Obama encourages more unsupportable mortgages.

 

"The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place. President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession."  Washpost

------------------------------

Wait a minute...  Wasn't one of the big problems in the housing crash debacle the Congress's insistence that banks should be encouraged to make loans to people who could not afford to make the payments?

The banks responded by doing that while supported along the way by Fanny and Freddy and then sold the loans to other paper mills that chopped them up into little bits that could be made into derivative securities.  Those houses then sold these securities to all sorts of clients while simultaneously betting against the clients in the credit swap defaults markets.  A further refinement was that the credit swap default market did not even care if the person taking out the "insurance" owned the security.  That was a mouthful.

Now the Obamanoids are encouraging a re-run of this process?  OK.  I see.  Social and political objectives trump financial common sense.  Latinos and African Americans are a key part of the Democratic Party base.  This is a pay-off for votes,

All this is interesting in the context of constant attacks by Democratic Party adherents in the media and the wonkery against Republican legislators who have the temerity to listen to their constituents on such the issues as gun law.  pl  

http://www.washingtonpost.com/business/economy/obama-administration-pushes-banks-to-make-home-loans-to-people-with-weaker-credit/2013/04/02/a8b4370c-9aef-11e2-a941-a19bce7af755_story.html?hpid=z1

 

 

 

 

Comments

[b]

"Social and political objectives trump financial common sense. Latinos and African Americans are a key part of the Democratic Party base."

I agree with the first sentence but the second is wrong.

Wall Street was the winner of the first housing bubble and Wall Street will be the winner of a second one.

Those Latinos and African Americans will spend money on houses they will then again lose.

Obama's constituency are not Latinos and African Americans. His constituency is Wall Street.

[Peter C]

This fits with Obama's pandering/partnership with Wall Street. On the West Coast and other high priced areas all the low hanging fruit of distressed mortgages have been snapped up by cash rich Cabals. Now loosen up the cash to prospective customers to purchase these same homes that were just scooped up by the Cabals. Pump and Dump, using the Fed, Treasury, and Tax Payers to insure the mess.

[harry]

Your governming aparatchiks are skilled in messaging and propoganda. They have a very good grasp of self dealing, and they have done a fine job of paying back their backers. I am particularly impressed by the nomination of Mary Jo White for SEC. A wonderful gift to those who might be concerned at the possibility of jail time or big fines. You see how valuable They are sadly rather bad at economic policy or economic philosphy or even longer term governance. You know, crony capitalism never works out well in the long run.

[turcopolier]

b

Always the sentimental lefty. Got to protect the minorities, eh? Yes, Obama is a flunky for Wall street. He is also a flunky for people like you. Yes, many Blacks and Latinos who will get mortgages while unqualified will lose the houses again. Yes. But Obama is still enabling them to buy these houses that they will lose, and on which Wall street will make more money. BTW, I am all for Latinos and Blacks who have worked themselves into financial qualification for mortgages getting them What I am not for is this kind of chicanery. pl

[elkern]

Republicans tried to blame the Crash on the poor (blacks...), but I'm not buying it.

I suspect that for every Grandma in North Philly who got in over her head buying a decrepit rowhouse for $90K, there was a suburban professional on the fast-track to early retirement flipping beachfront Condos for $900K. Then - as Col Lang describes - the Banksters ground up all those mortages with a few good ones and sold them as sausage, INTENTIONALLY inventing new "financial products" to hide the risk from customers.

When both of houses in my imaginary CDS lose half their value, the $450K loss from the Condo is a much bigger hit. Were there really 10 Rowhouses for every beachfront Condo in the pile of steaming manure at the south end of that north-bound Bull Market?

Well, maybe, but I doubt it. I have never seen any real numbers to back it up, either way. Until I do, I'm VERY skeptical about blaming the crash on the poor.

Col Lang states it as "people who couldn't afford to make the payments", which is reasonable, but that would include a whole lotta people who had decent jobs paying enough to cover the mortgage - until they lost their jobs in the crash. A huge portion of these were guys in construction - building the houses for the boom.

I think the root problems were:
- breaking Glass-Steagle, opened doors for...
- Overly clever Banksters, who got to play with huge piles of imaginary money borrowed from China because of...
- an economy overheated by Bush-Cheney policy: Huge increase in military spending (I-F'ING-RAQ), combined with tax cuts for the rich.

I think the laws & regulations written to open up the mortgage market to people less white than me played a small, perhaps trivial part in the Crash, but Republicans needed a scapegoat. Besides, weren't those laws written in, like 1975? If Clinton had given them new teeth via exectutive decree, couldn't Bush have just removed those same teeth?

[Tim Bassett]

Think you may have your history a bit wrong. Fannie & Freddie were actually losing market share during the bubble, their losses came from trying to win it back. It is an urban myth that the Community Reinvestment Act played a big part in the banking collapse.

I think you are right that the Government should probably not be subsidizing borrowing but the big interest deductions are in the corporate sector where tax law needs to be tightened such that interest is only tax deductible to the extent it is payable in the hand on the receiver otherwise this leads to the excessive leverage that led to the bubble.

What you also must be prepared for is that a less levered private sector means a more levered Government. Double entry dictates that one can only save if someone else borrows, if the private sector is going to save then the Government is going to borrow by definition ie exactly what we have seen since the bubble burst.

[turcopolier]

Tim Bassett

"Fannie & Freddie were actually losing market share during the bubble, their losses came from trying to win it back." Yes, but they were still playing in the same rotten game. pl

[Walrus]

That " forced lending to poor people" caused the gfc is an urban myth although I can't quote a reference just yet. The community reinvestment act is decades old.

The proximate cause was good old bankers greed that created a housing price bubble that eventually popped. it was the banks that relaxed the credit standards, nobody forced them to shove money down people's throats. It was the banks that repackaged toxic debt and on sold it.

Furthermore, your asinine system of "without recourse" housing loans creates a system where over investment in housing has no penalty (aka jingle mail). Over here, the banks will send you bankrupt if you fail to make mortgage payments and the sale value of the house doesn't cover the balance of the loan.

[turcopolier]

walrus

At least you all are interested. Surely you don't think what Obama is doing is a good idea? More people who can't afford them will buy houses. These will further fatten the banks and inevitably lead to another bubble in houses and securities. pl

[Norbert M. Salamon]

I would suggest that Obama's proposal is yet another attempt to keep business as usual operating.

The myth of energy independence is false, the myth of the USA banking system being healthier than the EU counterparts is false [clearly indicated by the FDIC's newest program copying the Cyprus modus operandi to the too big to fail banks, owners of trillions of $ of derivatives about to explode],
the myth of unemployment rate is false [doctored], as is the GDP figures.
The national debt figures are false, for they exclude the debt of states, municipalities and other public sourced debts.
The stock market does not reflect fundamentals [e.g. future earnings] but is the result of endless [monthly 85 billion] money creation by electronc means.
Obama and co are trying to prolong the time remaining til the next blow-up of the Financial/Real-estate/insurance/stockmarket collapse, preferably to the nexdt administration. I do not think that the delay is possible.

[William R. Cumming]

Would it surprise anyone to find that most of the nation's housing policy, including the HUD charge of decent, safe,sanitary housing for all Americans, is not controlled in the WH or HUD.

It is housed largely in US tax policy. The unlimited mortgage deduction is a driver on the collapse of the housing bubble, along with securitization.

And the FED has never repeat never understood housing policy and issues [or the energy sector] and never will understand with current staffing and appointees.

Still it is fun to see the poster and commentators frothing over meaningless spin. Thanks!

Disclosure: Moved from IRS to HUD on July 1, 1974 and stayed until September 10, 1979.

And when I arrived in HUD few understood that Treasury and the Joint Committee on Taxation made housing policy not the Housing Committees in the House and Senate.

There is an historic legal rubic--specifically that the LAW abhors meaningless acts. Unfortunately there are many including the willingness of US citizens and residents to own second beach front properties or dwellings on flood plains. Essentially, the SANDY bailout rewards generations of STATE and LOCAL negigence, sometimes gross negligence with more taxpayer dollars.

[VietnamVet]

Colonel,

This is not a matter of brown or purple. It is just another way for Wall Street to extract wealth from people who end up with nothing. A similar scam is Student Loans. Your waiter is trying to pay off his $100,000 in loans on a $20,000 income serving you. It is no different than Virginia Coal Miners, last century, paying all their wages to the Company Store.

The federal government could make its policy first to keep families in their homes and force Wall Street to take a haircut on their bad debt. Instead the Obama Administration is doing the exact opposite. After the next bust, that is sure to come, the US housing market will consist of only of renters.

[Mark Logan]

"A little weaker" I believe would be a good idea, the devil is entirely in how much. Full disclosure -I'm in the construction business.

The linked statement in that article from the Councelor of Treasury reflects what I am seeing here. After the self-trumpeting, of course. Starting with this:

"Many of these loans are held in non-agency trusts, so legislation that gives these high-interest borrowers in PLS trusts the ability to refinance into lower-cost loans could be especially impactful."

"A substantial portion of these loans – approximately 30 percent – are higher-risk, interest-only or balloon loans that could pose a greater risk of default."

I know people in this jamb who believe the banks are simply using "new regulations" as an excuse to keep them in the high rates. They never missed a payment and never lost their jobs.

[Tyler]

Denial ain't just a river in Egypt, based off of these posts.

Yes it was those Evil White Bankers(tm) who held a gun to the heads of the Noble Minorities and made them sign the paper.

GWB and Karl Rove were in full on neocon thought process when they believed that pushing more lah-tee-nos and blacks to buy houses would magically turn them into Ohio Republicans through the wizardry of home ownership making them more conservative, or something. Instead you got a massive bubble that wiped everyone out.

So lay that at their feet, that they wanted more minority home owners and here we are again.

BTW, claiming something is an 'urban legend' and then providing zero proof is disingenous hackery at its best.

[Walrus]

Col. Lang, I'm typing from an iPad on the boat and I can't yet point you to a reference, but I believe that the poor are actually better payers than the middle class.

The bulk of defaulters that started the gfc were middle class speculators, not the honest poor. I have no trouble with obamas program if he can produce the evidence that foreclosure rates among those with lower credit scores are not materially higher than those with good scores.

Pointer here: http://www.washingtonpost.com/wp-dyn/content/article/2010/06/18/AR2010061802885.html

[turcopolier]

walrus

"...I believe that the poor are actually better payers than the middle class. The bulk of defaulters that started the gfc were middle class speculators, not the honest poor"

Sentimental nonsense, and you are from a country like the UK where people who cannot pay off mortgages are not given them. pl

[turcopolier]

VV

"This is not a matter of brown or purple." Yes. I should have said "poor people." pl

[Larry Kart]

Even though the source here is a story in the intermittently reliable Washington Post, I wouldn't take it at face value, i.e. I wouldn't automatically trust the "face" that reporter Zachary Goldfarb has put on things. (BTW, I can't read the full story because it's behind the Post's pay-wall.) First, because (unless I'm searching carelessly) all references to this story so far (with the exception of our own happy nesting place and a Cleveland Plain-Dealer repeat of the Post's story) come from gloating, more or less right-wing web sites and publications; second, because if the story's characterization of the administration's actions/proposals, etc. here is accurate, the administration would have to be politically tone deaf to the point of stupidity. Not impossible, perhaps, but unlikely. I would wait a bit for further information.

[Larry Kart]

To quote from a post that a friend of mine just made elsewhere:

"The article is murky and sort of obscures what's really going on here. The debate hinges on a disagreement between the administration and banks of what constitutes a creditworthy borrower, but never really addresses the question of who is right: is the administration really trying to force banks to make stupid loans, or have banks become too skittish and refuse to give loans to people who are actually quite low credit risks? (Either their algorithms are badly calibrated and telling them that people are high risk when they aren't, or their algorithms are telling them correctly that people are low risk and they're hunting for reasons to ignore the algorithms anyway.)

"See, for instance, this story:

http://blogs.wsj.com/economics/2013/04/01/why-its-still-hard-to-get-a-mortgage/

[M. Hoppe]

No one seems to remember that the first round of defaults happened when the interest rates spiked on all of the adjustable rate mortages, held by all of those "unqualified" buyers, whom had been making payments for 5 or so years before the new terms kicked in.

[JohnH]

Obama doesn't give a damn about the Democratic base. In our area he didn't even use the Democratic organization to run his re-election campaign. He created his own instead.

Now that he's run for the last time, he can totally ignore Democrats. He has bigger fish to fry. Like the Clintons before him, he is positioning himself to cash out big time and will do anything a powerful lobby asks. The quid pro quo will come after he leaves office.

[elkern]

I've never seen a real breakdown of the mortgages which caused the crash, and I've been wondering about this for years. Anybody got any good links?

I don't think it's fair to require proof of the alternative theory ("blame the rich") when we're really just questioning the original premise ("blame the poor").

Perhaps coincidentally, there's an article titled "Austrians don't Blow Bubbles" up on TAC (yes, I follow the TAC site) which asserted the same thing:

"The basic narrative is not in dispute: banks, under pressure for short-term profits and goaded by regulators who wanted to enforce racial equality in home ownership, made hundreds of thousands of loans to people who… had never checked their credit ratings."

http://www.theamericanconservative.com/articles/austrians-dont-blow-bubbles/

It goes on to talk about middle-class people buying & flipping properties, but it's hard to read the sentence I quoted without seeing that the writer's sympathies lie with the bankers ("goaded by regulators"). The point of the article is to assert that if the "Austrians" ran the world, the crash (and all others) would never have happened. I bring this into this discussion to bolster my contention that the "blame the poor" meme was invented by people with a politcal ax to grind, not by neutral parties looking at the numbers scientifically.

The truth is most likely that there were many problems.

[The Twisted Genius]

I bought my first and probably last house in late 1994 when the tulipmania-like housing bubble was just getting underway. The loan officer tried awfully hard to get us to take a bigger loan. "You can afford a much bigger loan," she said. "I have two sons about to enter college. I know what I can and can't afford, you dumb son of a bitch!" I answered. I was so exasperated by her hard sell, I actually said this. A few years later when I refinanced, another loan officer asked if we wanted to take out a much bigger loan based on the ridiculously inflated value of our house. "No thanks," was my answer. This was a much less pushy and much more polite loan officer. With no mortgage and no student loans, and only modest wants, I was able to retire long before my contemporaries. Being a cheap bastard who abhors debt has its rewards.

An awful lot of people took out loans they couldn't afford on the belief that housing values would continue to skyrocket forever. People also rushed into the market fearing that they may never have a chance in the future. The loan officers loved it. They even coached people on how to lie on the applications to qualify for bigger loans. If you weren't mortgaged out the wazoo and flipping houses left and right you were an unambitious dolt who just didn't understand the new economy.

IMHO those who see a house as a financial instrument are the clueless idiots. Those who encourage other to see a house as a financial instrument are no more than repulsive grifters.

[scott s.]

I think you see the housing bubble take off after the Fed lowered the federal funds rate too low (well below Taylor rule). When the Fed started tightening in late 2003, banks needed to find a way to maintain cash flow, so shifted to the non-conventional mortgage market including the so-called private label MBS (non-GSE) securitization. Banks had changed their business models from holding mortgage paper and profiting on interest spreads to a cash flow from service model where banks made money from origination, servicing, securitization, and MBS trust management, meanwhile setting up MERS and other devices to get around traditional real property documentation processes. Note also much of the output of securitization was in instruments that carried AAA ratings and were allowed to be held by banks as Tier 1 capital, thus turning crappy mortgages into rock-solid assets. Also much of the bubble was restricted to a handful of states, CA, NV, AZ, and FL for reasons that probably have nothing to do with poor (or minority) borrowers.

[Tyler]

I'm working on getting a VA home loan right now. It has been non stop paperwork.