Obama Pushes Risky Home Loans Which Started Current Recession
As usual, President Obama is still on the campaign trail instead of in Washington getting work done — like he has for the last six years. This time he was in California with Democratic millionaire and billionaire donors stumping to make House Minority Leader Nancy Pelosi (D-Calif.) Speaker again. It’s evidently clear Obama's top priority is defeating the House GOP in 2014.
But that’s nothing new. What is concerning, however, was the other stump speech he made on the campaign trail this week; something that shows he didn’t learn a thing about the root causes of the Great Recession.
Obama is pushing to make more home loans available to people with weaker credit, an effort that his administration claims will help power an economic recovery but that experts say could open the door to the risky lending that caused the housing crash in the first place.
Obama and his economic advisers are saying the nation’s 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."
Are you kidding me? These are the same arguments we heard during the affordable housing crusade of the Clinton and Bush administrations too, how everyone "has a right to own a home" and "no one should be denied the American dream." They did it for the same reason any politician says things the public likes to hear: for votes.
Loose credit terms are what spurred the granting of housing developments and home loans that, to be perfectly blunt, should never have been granted by Fannie Mae and Freddie Mac. Those loans were then packaged into blocks, and chopped up into securities that were purchased by investors (many of whom were banks). When the housing bubble burst, it became impossible to weed out the foreclosed and threatened mortgages from the good mortgages, and all of the securities suddenly became not only impossible to trade, but more importantly, impossible to value.
Banks were forced to restrict lending in order to generate enough cash to compensate for the sudden evaporation in value of their securities holdings. The result was a liquidity crisis that halted economic activity across the board. When banks can't lend, economic activity simply grinds to a halt, and that is precisely what happened just before the election of 2008.
As economist Mark Zandi once said: "Lending money to American homebuyers had been one of the least risky and most profitable businesses a bank could engage in for nearly a century."
It was government intervention which turned a thriving housing industry into a swamp, as a study from the National Bureau of Economic Research concluded after painstakingly sorting through the failed home loans that caused the housing market collapse and identifying an overwhelming connection between them and Community Reinvestment Act mortgages.
The Community Reinvestment Act of 1977 directed federal regulatory agencies to "encourage" banks and other lending institutions "to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions." That sounds pretty innocent and, in fact, had little effect for more than a decade. However, its premise was that bureaucrats and politicians know where loans should go, better than people who have been in the business of making loans for years.
The real potential of that premise became apparent in the 1990s, when the Department of Housing and Urban Development (HUD) imposed a requirement that mortgage lenders demonstrate with hard data that they were meeting their responsibilities under the Community Reinvestment Act. What HUD wanted were numbers that looked good; showing that mortgage loans were being made to low-income people on a scale that HUD expected, even if this required "innovative or flexible" mortgage eligibility standards. In other words, quotas were imposed, and if some people didn’t meet the standards, then the standards "need to be changed."
Both HUD and the Department of Justice began bringing lawsuits against mortgage bankers when a higher percentage of minority applicants than white applicants were turned down for mortgage loans. In fact, a substantial majority of both black and white mortgage loan applicants had their loans approved, but a statistical difference was enough to get a bank sued.
Under growing pressures from both the Clinton administration and the Bush administration, banks began to lower their lending standards. Mortgage loans with no down payment, no income verification and other "creative" financial arrangements accumulated.
With mortgage loans widely available to people with questionable prospects of being able to keep up the payments, it was an open invitation to financial disaster. Those who warned of the dangers had their warnings dismissed. The result was a sub-prime housing crisis, which then triggered the Great Recession.
Since then, the government has shaped most of the housing market instead of the private sector, insuring 80%-90% of all new loans, according to the industry publication Inside Mortgage Finance. It has done so primarily through the Federal Housing Administration, which is part of the executive branch, and taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, run by an independent regulator.
Fast forward to 2013 and administration officials are encouraging lenders to use more subjective judgment again in handing out loans to high risk home buyers.
"If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from," said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.
Unbelievable. Did we learn nothing from 2008? Even former Rep. Barney Frank (D-Mass.), one of the biggest champions of the affordable housing crusade, has gone on the record saying it was a huge mistake and that those who can’t afford to own a home should rent, not own.
But since when has logic, history or facts gotten in the way of President Obama and a good stump speech on the campaign trail?