The Government's Obsession With Home Ownership and Its Role in Predatory Lending
Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market (see chart above showing the huge 5% government policy-induced spike in home ownership from 64% in 1994 to 69% by 2004, following a decade of stable homeownership at 64%). Now the motives of the GSEs fall into place. Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.
It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.
Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
~AEI's Peter Wallison writing in last week's Wall Street Journal
It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.
Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
~AEI's Peter Wallison writing in last week's Wall Street Journal
18 Comments:
This story is very counter-narrative. If you insist on posting this stuff it's only fair to warn you that you may draw the ire of "The One". This could result in public shaming and a declaration that you are not a "real" economist, but just someone with a "perspective". Other "real" economists will be encouraged to shun you and to associate only with certified "real" economists.
Apparently, you haven't been keeping score.
Careful.
astoundingly, in light of this epic and obvious failure, congress and the obama administration are already teeing up to do it again.
i fear they have figured out the magic formula of "compel bad decisions by the financial sector that benefit key constituencies, push until you create a market failure, blame capitalism, intrusively penetrate and regulate the space, repeat as necessary."
Now comes Rep. Eddie Bernice Johnson, D-Texas, and 50 other co-sponsors (all Democrats) of H.R. 1479 the “Community Reinvestment Modernization Act of 2009,” who want to expand the CRA to include not just banks but also credit unions, insurance companies and mortgage lenders. Congressman Barney Frank, chairman of the House Financial Services Committee, has supported the idea in the past. The SEIU and ACORN, along with a host of other activist groups, are also behind the effort.
President Obama has been a staunch supporter of the CRA throughout his public life. And his recently announced financial reforms would make the law even more onerous and guarantee an explosion in irresponsible lending. Obama wants to take enforcement of the CRA away from the Federal Reserve, the FDIC and other financial regulators who at least try to weigh bank safety and soundness when enforcing the law, and turn it over to a newly created Consumer Financial Protection Agency (CFPA). This agency’s core concerns would not be safety and soundness but, in the words of the Obama administration, “promoting access to financial services,” which is really code for forcing banks to lend to those who would not ordinarily qualify. Compliance would no longer be done by bank examiners but by what the administration calls “a group of examiners specially trained and certified in community development” (otherwise called community activists). The administration says, in its literature about the reforms, that “rigorous application of the Community Reinvestment should be a core function of the CFPA.”
I can't believe I overlooked this op-ed last week. Government involvement in the "housing bubble" should not be understated. The federal government is so big and lumbering that fallout from these misguided policies is nearly always significant.
The Obama scorecard is great. When all else fails, blame Bush. It's in the neo-liberal operating manual. How else can you explain the prevalence of such a trite technique?
I don't think he needs to worry about being shun. He's probably the only economists left in
Michigan.
The U.S. savings rate is almost non-existent as compared to thirty years ago. In 1981 a 20% down payment was the norm for a home purchase. Mortgage Debt as a % of disposable income was 43.1% in 1981 and today it is 95&.
The table that is referenced is from Jim Jubak via Briefing.com's Patrick O'Hare. The data pts. comparing 1981 to today are very spooky. The U.S. gov't policy is obcessed with guaranteeing a life style that is delusional.
We should wipe out the homeowner's mortgage interest tax deduction. Why a nanny state intervention like that?
Canada doesn't have it, and they had much smaller housing bubble.
True free marketeers hate usig the tax for social engineering.
I'd like to know how many people benefit from the mortgage interest tax deduction. I always get a better deal on the 1040EZ. Not that taxes are a good deal.
Could you please graph home foreclosures against C02 emissions? I am of the beleif that Co2 emissions have been causing global foreclosing for decades now.
Benny The Free Marketeer said...
We should wipe out the homeowner's mortgage interest tax deduction. Why a nanny state intervention like that?
Yeah, I don't understand why people put up with this huge tax benefit for the wealthy. Why should renters, who are mostly lower income people be left out? Why do people in high tax states get to have that subsidized as well by being able to deduct state taxes from Federal income? People who vote for high taxes should bear the full impact, not push it onto residents of low tax states. Just as people who buy houses should be bearing the full cost of their purchase.
Mortgage interest rates are already gamed downward by the government so throwing a tax benefit on top is egregious.
I believe this is a modern version of Thomas Jefferson's yeoman farmer idea. Recall he wanted a nation of farmers, and while that is not possible, universal home ownership may be the next best thing in many eyes. Ownership is thought to give people a stake in society, recall that praising of the ownership society by GW Bush.
If one combines this with the greed and fraud in the business it got us where we are. Note that mortgage companies did not bother to get copies of tax returns to verify income. Stated income/Liar loans were frauds out and out, but as we have seen the mortgage companies were to busy to do things right (see lawsuits on foreclosure and proving there is a debt in Ma and who it is owed to.)
Many people behaved non-rationally in the midst of the bubble, but then they always do.
We have had several instances in the last 40 years where bankers have behaved badly, the S&L crisis, the Mexican debt, and now this. If the best and brightest can screw it up so much maybe to steal from LBJ we need mediocre bankers (he said it about one of his supreme court nominees).
"never give a inch"
creeping government
my issue was always radical rent control, which hit Santa Monica in 1978. Statewide regulation of insurance rates came later.
People just didn't care enough to defend landlords or insurance companies. Today the pay czar was at work cutting executive pay.
My problem is these attacks are on individual types of business.
Government should be honest and just raise taxes in order to provide goodies. Maybe the tide will reverse some day.
The government policy had nothing to do with home OWNERSHIP. It promoted home living-in-ship. You would NEVER own a home with an interest only or Neg Am loan.
Teeing up? Every single housing bill passed under the Democrat congress has included "affordable housing" provisions. They've never stopped, despite the housing crash. This article makes a fine point, but it's lost on most Americans. They'd rather believe greedy Wall Street and deregulation was to blame to absolve themselves from guilt.
No one who bought, sold, or built a house in the past 14 years feels the slightest blame for this crisis. We're in collective denial. Carpenters and foreclosed homeowners see themselves as victims. The REAL victims are those of us smart enough to stay out of the frenzy but have to pay for it.
OA-
it's less a benefit to the wealthy than it is a benefit to the middle and upper middle class.
there are caps on how much mortgage interest you can deduct. here is SF, most of us cannot deduct all our interest.
it's still a bad and dangerously distortionary policy to encourage people to use the most heavily leveraged purchase they will ever make as their primary savings vehicle (where else are you going to get 10 or even 20 to one leverage?), but it benefits the middle classes far more than the upper.
it's a much bigger part of their income, and they can deduct all of their interest. once you go over $1million (which wont even get you a 2br in a good SF neighborhood), the deduction goes away.
median age has increased from 28.1 years in 1970 to 36.8 years in 2009
surely this accounts for some of the increase in homeownership rates.
older people are more likely to be homeowners
This just in: Twenty year old gets FHA loan in August for $183,000 with 3.5% down! What a country.
Correct link for FHA loan to twenty year old with 3.5% down, sorry.
Amazing who was directly involved in the policies at Fannie and Freddie-- none other than Rahm Emanuel (Former Freddie Board Member) and Franklin Raines (former Fannie CEO and major Obama fundraiser). Emanuel has taken alot of the Washington spotlight lately as the President's go-to guy. Raines has taken more of a back seat since allegations surfaced about Fannie's accounting practices while he was at the helm. Incidently, Michael Moore forgot to mention these facts in his movie too. Ooops!
Good work and very nice post!
Thanks for sharing!
- J.
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