford to say no to anyone." Taxpayers ended up bailing Fannie and Freddie out after its risky loans went south.
Yet the Federal Housing Finance Agency doubled down on failure by ratcheting up federal affordable housing mandates for Fannie and Freddie after the 2008 financial crisis. Its head, Mel Watt, was appointed by Obama in 2013, even though the policies he promoted in Congress helped cause the financial crisis. His tenure continued well into the Trump administration since a statute mandated that he could not be fired without cause.
To promote "affordable housing," Watt ordered Fannie Mae and Freddie Mac to substantially increase "lending to low-income families" and especially in "low-income areas" by 2017.
Genius.
This can lead to financial ruin for low-income individuals, and as a former Fannie Mae exec, Ed Pinto notes, the "affordable housing mandates lead to housing bubbles that make housing less affordable for the average buyer:
Loans drive up costs for everyone, because if someone can only pay 200K cash they can get 1M mortgage, which means they can pay much more than 200k for the same house so can bid higher.
Which means the old fashioned person who wanted to pay 200k cash for their home can't anymore, because houses don't cost that anymore (not anywhere I've lived anyhow, though I understand there are still places where 200k can get you a great house).
Which hurts EVERYONE, rich or poor, and poor people more.
NicoleK at January 10, 2019 1:21 AM
"Which means the old fashioned person who wanted to pay 200k cash for their home can't anymore..."
All one has to do is wait. The price hike due to easy credit doesn't last.
But policies like this do discourage ownership, in which case it might just be the point: propertyless people are easier to influence.
Radwaste at January 10, 2019 5:31 AM
Around 2030, the bulk of the Baby Boom is expected to begin dying off. Houses should be pretty cheap after that as supply increases rapidly.
Conan the Grammarian at January 10, 2019 6:03 AM
Hey, you can get housing really cheap in Detroit and St. Louis right now. Some rehab and reno required...
It's a perfect storm. Handing out mortgages (and auto loans) like candy gives the illusion that the economy is more sound than it is, and it buys the votes of people who expect something for nothing. Existing property owners love it because it makes the value of their property go up. Local governments love it because it makes property tax collections go up. (Property taxes are a fun one because it's one of the few places where government can get away with taxing unrealized gains...)
The people who get screwed are small investors. There is nothing they can invest in that has a non-trivial return, because credit is so cheap. But hey, most of those people are older. Socialized medicine will move them out of the way soon enough, and then inheritance taxes!
Conan is right. The real estate market is going to nosedive in about another ten years. It's basic demographics. What I'll be curious to see will be if the governments involved condemn and demolishes a bunch of housing, to prop up prices.
Cousin Dave at January 10, 2019 7:57 AM
Hey, you can get housing really cheap in Detroit and St. Louis right now. Some rehab and reno required...
It's a perfect storm. Handing out mortgages (and auto loans) like candy gives the illusion that the economy is more sound than it is, and it buys the votes of people who expect something for nothing. Existing property owners love it because it makes the value of their property go up. Local governments love it because it makes property tax collections go up. (Property taxes are a fun one because it's one of the few places where government can get away with taxing unrealized gains...)
The people who get screwed are small investors. There is nothing they can invest in that has a non-trivial return, because credit is so cheap. But hey, most of those people are older. Socialized medicine will move them out of the way soon enough, and then inheritance taxes!
Conan is right. The real estate market is going to nosedive in about another ten years. It's basic demographics. What I'll be curious to see will be if the governments involved condemn and demolishes a bunch of housing, to prop up prices.
Cousin Dave at January 10, 2019 7:57 AM
I have no idea why that posted twice. Sorry.
Cousin Dave at January 10, 2019 7:58 AM
What Fannie and Freddie did was much worse than indicated in the article. They cobbled together their mortgages as derivative debt instruments and sold them on the open market as good debt.
The problem was, no one knew just how good or bad the paper they were buying was. Maybe Freddie and Fannie did, but I doubt they knew with any great precision. Besides, that would have gotten in the way of those sweet, sweet bonuses.
In hindsight, they should have been separating the good debt from the questionable debt, but that means the questionable debt will demand higher interest loans to the home buyer since their debt would be resold at junk rates. And we couldn't have that.
NicoleK, one may still purchase a home with less than 5% down. I think we've finally gotten away from the 0% nonsense, but it isn't much higher. It seems you can still find 0% down, but that's an exception.
https://themortgagereports.com/11306/buy-a-home-with-a-low-downpayment-or-no-downpayment-at-all
I R A Darth Aggie at January 10, 2019 8:03 AM
I'll be curious to see will be if the governments involved condemn and demolishes a bunch of housing, to prop up prices.
Cash for Clunkers? that worked out so well. And yes, the auto loan industry has taken on some of the worst practices from the housing bubble. At least being upside down in a car isn't nearly as horrible as being so in a house.
Add on that sweet student debt. We're cruising for a bruising.
I R A Darth Aggie at January 10, 2019 8:08 AM
Maxine Waters, who promoted low income lending, is planning to wage war against banks like Chase that lent to people who then defaulted.
It is cargo cult economics. If middle class people own homes then getting people to own homes will make them middle class. But of course it doesn't.
If you own a home, at some point you will need a new roof (very pricey). For someone just getting by, this is a catastrophe. And yet you have to do it. This (and other repairs) can cause default. People just getting by should rent. The mortgage is only part of the cost of home ownership.
Also, people blame the banks for not lending but 1) the gov has put in rules after 2008 crash that made risky lending harder for banks and 2) home prices are so high because big cities often restrict building homes (California I'm looking at you).
Another problem with the bundled mortgages back on 08 was that the rating agencies get paid by the banks and they were very reluctant to downgrade these securities lest they lose business. It is like using the inspector your realtor recommends--conflict of interest.
cc at January 10, 2019 8:47 AM
You act like Fannie and Freddie aren't part of the federal government. They are GSEs. Government sponsored enterprises. While you can buy stock in them (ownership) they were originally chartered by the US congress and their original charters leave congress significantly in control of them. Expecting their management to defy the people who them there is stupid. And after '08 they even went into conservatorship to the federal government, so the appearance of the two being separate is even thinner.
Ben at January 10, 2019 9:55 AM
"Cash for Clunkers? that worked out so well."
Yeah, I know. I didn't mean to imply that I thought it was a good idea. Cash for Clunkers was terrible because it took a bunch of affordable cars out of the market. Demolishing vacant properties does the same thing; it eliminates the properties that would otherwise be purchased by first-time homeowners.
Cousin Dave at January 10, 2019 10:19 AM
Demolishing vacant properties does the same thing; it eliminates the properties that would otherwise be purchased by first-time homeowners.
Yes. It would be great for someone like me who could sell an existing home, but a demoed lot on the cheap, and build a really nice home, complete with walls, fences and moats.
And gators in the moats. Gotta keep the riff-raff off the lawn.
I R A Darth Aggie at January 10, 2019 11:32 AM
It also allows a developer to turn a 1/4 acre plot with one single family residence on it into a mini-development with 4-5 zero-lot-line houses in it. And each of those houses will sell for the price of that one SFR.
You think we have eminent domain issues now?
Conan the Grammarian at January 10, 2019 4:52 PM
"It also allows a developer to turn a 1/4 acre plot with one single family residence on it into a mini-development with 4-5 zero-lot-line houses in it."
Yup. In my little neighborhood in the last four years the city has added 50 apartments to a 100-unit complex, torn out three single-family dwellings and replaced them with 12 townhouses, and added a shopping center and 30+ townhouses on a corner that looks across the intersections to three other shopping centers. It is now nearly impossible to get around town due to the increased traffic.
This is Homer Simpson donut-level gluttony. Mmmmm. Property taxes. Arglarglargl.
Gog_Magog_Carpet_Reclaimers at January 10, 2019 11:04 PM
The people who have or want small kids now don't care that in 15 years they'll be able to afford to house them.
NicoleK at January 11, 2019 12:49 PM
Consider this - the Federal Reserve has, for decades, been lending money at interest rates below real inflation, in effect paying borrowers to take the money.
Would you like a piece of that? Well, if you're an inventor and you want to use the money to turn your idea into a useful product, forget it. If you're a manufacturer and want to use it to expand your plant, add capacity and create more jobs, too bad. It's only available if you're a federally chartered bank, in other words, if you agree that the only thing you'll do with the money is turn around and lend it out to someone else. Free money, and the faster you lend it, the more we'll give you.
Can you think of a better way to incentivize irresponsible lending? I sure can't.
bw1 at January 17, 2019 8:03 PM
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