The Qualified Mortgage Rule to restore Good Lending Practices destroyed by Government

Posted by PITHOCRATES - October 26th, 2013

Week in Review

Fannie Mae and Freddie Mac were largely responsible for the subprime mortgage crisis.  Because they removed risk from lenders, allowing them to sell more risky mortgages.  Something lenders wouldn’t have done if they had to carry the risk of these loans.  But once they could sell those risky loans to Fannie Mae and Freddie Mac what did they care?  So they earned their money with loan origination fees.  Not by servicing these loans.  As had been the tradition in the lending industry until the government intervened to stimulate the housing market.  Which they did.  By putting people who couldn’t afford houses into houses.  Giving us the subprime mortgage crisis.

Fannie and Freddie are still active.  In particular helping rich people who can take advantage of the Federal Reserve’s quantitative easing.  Who are the only people doing well as median household income falls in the worst economic recovery since that following the Great Depression (see US extends backing for higher-priced mortgages by Diana Olick posted 10/24/2013 on CNBC).

Federal regulators will allow Fannie Mae and Freddie Mac to continue funding higher-priced mortgages, at least through the middle of next year. President Barack Obama had called on the Federal Housing Finance Agency, the conservator of the two mortgage giants since September 2008, to lower the limits by the end of this year in order to shrink their role in the market. FHFA acting director Ed DeMarco, however, said the timing is not right just yet.

“We are not making a change there in the immediate term,” DeMarco told reporters. “I recognize and understand that the industry is very busy right now making implementation of other regulations that take effect the first of next year, and that’s enough.”

DeMarco is referring to new mortgage regulations from the Consumer Financial Protection Bureau, requiring lenders to prove a borrower has the ability to repay a loan. The so-called “Qualified Mortgage rule,” goes into effect Jan. 1, and lenders are scrambling to make sure they will be in compliance with all its requirements.

The Qualified Mortgage rule?  You know what we used to have before we had to have the Qualified Mortgage rule?  Good lending practices.  Where lenders carried their loans on their balance sheets.  And serviced those loans.  Holding on to all the risk from their lending decisions.  Which prevented them from making loans to unqualified applicants.  The way a good banking system should operate.  The way it was before the government destroyed it with their manipulation of interest rates.

Now the government wants to do what it was doing before the subprime mortgage crisis.  Putting as many people into homes who can’t afford them.  Only this time they’ve added a law to prevent lenders from qualifying the unqualified.  Even while the government is pressuring them to do so.  Just like Bill Clinton did with his Policy Statement on Discrimination in Lending that kicked off subprime lending in earnest to qualify the unqualified.  Because the Clinton administration called any denials of loans to the poor/minorities as discriminatory lending practices.  Of course, back then lenders had only good lending practices to hang their hat on.  Now they have a law to use to defend themselves against charges of discriminatory lending practices.  Which basically takes the lending industry back to where it was before the government destroyed it and gave us the subprime mortgage crisis.  Things would have been a whole lot easier and less costly if the government had just stayed out of it in the first place.

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Alan Greenspan blames Irrational Risk-Taking and not his Keynesian Policies for the Subprime Mortgage Crisis

Posted by PITHOCRATES - October 26th, 2013

Week in Review

Since the Keynesians took over monetary policy we’ve had the Great Depression, the inflation racked Seventies, the dot-com bubble/recession of the late 1990s/early 2000s and the subprime mortgage crisis.  It’s also given Japan their Lost Decade, a deflationary spiral that started in the late Eighties that they are still fighting today.  As well as the sovereign debt crisis still ongoing in Europe.  So Keynesian economics has a record of failure.  Yet governments everywhere embrace it.  Why?  Because they love having the power to create money.  Especially when it’s ostensibly for helping the economy.  Which it never does.  As efforts to do so resulted in the carnage noted above.  But it always gives a good excuse for another surge in government spending.  And Keynesians love government spending.

Why does Keynesian economics fail?  Alan Greenspan, former chairman of the Federal Reserve whose policies helped create some of this carnage (dot-com bubble and subprime mortgage crisis), explains (see Greenspan ponders the roots of a financial crisis he failed to foresee by Martin Crutsinger, The Associated Press, posted 10/21/2013 on The Star).

Now, Alan Greenspan has struck back at any notion that he — or anyone — could have known how or when to defuse the threats that triggered the crisis. He argues in a new book, The Map and the Territory, that traditional economic forecasting is no match for the irrational risk-taking that can inflate catastrophic price bubbles in assets like homes or tech stocks.

This is why the Soviet Union lost the Cold War.  Because their managed economy failed.  As all managed economies fail.  Because it is impossible to know the decisions of hundreds of million people in the market.  These people making decisions for themselves result in economic activity.  But when governments try to decide for them you get Great Depressions, debilitating inflation, bubbles and nasty recessions.  As well as the collapse of the Soviet Union.

People only took irrational risks when the Federal Reserve (the Fed)/government interfered with market forces.  The dot-com bubble grew because the Fed kept interest rates artificially low.  So was it irrational for people to take advantage of those artificially low interest rates and make risky investments they otherwise wouldn’t have made?  Yes.  But if the Fed didn’t keep them artificially low in the first place there would have been no dot-com bubble in the second place.

Was it irrational for people to buy houses they couldn’t afford when the Clinton administration forced lenders to qualify the unqualified for mortgages they couldn’t afford?  Was it irrational behavior for people to buy houses they couldn’t afford because of artificially low interest rates, ‘cheap’ adjustable rate mortgages, zero-down mortgages, interest only mortgages and no-documentation mortgages?  Yes.  But if the Fed/government did not interfere with market forces in the first place to increase home ownership (especially among those who couldn’t qualify for a conventional mortgage) there would have been no subprime housing bubble in the second place.

The problem with Keynesians is they call anyone who doesn’t behave as they hope to make people behave with their policies irrational.  That is, people are irrational if they don’t think like a Keynesian and therefore cause Keynesian policies to fail.  But before there could be irrational exuberance there has to be a climate that encourages irrational exuberance first.  For if we went back to the banking system where our savings rate determined our interest rates as well as the investment capital available there would be no bubbles.  And no irrational exuberance.  What kind of a banking system would that be?  The kind that vaulted the United States from their Founding to the number one economic power in the world in about one hundred years.  And they did that without making money.  Unlike today.

Q: The size of the Federal Reserve’s balance sheet stands at a record $3.7 trillion, reflecting all the Treasurys and mortgage-backed securities the Fed has bought to push long-term interest rates down. You have expressed concerns about this size, which is more than four times where the balance sheet stood before the start of the financial crisis. What are your worries?

A: My basic concern is that we have to rein this thing in well before the demand for funds picks up and makes it very difficult to rein in. (Inflation) is not immediate. It is down the road. But historically, there are no cases where central banks blow up their balance sheets or where countries print money which doesn’t hit (with higher inflation).

The balance sheet is four times what it was before the Great Recession?  That’s an enormous amount of new money created to stimulate the economy.  And yet we’re still wallowing in the worst economic recovery since that following the Great Depression.  I don’t know how much more you can prove the failure of Keynesian economics than this.  About five years of priming the economic pump with stimulus stimulated little.  Other than rich Wall Street investors who are using this easy money to make more money.  While the median household income falls.

Keynesian economics attacks the middle class.  While enriching the ruling class.  And their crony friends on Wall Street.  These policies further the divide between the rich and everyone else.  Yet they continually say these same policies are the only way to reduce the divide between the rich and everyone else.  The historical record doesn’t prove this.  And those familiar with the historical record know this.  Which is why the left controls public education.  So people don’t learn the historical record.  Because once they do it becomes harder to win elections when you’re constantly lying to the American people.

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Is the New York Times ready to blame Bill Clinton for the Subprime Mortgage Crisis?

Posted by PITHOCRATES - August 18th, 2013

Week in Review

President Obama likes to say that the Republicans only want to try the failed policies of the past.  And he’s both right and wrong.  For the Republicans do want to implement the policies of the past.  Because these policies did NOT fail.  Contrary to President Obama’s recurring bleat.  For the policies of President Reagan were based on classical economics.  Those same policies that made America the world’s number one economic power.  While the policies of the left, Keynesian economic policies, have failed every time they’ve been tried.  And reduced America’s economic prowess.

Before John Maynard Keynes came along during World War I the U.S. economy was steeped in the philosophy of our Founding Fathers.  Thrift.  Frugal.  Rugged individualism.  These are the things that made America great.  For over a hundred years Americans worked hard and saved their money.  Spending as little for the here and now.  Always planning for the future.  They put everything they didn’t have to spend into the bank.  As everyone put away these small amounts of money banks turned the aggregate of these numerous small deposits into capital.  Which investors borrowed at reasonable interest rates because we had a high savings rate.  Providing plenty of capital to grow the American economy.  Thanks to a sound banking system.   That exercised sound lending practices.  With investment capital a high savings rate provided.

This system worked so well because people balanced risk with reward.  Bankers made wise lending decisions based on the likelihood of those loans being repaid.  And investors with a history of wise and responsible borrowing had continued access to that investment capital.  While banks who took too great a risk failed.  And investors who took great risks soon found themselves broke with no further access to investment capital.  This balance of risk and reward complimented with a populace that was thrifty and frugal with their money created Carnegie Steel.  The Standard Oil Company.  And the Ford Motor Company.  Risk takers.  Who balanced risk with reward.  And paid a heavy price when they took too great a risk that had no reward.

But the days of Andrew Carnegie, John D. Rockefeller (Standard Oil) and Henry Ford are gone.  These men probably couldn’t—or wouldn’t— do what they did in today’s regulatory environment the left has created.  The higher taxes.  And the financial instability caused by the left’s destruction of the banking system.  As the left has made high-finance a plaything for their rich friends.  By transferring all risk to the taxpayer.  Allowing bankers to take great risks.  With little downside risk.  Giving us things like the subprime mortgage crisis.  Where President Clinton’s Policy Statement on Discrimination in Lending (1994) unleashed 10 federal agencies on banks to pressure them to loan to the unqualified or else.  So they did.  Using the Adjustable Rate Mortgage as the vehicle to get the unqualified into homeownership.  These with no-documentation mortgage applications, zero-down, interest-only, etc., put people into homes by the droves.  Especially those who could not afford them.  Of course, banks just won’t loan to the unqualified without some federal assistance.  Which came in the guise of Fannie Mae and Freddie Mac.  Who bought those toxic mortgages from these lenders, repackaged them into collateralized debt obligations and sold them to unsuspecting investors.  And, well, you know the rest.

So Bill Clinton gave us the subprime mortgage crisis.  And the Great Recession.  It’s always the same.  Whenever liberals get into power they do the same thing over and over again.  They destroy the economy with policies that only benefit them and their rich friends.  America’s aristocracy.  Yet they talk the talk so well people believe that THIS time things will be different.  But they never are.  Already President Obama is talking about doing the same things to increase homeownership that got us into the subprime mortgage crisis.  And his disastrous policies didn’t even prevent his reelection.  Because he can talk the talk so well.  Just like Clinton.  So well that few look at the swath of destruction in their wakes.  At least, not on this side of the Atlantic (see The New York Times takes down the Clinton Foundation. This could be devastating for Bill and Hillary by Tim Stanley posted 8/14/2013 on The Telegraph).

Is the New York Times being guest edited by Rush Limbaugh? Today it runs with a fascinating takedown of the Clinton Foundation – that vast vanity project that conservatives are wary of criticising for being seen to attack a body that tries to do good. But the liberal NYT has no such scruples. The killer quote is this:

For all of its successes, the Clinton Foundation had become a sprawling concern, supervised by a rotating board of old Clinton hands, vulnerable to distraction and threatened by conflicts of interest. It ran multimillion-dollar deficits for several years, despite vast amounts of money flowing in.

A lot of people are scratching their heads as to why the New York Times would run this story.  For it is very out of character for a liberal paper to attack a liberal icon.  Could it be to air out this dirty laundry long before Hillary is a candidate for president?  What, that?!?  That’s old news.  We’ve talked about it already.  Talked it to death.  Nothing to see there.  So let’s focus on what’s important for the American people.

Or could it be that the left has grown tired of the Clintons?  After all, Barack Obama was the first black man elected president.  Something the young people can get excited about.  But will today’s young even know who the Clintons are?  Could be a problem for a party that historically gets the youth vote.  So is this the first sign that Hillary won’t be the anointed one in 2016?  And is this an opening broadside against Hillary?  A harbinger of what is yet to come?  Perhaps.  Or it could mean people are just not falling for the Clinton charm anymore.  Something our friends in the British media have no problem seeing through.

The cynical might infer from the NYT piece that the Clintons are willing to sell themselves, their image, and even their Foundation’s reputation in exchange for money to finance their personal projects. In Bill’s case, saving the world. In Hillary’s case, maybe, running for president.

It’s nothing new to report that there’s an unhealthy relationship in America between money and politics, but it’s there all the same. While the little people are getting hit with Obamacare, high taxes and joblessness, a class of businessmen enjoys ready access to politicians of both Left and Right that poses troubling questions for how the republic can continue to call itself a democracy so long as it functions as an aristocracy of the monied. Part of the reason why America’s elites get away with it is becuase they employ such fantastic salesmen. For too long now, Bill Clinton has pitched himself, almost without question, as a homespun populist: the Boy from Hope. The reality is that this is a man who – in May 1993 – prevented other planes from landing at LAX for 90 minues while he got a haircut from a Beverley Hills hairdresser aboard Air Force One. The Clintons are populists in the same way that Barack Obama is a Nobel prize winner. Oh, wait…

Wish America could see Clinton and Obama as plainly as this.  And not get lost in the gaze of their eyes.

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The British have included a little Subprime Mortgage Crisis in their 2013 Budget

Posted by PITHOCRATES - March 24th, 2013

Week in Review

Governments like people buying houses.  Because it is the biggest engine of economic activity.  Generated from  building houses.  And then furnishing them.  And they’ll do just about anything to encourage people to buy houses.  No matter the damage it can cause.  As we’ve recently learned.  But that hasn’t stopped government from making the same mistakes (see Budget 2013: The good, the bad and the ugly by Sam Bowman posted 3/20/2013 on Adam Smith Institute).

Bank guarantees to underpin £130bn of new mortgage lending for three years from 2014. Apparently the Treasury has not learned the lesson of 2008: injecting taxpayer money into the housing sector will simply inflate prices, distorting price signals and stoking the housing bubble that already seems to be growing in the housing sector. Houses are expensive because supply is restricted by the planning system. Instead of throwing money at the problem and driving prices up even more, the government should have the courage to liberalize planning to allow more development, including on green belt land.

Government ministers picking winners. Fiddling with tax breaks for specific industries is a mug’s game. There is no way the government can know which industries to promote, and these projects inevitably collapse into a mess of overcomplicated grant schemes and politics-driven bailouts of failing firms. Only consumers can pick winners.

Government spending is still rising. Despite all the talk of cuts, the government will still be spending £761bn this year, nearly £20bn more than last year. By leaving healthcare alone and failing to carry out the big structural reforms needed to reduce social security spending, the government  is not matching its rhetoric on spending with the action needed. We’re still going to be borrowing £108bn this year – that’s £295m a day, every day, with no end to the borrowing in sight.

While those on the Left blame Wall Street and greedy banks for the subprime mortgage crisis the British press knows who was at fault.  The U.S. government.  They’re the ones who kept interest rates artificially low.  Creating a housing bubble.  It was Bill Clinton who pressured lenders to make bad loans (to fix discrimination in lending that was not there).  This is why banks turned to subprime lending.  And the adjustable rate mortgage (ARM).  To qualify the unqualified.  Which they only did because Fannie Mae and Freddie Mac guaranteed those loans.  Even buying them to get them off of the banks’ books.  So the U.S. government caused the subprime mortgage crisis.  Not Wall Street.  Or greedy bankers.

Land use restrictions have long kept housing prices high.  Rich people have used their influence with government to restrict new housing in some very nice areas.  You can’t build new housing in some of the most exclusive neighborhoods.  Which keeps housing availability low.  Housing prices high.  And the ‘undesirables’ out of these rich people’s neighborhoods.  Allowing the rich to stick with their own kind.

Friends of the government get special favors.  Solyndra gets government loans to produce something there is no market for.  They go bankrupt.  Yet the government continues to spend money to pick winners the market passes on.  Some things never change.  No matter where you are.

Wherever you look these days governments give examples of what not to do.  Yet no one ever heeds these warnings.  And they make the same mistakes over and over again.  No matter how bad those mistakes were.  And as far as mistakes go, few were as bad as all the bad policy decisions that led up to the subprime mortgage crisis.  Yet President Obama has already talked about doing more of the same.  As are the British.  Why?  Because of that insatiable desire governments have to spend.  It has toppled empires in the past.  And yet they still spend.  As they will always continue to spend.  Because spending gives them power.  Which trumps everything else.  Even the trust of the people.

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Two Consecutive Negative Quarterly Growth Rates in Business Earnings say we’re in a Recession

Posted by PITHOCRATES - March 9th, 2013

Week in Review

Business earnings drive everything in the economy.  Every dollar a person spends in the economy came from a business.  From someone spending their paycheck.  To someone spending their government assistance.  Because business provides every tax dollar the government collects.  Whether from the business directly.  Or from their employees.  So business earnings are everything.  If they’re not earning profits they’re not creating jobs.  And the fewer people that are working the less tax revenue there is.

Lakshman Achuthan with the Economic Cycle Research Institute (ECRI) looks at business earnings and has found a direct correlation between the growth rate of business earnings and recessionary periods.  Finding that whenever there were 2 or more consecutive quarters of a falling growth rate in business earnings we were in a recession.  Business Insider has reproduced his chart showing this correlation as well as quoting from his report (see CHART OF THE DAY: A Stock Market Trend Has Developed That Coincided With The Last 3 Recessions by Sam Ro posted 3/6/2013 on Business Insider).

This is a bar chart of S&P 500 operating earnings growth going back a quarter of a century on a consistent basis, as we understand from S&P. Others can choose their own definitions of operating earnings, but this is the data from S&P. In this chart, the height of the red bar indicates the number of consecutive quarters of negative earnings growth.

It is interesting that, historically, there have never been two or more quarters of negative earnings growth outside of a recessionary context. On this chart, showing the complete history of the data, the only times we see two or more quarters of negative growth are in 1990-91, 2000-01, 2007-09 and, incidentally, in 2012. This data is not susceptible to the kind of revisions one sees with government data. The point is that this type of earnings recession is not surprising when nominal GDP growth falls below 3.7%. So, even though the level of corporate profits is high, this evidence is also consistent with recession.

Follow the above link to see this chart.

The stock market is doing well now thanks to the Federal Reserve flooding the market with cheap dollars.  Investors are borrowing money to invest because of artificially low interest rates.  So the rich are getting richer in the Obama recovery.  But only the rich.  For an administration that is so concerned about ‘leveling the playing field’ their economic policies continually tip it in favor of the rich.  Who can make money even if the economy is not creating new jobs.  Which it isn’t.

All of these recessions can be traced back to John Maynard Keynes.  And Keynesian economics.  Playing with interest rates to stimulate economic activity.  The 1990-91 recession was made so bad because of the savings and loan (S&L) crisis.  Which itself is the result of government interventions into the private economy.  First they set a maximum limit on interest rates S&Ls (and banks) could offer.  Then the Keynesians (in particular President Nixon) decoupled the dollar from gold.  Unleashing inflation.  Causing S&Ls to lose business as people were withdrawing their money to save it in a higher-interest money market account.  Then they deregulated the S&Ls to try and save them from being devastated by rising inflation rates.  Which the S&Ls used to good advantage by borrowing money and loaning it at a higher rate.  Then Paul Volcker and President Reagan brought that destructive high inflation rate down. Leaving these S&Ls with a lot of high-cost debt on their books that they couldn’t service.  And while this was happening the real estate bubble burst.  Reducing what limited business they had.  Making that high-cost debt even more difficult to service.  Ultimately ending in the S&L crisis.  And the 1990-91 recession.

Fast forward to the subprime mortgage crisis and it was pretty much the same thing.  Bad government policy (artificially low interest rates and federal pressure to qualify the unqualified) created another massive real estate bubble.  This one built on toxic subprime mortgages.  Which banks sold to get them off of their books as fast as possible because they knew the mortgage holders couldn’t pay their mortgage payment if interest rates rose.  Increasing the rate, and the monthly payment, on their adjustable rate mortgage (ARM).  Fannie Mae and Freddie Mac bought and/or guaranteed these toxic mortgages and sold them to their friends on Wall Street.  Who chopped and diced them into collateralized debt obligations (CDOs).  Sold them as high-yield low-risk investments to unsuspecting investors.  And when interest rates rose and those ARMs reset at higher interest rates, and higher monthly payments, the subprime borrowers couldn’t pay their mortgages anymore.  Causing a slew of foreclosures.  Giving us the subprime mortgage crisis.  And the Great Recession.

In between these two government-caused disasters was another.  The dot-com bubble.  Where artificially low interest rates and irrational exuberance gave us the great dot-com bubble.  As venture capitalists poured money into the dot-coms who had nothing to sell, had no revenue and no profits.  But they could just as well be the next Microsoft.  And investors wanted to be in on the next Microsoft from the ground floor.  So they poured start-up capital into these start-ups.  Helped by those low interest rates.  And these start-ups created a high-tech boom.  Colleges couldn’t graduate people with computer science degrees fast enough to build the stuff that was going to make bazillions off of that new fangled thing.  The Internet.  Even cities got into the action.  Offering incentives for these dot-coms to open up shop in their cities.  Building expansive and expensive high-tech corridors for them.  Everyone was making money working for these companies.  Staffed with an army of new computer programmers.  Who were living well.  The brightest in their field earning some serious money.  So they and their bosses were getting rich.  Only one problem.  The companies weren’t.  For they had nothing to sell.  And when the start-up capital finally ran out the dot-com boom turned into the dot-com bust.  As the dot-com bubble burst.  And when it did the NASDAQ crashed in 2000.  When it became clear that all of President Clinton’s prosperity in the Nineties was nothing more than an illusion.  There would be 4 consecutive quarters of negative growth in business earnings before the dust finally settled.  One quarter worse than both the S&L crisis and the subprime mortgage crisis recessions.

And now here we are.  With 2 consecutive quarters of negative earnings growth under our belt.  Based on this chart this has happened only three times in the past 3 decades.  The 1990-91 recession.  The 2000-01 recession.  And the 2007-09 recession.  Which if his theory holds we are in store for another very nasty and very long recession.  No matter what the government economic data tells us.

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If you Missed the U.S. Subprime Mortgage Crisis you might be able to catch one in South Korea

Posted by PITHOCRATES - February 23rd, 2013

Week in Review

Stop me if you heard this one before (see S. Korea’s Poisoned Chalice of Household Debt Restricts Park by Sangwon Yoon posted 2/21/2013 on Bloomberg).

Park [Geun Hye, Korea’s incoming president] suggested state institutions could buy stakes in mortgaged apartments that have fallen in value, such as Kwon’s. The stakes would then be used as collateral for asset-backed securities, using rent from homeowners to pay interest to investors…

South Korean regulators have been working on a “soft landing” policy since June 2011, including limits on bank lending and tax breaks for homeowners switching to fixed-rate loans. About 85.8 percent of mortgages are currently adjustable…

“The quality of household debt is worsening,” said Lee Eun Mi, senior research fellow at Samsung Economic Research Institute in Seoul. Park needs “measures to stymie the rising danger of a massive default crisis…”

Some borrowers have staved off default by taking out further loans to pay mortgage interest…

Irresponsible household borrowing began after the 1997-1998 Asian financial crisis, said Kim Mi Sun, a debt counselor at a non-profit organization called Edu Money in Seoul. In the wake of corporate defaults during the crisis, the government curbed companies’ ability to sell credit, prompting banks to expand lending to consumers, including a rapid increase in home loans.

“It became so much easier to get loans after the crisis and everyone started taking out debts and mortgages they couldn’t afford,” said Kim. “The crux of the issue is that people simply don’t know how to manage their finances.”

The credit boom early in the last decade caused house prices to soar and left many Koreans with large loan obligations.

Sound familiar?  Sounds a lot like the subprime mortgage crisis, doesn’t it?  Easy credit encouraged a lot of people to buy houses they couldn’t afford with adjustable rate mortgages (ARM).  Just like in the United States following President Clinton’s Policy Statement on Discrimination in Lending.  Where the president told lenders that they had better find a way to qualify the unqualified or else.  Which they did.  With subprime lending.  And the ARM.  And when the interest rates reset at higher rates there was a massive default crisis.

Interestingly Park Geun Hye is suggesting a solution to help underwater mortgages that the U.S. used to spread the subprime mortgage crisis contagion around the world.  The collateralized debt obligation (CDO).  Fannie Mae and Freddie Mac bought the toxic subprime mortgages and packaged them into CDOs.  And unloaded them on unsuspecting investors.  Telling them that they were high yield.  And low risk.  Because their return came from the cash flows of homeowners making mortgage payments.  And what was less risky than mortgage payments?  Of course, what they failed to mention was that these were ARMs sold to low-income people who had no hope of paying their mortgage payments if interest rates ever rose.  Which they did.  Sending the fallout of the subprime mortgage crisis around the world.

No.  CDOs may not be the best solution to their problems.  And chances are that investors may not buy these.  For they were burned once by Fannie Mae and Freddie Mac.  And they’re probably not going to fall for the old ‘investment backed by cash flows from subprime mortgages’ trick again.

Amazing how some things never change.  Different place.  Different people.  But the same bad government policies.  Producing the same massive default crisis.  This is what you get when you interfere in the free market economy.  But some people never learn this lesson.  Despite the numerous examples of what not to do.  And if anyone taught people what NOT to do was the U.S. in the run-up to the subprime mortgage crisis.  Even the Americans can’t learn from their own lesson as President Obama is already talking about bringing back the policies that caused the subprime mortgage crisis in the first place.  Putting more people into houses that they can’t afford.

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Homeowners are still Suffering in the Housing Market but Speculators are Profiting

Posted by PITHOCRATES - February 3rd, 2013

Week in Review

Housing sales drive the economy.  Because it takes a lot of economic activity to build houses.  And even more for homeowners to furnish their homes.  This is why the government gave us the subprime mortgage crisis and the Great Recession.  They kept interest rates artificially low.  And the Clinton administration forced lenders to lower standards to put as many people into houses as possible.  But, alas, they put a lot of people into homes that couldn’t afford them.  Using subprime mortgages to get them into those homes.  Like the adjustable rate mortgage.  And when interest rates went up so did their mortgage payments.  And they defaulted.  Which kicked off the subprime mortgage crisis.  Giving us the Great Recession.

These low interest rates created a great demand for housing.  Everyone was borrowing money to buy.  Because money was so cheap to borrow.  And with those lower standards borrowing money was never easier.  Especially for investors.  Who bought houses.  Fixed them up.  And put them back on the market.  House flippers.  With all this demand housing prices soared.  Creating a great housing bubble.  Which burst.  As all bubbles do.  And housing prices plummeted.  Leaving people with mortgages greater than the new value of their houses.  Some walked away.  Especially those who put little to nothing down.  Like those house flippers.  And those subprime borrowers.  Flooding the market with more homes.  Putting further pressure on housing prices.

It was a huge mess the government gave us.  The damage was great.  And we’ve been waiting a long time for the housing market to recover.  Housing prices are finally rising.  But not for the right reasons (see Home prices on the rise, but not ownership by Alejandro Lazo posted 1/29/2013 on the Los Angeles Times).

The sharp increase in home prices — particularly in regional markets such as Phoenix and Las Vegas, which had been so decimated by the bust — is raising concern among some economists…

It is those kinds of big increases that could fuel speculation.

“It does concern me a bit,” Zillow.com chief economist Stan Humphries said. “It encourages people to think about housing as a short-term investment, instead of a long-term investment…”

While prices may be rising, homeownership is struggling, an indication that investors are playing a big part in fueling the market’s rebound. The Census Bureau said Tuesday that national homeownership fell 0.6% to 65.4% in the fourth quarter over the same period a year earlier…

The spike in prices is masking the trouble that borrowers with underwater mortgages are facing. In fact, it’s precisely because so many borrowers cannot get out from underneath their upside-down homes that prices are rising so much, economists have said, because those people are simply hanging on and not putting their homes on the market.

People underwater are hanging on because they don’t want to take a huge loss by selling.  When you lose some 25-40% of your home’s value there’s only one way to get it back.  You keep living in it.  For a long time.  For only time can restore a home’s value.  Which a homeowner will lose if he or she sells.

So house prices are coming back up.  But like elsewhere in the economy it’s the rich who are doing well.  Not middle class families.  Those who want to live in their homes.  Furnish their homes.  These people who drive real economic activity.  Not the house flippers who are just trying to profit off the misfortune of others.  Who are picking up houses on the cheap thanks to those lost their homes or sold them at a loss.  And flipping them to make a profit.  These are the people doing well in Obama’s America.  Not middle class families.

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The Democrats issue new Lending Regulations to address the Financial Crisis they Created

Posted by PITHOCRATES - January 13th, 2013

Week in Review

The subprime mortgage crisis is still a political football.  The Democrats are using the crisis to further regulate the financial markets.  Giving us the convoluted Dodd-Frank Wall Street Reform and Consumer Protection Act.  Financial reform.  For apparently there was no financial oversight of the financial markets up until now.  Despite Barney Frank being the Chairman of the House Financial Services Committee (2007-2011).  And Chris Dodd being the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs (2007-2011).  Both of who were responsible for the oversight of Fannie Mae and Freddie Mac.  The GSEs at the center of the subprime mortgage crisis (see Mortgage lender rules released by Daniel Wagner, Associated Press, posted 1/10/2013 on The Washington Times).

In the wake of the national housing collapse that helped bring on the Great Recession, federal regulators for the first time are laying out rules aimed at ensuring that borrowers can afford to pay their mortgages.

The long-anticipated rules being unveiled Thursday by the Consumer Financial Protection Bureau impose a range of obligations and restrictions on lenders, including bans on the risky “interest-only” and “no documentation” loans that helped inflate the housing bubble…

CFPB Director Richard Cordray, in remarks prepared for an event Thursday, called the rules “the true essence of responsible lending…”

Mr. Cordray noted that in the years leading up to the 2008 financial crisis, consumers could easily obtain mortgages that they could not afford to repay.

So, prior to the Great Recession and the 2008 financial crisis we did not have responsible lending.  Which resulted in consumers obtaining mortgages they could not afford to repay.  Why?  Why were people getting mortgages they had no chance of repaying?  Who was responsible for that?  Well, as it turns out it was President Clinton.  Whose administration overhauled the Community Reinvestment Act (see New Study Finds CRA ‘Clearly’ Did Lead To Risky Lending by Paul Sperry posted 12/20/2012 on Investors.com)

Democrats and the media insist the Community Reinvestment Act, the anti-redlining law beefed up by President Clinton, had nothing to do with the subprime mortgage crisis and recession.

But a new study by the respected National Bureau of Economic Research finds, “Yes, it did. We find that adherence to that act led to riskier lending by banks.”

Added NBER: “There is a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam. Moreover, the effects are larger for loans made within CRA tracts,” or predominantly low-income and minority areas.

To satisfy CRA examiners, “flexible” lending by large banks rose an average 5% and those loans defaulted about 15% more often, the 43-page study found…

The strongest link between CRA lending and defaults took place in the runup to the crisis — 2004 to 2006 — when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.

CRA regulations are at the core of Fannie’s and Freddie’s so-called affordable housing mission. In the early 1990s, a Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie.

It passed a law requiring the government-backed agencies to “assist insured depository institutions to meet their obligations under the (CRA).” The goal was to help banks meet lending quotas by buying their CRA loans.

But they had to loosen underwriting standards to do it. And that’s what they did…

From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features…

Housing analysts say the CRA is the central thread running through the subprime scandal — from banks and subprime lenders to Fannie and Freddie to even Wall Street firms that took most of the heat for the crisis…

While the 1977 law was passed 30 years before the crisis, it underwent a major overhaul just 10 years earlier. Starting in 1995, banks were measured on their use of innovative and flexible” lending standards, which included reduced down payments and credit requirements.

Banks that didn’t meet Clinton’s tough new numerical lending targets were denied merger plans, among other penalties. CRA shakedown groups like Acorn held hostage the merger plans of banks like Citibank and Washington Mutual until they pledged more loans to credit-poor minorities (see chart).

A Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie?  And Democrats say that Community Reinvestment Act had nothing to do with the 2008 financial crisis?  Funny.  Based on the historical record the Democrat Congress that forced lenders to loosen underwriting standards to meet those quotas are solely responsible for setting into motion the events that led to the 2008 financial crisis.  Not Wall Street.  Not the banks.  It was the Democrat Congress that empowered HUD to destroy good lending practices.  And they bear the responsibility for the 2008 financial crisis.  And the Great Recession.

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President Obama’s Economic Recovery is worse than Ronald Reagan’s and George W. Bush’s Combined

Posted by PITHOCRATES - December 8th, 2012

Week in Review

President Obama has said time and again that we can’t go back to the failed policies of the past.  Referring to Ronald Reagan and George W. Bush and their tax cutting ways that stimulated real job creation.  Not the Obama administration Keynesian stimulus spending which has the absolute worst record of job creation in post-war America (see THE SCARIEST JOBS CHART EVER by Joe Weisenthal posted 12/7/2012 on Business Insider).

Despite the strong jobs report, the employment situation in America remains depressing.

Once again, we go back to Calculated Risk, which compares the trajectory of this recovery (red line) with all other post-WWII recoveries.

As you can see, the pace of the downturn was far more severe than anything in previous recessions, and the long march back to pre-recession levels remains incredibly slow.

The chart tells a dismal story.  Ronald Reagan chose tax cuts to pull us out of the 1981 recession.  That recession saw a peak job loss of just over 3%.  And a duration of just over 27 months to recover ALL the jobs that we lost in that recession.

George W. Bush chose tax cuts to pull us out of the 2001 recession following the bursting of Bill Clinton’s dot-com bubble.  That recession saw a peak job loss of just over 2%.  And a duration of about 46 months to recover ALL the jobs lost in that recession.

Bill Clinton’s Policy Statement on Discrimination in Lending basically created subprime lending.  As the Clinton administration pressured lenders to find a way to qualify the unqualified for mortgages.  And the real estate market boomed in the 2000s.  But much like the economic boom in the 1990s it was just a bubble.  That inflated to dangerous heights thanks to Fannie Mae and Freddie Mac buying those toxic subprime mortgages from lenders so they could approve more of them.  Unloading those toxic mortgages on unsuspecting investors.  Sending this toxic contagion throughout the world.  The resulting 2007 recession saw a peak job loss of about 6.5%.  And a duration of about 58 months AND counting to recover all those  jobs lost in the current recession.  We still have another 3% to go.

This postwar recession is the worst by whatever metric you measure it by.  But the singular aspect of it that makes this recession much longer and deeper in job losses is the Obama administration’s choice of using Keynesian stimulus to try to end it.  Instead of tax cuts.  Which is why the Obama recovery is far worse and more long-lasting in misery than both the Reagan and Bush recoveries added together.  Proving the current economic disaster is an Obama disaster.  For his insistence on using the failed policies of Keynesian stimulus spending instead of the time proven policies of tax cuts.

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The Easy Credit of Central Banks can’t Stimulate when Recessions are Still Correcting Prices

Posted by PITHOCRATES - July 14th, 2012

Week in Review

Central banks have caused most of our financial woes today.  Easy credit created a frenzy of buying.  Pushing asset prices skyward.  America’s subprime mortgage crisis was caused by easy credit.  Well, that, and bad government policy like forcing lenders to lend even to people who were unqualified.  And they had their government sponsored enterprises (GSE), Fannie Mae and Freddie Mac, unload those toxic mortgages to unsuspecting investors.  You add this to the easy credit of America’s central bank, the Federal Reserve, and it created an incredible housing bubble.  That just didn’t burst.  It exploded.  Sending the U.S. into the greatest recession since the Great Depression.  The Great Recession. 

As housing prices fell back to earth homeowners found themselves underwater in their mortgages.  Some refinanced.  Some just walked away.  Some went through foreclosure.  Leaving the country littered with foreclosed homes.  And all of this financial destruction was brought to us courtesy of the Federal Reserve and their easy credit.  Despite all of this devastation our central bank has caused us some people still think that central banks can stimulate us out of the Great Recession.  Perhaps they’ll finally learn the folly of their thinking (see Roubini: My ‘Perfect Storm’ Is Unfolding Now by Ansuya Harjani, CNBC, posted 7/9/2012 on Yahoo! Finance).

“Dr. Doom” Nouriel Roubini, says the “perfect storm” scenario he forecast for the global economy earlier this year is unfolding right now as growth slows in the U.S., Europe as well as China.

In May, Roubini predicted four elements – stalling growth in the U.S., debt troubles in Europe, a slowdown in emerging markets, particularly China, and military conflict in Iran – would come together in to create a storm for the global economy in 2013…

Policy easing moves by the European Central Bank (ECB), Bank of England (BoE) and the People’s Bank of China (PBoC) last week did little to inspire confidence in global stock markets…

Bill Smead, CEO of Smead Capital Management, agrees that there is little central banks can do arrest the global slowdown.

Last week, he told CNBC that there is “virtually zero chance” that pump-priming by central banks will succeed, suggesting that policymakers should instead let the economic bust work itself through the system.

Yes.  We should let the economic bust work itself through the system.  Because that’s what recessions are supposed to do.  That’s why we call them corrections.  When rising prices create asset bubbles recessions come along and correct these prices back to where they should be.  Where the market would have had them had it not been for all of that easy credit.

Recessions aren’t pleasant.  But it’s the price we must pay.  Especially when we interfere with market forces to keep interest rates artificially low to stimulate economic activity.  Because the economic activity they stimulate is as artificial as the interest rates.  People don’t base their purchasing decisions on supply and demand.  They base them on the availability of easy credit.  Where people say things like, “I had no intention of buying a 3,000 square foot home for me and my wife but at these mortgage rates I’d be a fool not to.  And wouldn’t a Cadillac look just great in the driveway?  At these low interest rates I can afford both.  I mean, it’s not like I’m going to lose my job or anything.”

Of course people do lose their jobs.  And their homes.  And their cars.  What happens then?  Why, we have a subprime mortgage crisis.  And a Great Recession.  That’s what.

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