Prolonging Government-Sponsored Housing Agony
Hoar, William P., The New American
ITEM: The Washington post for August 16 reported:
President Obama has directed a small team of advisers to develop a proposal that would keep the government playing a major role in the. nation"; mortgage market, extending a federal loan subsidy for most home buyers, according to people familiar, with the matter. The decision follows the advice of his senior economic and housing advisers, who favor maintaining the government's role as an insurer of mortgages for most borrowers. The approach could even preserve Fannie Mae and Freddie Mac, the mortgage finance giants owned by the. government, although under different names and With significant new constraints, said people knowledgeable about the discussions.
ITEM: The Obama administration said it had a new plan to help "struggling home owners," reported CNNMoney.com for July 8. "At a town hall meeting this week. President Obama conceded that his administration has failed to provide enough support to homeowners."
CORRECTION: We can't afford any more such help. The federal government wants us to concentrate on what it is supposedly doing for us--when the bigger problem is what it is doing to us.
Previous supposedly helpful government policies pumped up the housing bubble, which predictably burst amid a financial crash. This left the taxpayers holding the bag for around $150 billion that the quasi-governmental housing giants lost when the bubble popped in 2008 and Fannie Mae and Freddie Mac were nationalized outright.
Since the market's peak in 2007. total housing values in the United States have plummeted about 30 percent, dropping about $6.6 trillion by some estimates. Yes, markets go up and down. However, in this case the markets were purposely distorted by the federal government's backing of the huge financial enterprises that encouraged risky loans as well as the loosening of lending standards for political reasons.
The government-sponsored enterprises (GSEs)--which privatized profits and socialized losses--essentially twisted the arms of banks to make loans to people who couldn't afford them. While some of the big boys with Fannie, Freddie, and the banks feasted on the mortgages for a good while, it was inevitable that the bill would come due.
George Mason University economist Russ Roberts has described in his paper "Gambling With Other People's Money" how the GSEs took over risky loans even as the housing market was starting down--with Fannie and Freddie buying "25.2% of the record S272.81 billion in subprime MBS [mortgage backed securities] sold in the first half of 2006." The year before, they purchased 35.3 percent of all subprime MBS. and in 2004. the two purchased almost 44 percent of all of the subprime MBS sold.
Thereafter, when the defaulting of the bad loans generated a crisis, the GSRs sot bailed out by the taxpayers. Washington has taken over direct control of more than half of the mortgage market in the country--leaving the taxpayers even more exposed, although the liabilities of the GSFs are not even accounted for on the federal budget books.
As summarized by Gretchen Morgen-son and loshua Rosner in their book, Reckless Endangerment: How Outsized Ambition. Greed, and Corruption Led in Economic Armageddon (Times Books. 2011), "By 2008, the American economy was in tatters, jobs were disappearing, and the nation's middle class was imperiled by free-falling home prices and hard-hit retirement accounts. Perhaps most shocking, home ownership was no longer the route to a secure spot in middle-class America. For millions of families, especially those in the lower economic segments of the population, borrowing to buy a home had put them squarely on the road to personal and financial ruin."
Taking into consideration those loans guaranteed or owned by Fannie Mae (Federal National Mortgage Association -FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation--FHLMC), plus Federal Housing Administration loans, the U.S. government has been responsible for around 95 percent of mortgage, origination between 2008 and 2010. according to an analysis by the Bank of America Corp.
The government has said it will close down Fannie and Freddie, but its actions and apparent planning to date say otherwise. It is of course possible that the names of the entities and some regulations may change, but that would just be eyewash. The Washington Post story cited above was quickly "denied," but with so many loopholes in the denials that many observers saw the release of the plans--which would keep federal control over the housing mortgage sector--as the floating of a trial balloon to judge public sentiment.
The Post account, on the other hand, cited inside sources who said the administration supports "restructuring Fannie and Freddie as public utilities overseen by a government regulator." White House spokesmen can dissemble, putting up a false front about how a final decision hasn't been made, but we'll bet we're in for another rendezvous with debt.
The President, nevertheless, says we are not doing enough for homeowners, apparently believing we can spend and/' or subsidize the housing market into mint condition. In actuality, the government is already spending more than $100 billion each year to subsidize homeowners, as was pointed out not long ago by several professors from the New York University .Stern School of Business in an op-cd in the New York Times.
The professors explained (in "While Picket Fence? Not So Fast") that it was such subsidies that "enabled people to borrow more than they could afford so they could buy houses bigger than they needed, leading to a house price bubble. The policies encouraged homeowners to make highly leveraged bets on real estate that turned sour and wiped out nearly $8 trillion in household net worth."
Meanwhile, Obama, as pointed out in Investor's Business Daily, told "a small African American newspaper in Detroit ... that the 'federal government has really abandoned the field when it comes to affordable housing." Continued IRD:
That's a stunningly absurd statement. Under relentless pressure from HUD, Fannie and Freddie bent over backward to underwrite these home loans, despite the risks. It wound up holding or guaranteeing almost half the subprirne and other toxic loans in the mortgage system when the bubble burst in 2008. The agencies were responding to increasingly drastic multicultural loan quotas slapped on them by HUD. The administration claims Fannie and Freddie's failure had nothing lo do with the affordable-housing goals, which soared to 56% on the eve of the crisis. Rather, chasing profits led them to take excessive risk. "We should be careful not to learn the wrong lesson from this experience." HUD Secretary Shaun Donovan warned critics, "and sacrifice an important feature of the current system: wide access to mortgage credit." This is a shameless fairy tale. As documented in The Great American Bank Robbery [by Paul Sperry, Thomas Nelson, 2011], Fannie and Freddie warned shareholders before the crisis that they were taking a bath on subprirne and other politically correct loans to satisfy then HUD regulators, who were obsessed with boosting minority home ownership.
Housing Secretary Donovan is said to be particularly enthusiastic about keeping the federal government in the mortgage business. This is hardly a surprise. As IBD observed: Donovan "happens to be one of the Clinton officials who advised HI ID to make the fateful decision in 2000 of requiring Fannie and Freddie to make half their loans to people who posed a high risk of not paying them back. He also was one of the. geniuses behind the idea to have Fannie and Freddie earn goal credits by buying or issuing subprirne securities. So some of the same social engineers who in the name of 'democratization of credit' pushed Fannie and Freddie off the cliff (and the entire financial system along with them) are now doubling down on their mistakes."
No doubt Donovan is an altruistic soul just trying to protect the public. The public, however, is more likely to need shelter from such federal benefactors.
Consider the Dodd-Trank Wall Street Reform and Consumer Protection Act, signed in 2010 and filled to the brim of its 2,315 pages with rules and regulations said to be needed because of the financial crisis. Also consider that the Frank in the name of that law refers to Representative Barney Trank (D-Mass.), the Banking Committee guardian of the GSEs. Implementation of the incredibly complicated piece of legislation is estimated to cosl $3 billion: the liberal Atlantic magazine pegs its costs at close lo SI trillion. For all of that, the prime movers of the financial crisis are shielded by the far-reaching reform legislation.
Treasury Secretary Timothy Geithncr proclaimed many months ago that the administration had started to wind down Fannie and Freddie and reform the mortgage market. Very slowly, one gathers. Perhaps the administration hopes to tax our patience. John Berlau and Matthew Melchiorre, writing in National Review Online in July, observed:
Yet Fannie and Freddie are bigger than ever, securitizing nine out often home mortgages and receiving unlimited guarantees from the taxpayer, thanks to the Obama administration's Christinas Eve bailout of 2009. And one provision of Dodd-Frank has not only slowed the momentum of reforming the GSEs. but threatens to make them even bigger. Dodd Frank's rules on "qualified residential mortgages'' - as currently proposed in a joint regulation by banking agencies, the Department of Housing and Urban Development, and the Securities and Exchange Commission--aggrandize the GSRs by putting shackles on their private-sector competitors. The regulation sets overly strict rules for down pay ments for mortgages to be securitized, but then exempts from these requirements any home loan insured by the Federal Housing Administration or purchased by Fannie or Freddie.
The workings of the GSEs are also described well in a Cato Institute Policy Analysis by Biooklyn Law School Professor David Rciss ("Fannie Mae, Freddie Mac, and the Future of Federal Housing Finance Policy." April 18, 2011). Professor Rciss, among other points, notes that the GSF.s were set up lo have no effective competition; used their funding advantage to the disadvantage of consumers, through higher prices; and have had their obligations carried off the federal books. If off-budget accounting is a bad sign when found in corporations such as Enron, says the professor, "it is at least as bad for the federal government."
As the Latin phrase has it: Quis custodies ipsos custodes? Who will guard the guards themselves?
Robert Murphy, writing shortly after the housing bust in late 2008, observed that die official mission of the GSEs was to "cause banks to lend to applicants who would be rejected in the absence of government meddling." As he summarized in The Freeman for December 2008, Fannie and Freddie "allowed their private executives to profit greatly from implicit taxpayer support over a period of decades. However, now that their excessive risk-taking has finally caught up with them, the GSEs' shaky balance sheets have been absorbed by the federal government, which at the same time has announced that the two failing giants will take on even more obligations.'1 hi addition lo more bilking of the taxpayer, cautioned Murphy,
the seizure is an ominous sign of just how much power the executive branch has accumulated. The takeover of Fannie and Freddie will do nothing to promote stability in the financial markets in the long run, but it will serve as a precedent for further "necessary" expansions of government control of the economy.
Three years out, those comments seem even more prescient.
The bailout of the federal housing entities, which masqueraded as private firms until the storm came, was supposed to cue-tail foreclosures of Americans caught up in the government's expensive generosity. Yet, the American dream of homeowner ship has turned into a nightmare for many, as detailed in a recent Detroit Free Press study of the. GSEs--demonstrating how these entities have been pressing banks to force owners out of their homes, as well as selling hundreds, perhaps thousands, of foreclosed properties, many at half their worth--in the process driving down the properly values of other Detroit-area homes.
Alan White, a law professor at Valparaiso University, told the paper that Fannie is sabotaging efforts to prevent foreclosures. "Fannie just wants lo clean up its balance sheet and get these loans off the books while taxpayers are eating these losses." Treasury and the Federal Housing Finance Agency, which regulates Fannie, "are letting them gel away with it," he said. "Wealth is being destroyed, people are losing houses needlessly, and Taxpayers are losing money."
At another of his "town-hall" meetings in August, President Obama said, "It will probably take this year and next year for us to see a slow appreciation again in the housing market." As it happens, dial would be right after the next election. And he may be right. By then, our credit might be so bad that we can't even borrow more trouble.
--WILLIAM P. HOAR…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Prolonging Government-Sponsored Housing Agony. Contributors: Hoar, William P. - Author. Magazine title: The New American. Volume: 27. Issue: 18 Publication date: September 19, 2011. Page number: 41+. © 2009 American Opinion Publishing, Inc. COPYRIGHT 2011 Gale Group.
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