Tag: Government policies and the subprime mortgage crisis

The “Do Nothing” Congress Cuts Both Ways

We’ve been hearing for the last couple of years that the Republican congress won’t do anything (with “do anything” defined as “unilaterally cave in to the President’s entire agenda”). But doing nothing cuts both ways. It’s not like the Democrats are proposing a raft of great laws that would save our country. And in many cases, they are opposing them for stupid reasons:

A high-profile Senate bill that would dismantle Fannie Mae and Freddie Mac suffered a blow this week when key Democrats decided not to support the legislation, likely wiping out its chances of advancing to the floor this year.

The bill has enough votes to pass the Senate Banking Committee, which plans to consider the measure next week. But the bill’s sponsors — Sens. Tim Johnson (D-S.D.) and Mike Crapo ­(R-Idaho) — failed to win over the committee’s liberal Democrats and secure a larger majority.

Without more support, Majority Leader Harry M. Reid (D-Nev.) is unlikely to move the measure to the full chamber, and its chances of gaining traction next year are unclear. The setback comes despite bipartisan support for the bill on the committee and suggests that the effort to revamp the nation’s housing finance system could stretch on for years.

The bill would gradually unwind these two behemoths and shift the risk back to the private sector, where it belongs. This has run into a firestorm of opposition from groups that want the GSE’s to loan more money to low-income groups as well as people who want to re-inflate the mortgage market and the derivatives market.

The liberal intelligentsia had been desperately trying to pretend that Fannie and Freddie — who controlled the lion’s share of the imploded mortgage market — had nothing to do with the financial crisis. They are wrong about this, cherry-picking the data that support their cause. But they are wrong on a more fundamental level as well.

The fundamental error is that encouraging poor people to buy houses is a bad thing. Not just bad for the economy, not just bad for the markets, not just bad for any of the reasons usually cited. It is bad for poor people. Buying a house for anyone is a marginal investment at best, unless it comes with a lot of land. I bought my house because I value the things that come with home ownership — stability, responsibility, possession — and because it is a form of forced savings. I also have a good credit rating so my loan was cheap. But unless you’re investing in rental properties, a home is a solid investment, not a great one. And it’s a terrible investment if you have poor credit, move a lot, have a shaky job situation or aren’t very good with money — traits that are very common among the poor.

Look at what happened during the financial crisis. Thanks to efforts to get the poor to buy houses, they had almost all of their wealth tied up in housing. When the bubble popped, it destroyed what little wealth the poor had:

The chart above splits U.S. homeowners into net-worth quintiles, and plots housing as a fraction of all assets for each quintile in 2007. For the poorest homeowners, houses were by far the most important thing they owned going into the Great Recession, making up almost 80 percent of their total assets. Another way of saying this is that the poor held very few financial assets such as stocks, bonds or mutual funds. On the other hand, housing was a much smaller part of the overall asset portfolios of the richest households — less than 20 percent.

So the poor were much more vulnerable to a crash in housing prices in 2007 than the rich were. In fact, it was even worse for the poor because they used so much debt to purchase their homes. Above, we also plot mortgage balance as a fraction of home value in 2007 for each of the net-worth quintiles. For example, if a household owned a home worth $100,000 and had a mortgage of $80,000, then the household would have a mortgage balance that was 80 percent of the home’s value.

Leverage can be a very dangerous thing for borrowers when their home values plummet. Continuing the example above, if someone has a $80,000 mortgage on a $100,000 home, and the home drops in value by 20 percent to $80,000, then the homeowner loses $20,000, or 100 percent of their equity in the home. Home prices fell 20 percent, but the homeowner lost 100 percent. That’s the effect of leverage!

The so-called “ownership society” encouraged this behavior under the belief that housing was a magical money maker that would turn poor people into rich people. Rich people own homes; therefore owning homes must make your rich. But it doesn’t and it never will. Owning a house is not a path to sudden riches. It is, at best, a sound investment if you have the means, the stability and the discipline.

Not that Fannie and Freddie have learned from their experiment in sucking away what little wealth the poor have. Just today, the overseer of the GSE’s announced that he wants to expand their role in the markets, to encourage people to buy houses and to not lower the caps on their mortgages. This is being done to “stimulate the economy”. But we’ve been down this road before. The only things that got stimulated were Wall Street crooks and mortgage sharks. Everyone else ended up getting “stimulated” right up the keister.

Enough. End this madness. End the GSE’s. Let’s not go down that road again thinking that this time, it will be different. If the President and his sycophantic media want Congress to “do something” I suggest they start right here with a bi-partisan effort to finally end this failed experiment.

I told you so…

Well, I am going to revel in the “I told you so moment”, but yet another study asking the question”Did the Community Reinvestment Act (CRA) Lead to Risky Lending?“, reports that:

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

Social engineering sucks. You can not socio-engineer the laws of economics or human nature. These attempts, no matter how brutally imposed, have always failed. It did this time too, as the CRA basically was an attempt to bend the laws of economics and human nature in an attempt to make irresponsible people responsible while somehow also producing money. Trillions were lost and these effects will be with us for decades. After a lot of grandstanding and political theater, we got a lot more government regulation, regulation that makes it easier for politicians that want to sell special favors to do so, but never addressed the fundamental and underlying problem the CRA causes, and are looking at a repeat, sooner than later.

There is a reason that government ended up paying TARP money, and it was not just the too big too fail bullshit they sold us. They paid because that was part of the CRA deal. Government would save the lenders when economic reality blew the house of cards down. Our politicians, I suspect, realized that if they didn’t keep their part of this deal with the devil – the government plays the role of the devil here in case you are not bright enough to grasp that – they forced on the lenders, that their socio-engineering days where going to be numbered. The problem was the CRA and our government’s unbelievably stupid need to socio-engineer the left’s idea of Utopia, but we can keep pretending the problem is the big banks and not our government. What could possibly go wrong with more of the same?

I told you we where going to get it even worse…

And it looks like the social engineers do not plan to disappoint. Remember when I pointed out that the same politicians that created the environment that caused the housing collapse demanding to be the ones to fix the evil lenders was certainly not fixing anything and likely to make it worse? Well, I hate to be right on this, but I am:

Just days before Christmas, the Obama administration gave Bank of America a big lump of coal, levying a hefty $335 million dollar fine on the company for discriminating against minorities in its lending practices.

Supposedly Countrywide, a mortgage company bought by Bank of America in 2008, had not given out enough low interest rate loans to minorities from 2004 to 2008.

Look, I have no skin in the game if B of A gets hammered, and I certainly dislike Country Wide with a passion because Mozilo and Dodd are butt buddies, but the problem that caused the economic disaster the left blamed on everyone but their social engineering policies, and which have been prolonged, because of 3 years of idiotic Keynesian policies that have done nothing but funnel trillions of tax payer dollars to democrats and their friends, are still there.

What the large fine reveals is that President Obama hasn’t learned anything from the recent financial crisis.

What the president sees as discrimination in awarding a mortgage, lenders saw as wise business decisions.

If a borrower can’t afford a down payment, Obama appears to view charging a higher interest rate as discrimination. Lenders also think that they shouldn’t treat borrowers whose sole source of income is welfare or unemployment insurance, the same as those applicants who have a job. But Obama, again, appears to view this as discrimination.

There is obviously a problem with no down payments: if the price of the house falls so that it is worth less than the loan, people will default and walk away. Similarly, when unemployment insurance or welfare runs out, borrowers might find they can’t keep paying their mortgage.

The Equal Credit Opportunity Act the Obama administration used to impose this fine was exactly what helped cause the mortgage crisis by forcing lenders to make risky loans that they didn’t want to make.

Does that Equal Credit Opportunity Act sound familiar? I mentioned in my long discussion with the people that told me government was the solution, not the problem, while ignoring that government forced lenders to throw pearls to swine despite the obvious problems. I guess the people that told me I was wrong now have some crow to eat. And so soon! Exhibit A, people. There will be more because the social engineers will be damned if they give up trying to breed Unicorns.

B of A just got hammered for Country Wide wanting to charge high risk lenders more or not seeing welfare as reasonable source of income on applications. What do you think the impact of the government bitchslapping a lender into giving high risk lenders money to buy a house will do to the market yet again? And that 2000 page monster Dodd & Frank put together will do nothing but make it more costly and the impact deeper. Think the LSM will tell anyone this was a bad move? Or do you think they will make it look like Team Blue is again helping the little guy out? Heck, will they even report it? Yeah, I thought so.

Damn, I hate to be right. What’s the definition of insanity again? To do the same dumb thing over and over, fail, and still expect that the next time will make it work? And no, there is no appology needed from the usual suspects that told me the problem was the evil banks, and not the stupid social engineering assholes in government and their insane policies….

Back to the Well

Just remember: according to the likes of Paul Krugman, Fannnie and Freddie had nothing to do with the financial crisis:

Mortgage finance giant Fannie Mae said it would ask for an additional $5.1 billion from taxpayers as a weaker housing market causes continued losses on loans made prior to 2009.

Since the firm was seized by the U.S. Treasury in 2008, it has needed about $104 billion in government capital injections, although it has paid back about $14.7 billion in dividends.

Freddie and Frannie combined are about $143 billion in the hole to the taxpayers. Like the government funding them, they are assuring thus that everything will be just fine in a decade or so. But they’re losing money today, so…

It’s amazing that with all the deserved bile thrown at the banks, there are still those who hold back on the socialized monstrosities, run by and for political hacks. Or … maybe it doesn’t.

Ain’t that a bitch?

Guess who so far has ended up being the biggest beneficiary of the Dodd-Frank financial regulation law? For those of you not familiar with Dodd and Frank, here is some background. Chris Dodd was a senator from my state, Connecticut, and one of the instrumental people behind the previous laws and government push to force lending to high risk people in his political career, ending up as the banking committee chairman (better to rob us blind!) right at the time the crisis happened. His meddling, in the name of “social justice”, but always while larding his friends and donors with government largesse, made him an instrumental player in setting the stage for the practices that led to first the housing and the following economic collapse back in 2007/2008. Dodd also was the guy that put regulation in the “must have” bailout plan to protect the big wigs and their bonuses at AIG. He was mired in one scandal after another, and basically decided not run for reelection in 2010, opting instead IMO to go steal people’s money doing something else.

Barney Frank, is a representative from Massachusetts. In addition to having the distinction as the only congress critter that dated a guy that run gay prostitution ring from their shared residence, he was also the head architect behind the scandalous and criminal repackaging of high risk loans, to make them palatable, through the government owned and run, but mysteriously categorized as private sector entities, Freddie Mac/Fannie Mae, and a key player in protecting Freddie & Fannie from any serious scrutiny – another one of his lovers was put in charge of running one of those – by accusing those pointing out the problem of being racists, until the whole house of cards came tumbling down.

As a reward for their roles in the horrible crisis and economic collapse it cause, these two where allowed, well they demanded, to be given the reigns of power, to produce the new series of regulations which they told us would prevent another crisis like the one their previous involvement caused. As expected, they didn’t do anything to end either the idiotic practice of having governments force lending institutions to give loans to high risk people looking for a loan, or to address the massive problems at Freddie/Fannie, but created a slew of regulation in a bill with over 2300 pages of bullshit, designed to allow people in government to increase their ability and power to pick which businesses would be winners and whom the losers. In return for some large donations, of course. So, don’t be surprised that the clock is already ticking on the next economic implosion, courtesy these two morons.

But back to the original question: guess how is making out real good because of the Dodd-Frank’s financial regulation law? Well, the very people involved in writing the rules then turning into evil lobbyists, of course.

It may not prevent another bailout or protect consumers from dangerous financial products, but the Dodd-Frank financial regulation law — now one year old — has already benefited one group of people: the government officials who wrote and implemented the law before cashing out as lobbyists or consultants for Wall Street, hedge funds and big banks.
The top staff lawyers in charge of crafting the legislation in both chambers of Congress have both left Capitol Hill for K Street, as has a Securities and Exchange Commission staffer who helped implement the law. This is “private-sector job creation, Obama-style,” as blogger Ira Stoll drolly notes.

The Great Wall Street Cashout is another example of how President Obama’s agenda of bigger government — and congressional Democrats’ style of leaving the key details up to executive-branch regulators — accelerates the revolving door and breeds crony capitalism.

Dodd-Frank was supposed to prevent future bailouts, tamp down on excessive risk taking by financial institutions and, through a new agency called the Consumer Financial Protection Bureau, protect regular people from predatory lenders or harmful and complex financial products.

SAY IT AIN’T SO!

Seriously. Why is this news? It’s of the “Dog bites man” variety. The very regulators engaged in writing this piece of garbage leave government, become lobbyists, and then rake in the cash? Who would have thunk that!

I can’t blame these guys for pulling this stunt, but I certainly can go off on the next leftist asshole that tells me how evil capitalism or Wall Street is. These government scumbags and their games make those guys look like pikers. Remember, Wall Street, or for that matter any other business/economic power center, can only do the things people in government write laws to make them do. We got more of the same in the healthcare takeover by government bill too. If we really wanted to curtail these kinds of bad practices, what we should have done is removed the power from government, by removing as much involvement by them from the equation. Instead we did exactly the opposite. Go figure.