Monday, July 21, 2014

Next housing bubble

From page A4 | December 16, 2013 |

The elements are in place for the next housing bubble and subprime mortgage crisis. Two key factors are 1) the appointment of Rep. Mel Watt, D-N.C., as chief of the Federal Housing Finance Agency, which controls government-sponsored mortgage giants Fannie Mae and Freddie Mac, and 2) the $13 billion fine against J.P. Morgan.

As a congressman Watt was a longtime supporter of affordable housing quotas. In 2003 he helped to prevent the Bush administration from increasing oversight of Fannie and Freddie. “In 2007 he cosponsored legislation that would have pushed the two Government Sponsored Enterprises even deeper into the subprime mess,” wrote Peter J. Wallison, a senior fellow at the American Enterprise Institute, in the Dec. 5 Wall Street Journal.

The $13 billion fine the U.S. Justice Department extracted from J.P. Morgan includes $4 billion that “will take various forms, including forgiveness, loan modification, target originations” and “efforts to reduce blight.” That is a backdoor gift to Detroit to bulldoze its thousands of abandoned homes. In fact, the bank is directed to spend the money in Detroit and certain neighborhoods in New York.

But if it doesn’t accomplish the aforementioned tasks, then the bank must pay “liquidated damages in the amount of the shortfall to Neighborhood Works, a nonprofit organization and leader in affordable housing and facilitating community development.” This is a grant to a nonprofit community organizing group that the government itself cannot make, but it can force J.P. Morgan to make. “Affordable housing” is another way of saying subprime loans to low-income people who couldn’t afford to be homeowners anyway.

The housing bubble and its dramatic popping in 2007-2008 was a government-induced crisis, despite the continuing attempt to blame bankers and Wall Street.

Congress instituted the troubles in 1992 by setting goals for Fannie Mae and Freddie Mac of “affordable housing.” Congress’ original goal was 30 percent of the loans to low- and moderate-income borrowers. These were defined as at or below the median income level in their communities.

The Department of Housing and Urban Development was given authority to increase the goals, according to a more detailed presentation Wallison made to Hillsdale College. HUD raised the goal to 42 percent in 1996, 50 percent in 2000 and 56 percent in 2008.

These two GSEs began accepting loans with 3 percent downpayments in 1995 and zero down in 2000. That led to lower credit standards for borrowers. “…by 2008, just before the crisis, 56 percent of all mortgages in the U.S. — 32 million loans — were subprime or otherwise low quality. Of this 32 million, 76 percent were on the books of government agencies or institutions like the GSEs that were controlled by government policies,” Wallison wrote.

Wallison is the Arthur F. Burn chair in Financial Policy Studies at the American Enterprise Institute.

Fannie Mae and Freddie Mac, the Government Sponsored Enterprises, started the ball rolling on collateralized debt obligations for which J.P. Morgan was required to pay a $13 billion tribute to U.S. Attorney General Eric Holder, with $4 billion potentially going to an Acorn-style community organization. Eighty percent of the securities weren’t even sold by J.P. Morgan; they were sold by Washington Mutual and Bear Stearns brokerage, which the government asked J.P. Morgan to buy as part of an effort to contain the financial fallout when it allowed Lehman Brothers to go bankrupt.

The popping of the housing bubble led to massive mortgage defaults and declines in housing values of 30-40 percent. The two GSEs became insolvent and the federal government bailed them out with $180 billion.

Now even the crazy-quilt Dodd-Frank Act is backing 3 percent loans again through its Consumer Financial Protection Bureau.

The advocates for giving loans to those with low credit scores who can’t afford mortgage payments are back in the saddle. They are going to ride this affordable housing horse until it falls dead in its tracks.



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