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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The Federal Government’s entry into the Student Loan Market eliminates Market Forces

Posted by PITHOCRATES - September 7th, 2013

Week in Review

A sound banking system is a requirement for any advanced economy.  Because you need capital to make an advanced economy.  And how do you do that?  By people responsibly saving for their retirement.  Putting away a few dollars of every paycheck.  A small amount of money that can’t buy much of anything.  But when hundreds of thousands of people save a few dollars from every paycheck those small amounts become capital.  Large sums of money banks can lend out to investors who want to build factories.  Responsible bankers loaned their customers’ deposits to investors.  Investors paid the bankers interest on these loans.  And the bankers paid interest to their depositors.  The economy grew.  And people saved for their retirement.  The system worked well.  And grew the US economy into the world’s number one economy.  But now we’re in danger of dropping from that number one spot.  Because the government destroyed our banking system (see Exclusive – JPMorgan to stop making student loans by Reuters posted 9/5/2013 on Yahoo! Finance).

JPMorgan Chase & Co (NYS:JPM) will stop making student loans in October, according to a document reviewed by Reuters on Thursday, after the biggest U.S. bank concluded that competition from federal government programs limits its ability to expand the business.

When the government runs a deficit they sell bonds to finance it.  Pulling capital out of the private sector.  Raising borrowing costs.  The government then tries to lower borrowing costs by printing money.  Expanding the money supply.  And by making more money available to lend interest rates fall.  But it also does something else.  It encourages bad investments.  Malinvestments.  People who look at those artificially low interest rates and think they should borrow money when the borrowing is good.  Even when they don’t have a good investment opportunity.

They may expand their business now because money is cheap now.  Even though they don’t really need the additional capacity now.  And then if the government raises interest rates to cool the overheated economy thanks to those artificially low interest rates these same investors see their revenues fall as they took on additional expenses by expanding their business.  Just because interest rates were low.  Now their costs are higher just when their revenues have fallen.  Pushing the business towards bankruptcy.  Which would never have happened if the government didn’t encourage them to borrow money they didn’t need by keeping interest rates artificially low.

But getting people to borrow money when they don’t need it is the government’s only economic policy.  Which they took to another level in the housing market.  With pressure from the Clinton Justice Department on lenders to qualify the unqualified for loans.  Exploding the use of risky subprime lending.  And then using Fannie Mae and Freddie Mac to buy these risky subprime loans from these lenders.  Removing all risks from these lenders and passing them on to the taxpayers.  To encourage these lenders to lower their lending standards.  So they would keep making risky loans.  Which they were more than willing to do if they incurred no risk in making these loans.  Which Fannie Mae and Freddie Mac did for them.  Thus further destroying the banking system.

And now the government has taken over student loans.  Where they will do to student loans what they did to home mortgages.  Where lending decisions will be made for political reasons instead of objective lending standards.  Guaranteeing more subprime mortgage crises in the future.  A further destruction of the banking system.  And the destruction of one of the pillars of an advanced economy.

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Banking, Lending Standards, Dot-Com, Subprime Mortgage and Bill Clinton’s Recessions

Posted by PITHOCRATES - March 19th, 2013

History 101

Lending more made Banks more Profitable as long as they Maintained Good Lending Standards

Money is a commodity.  And like any commodity the laws of supply and demand affect it.  If a lot of people want to borrow money interest rates rise.  This helps to make sure the people who want to borrow money the most can.  As they are willing to pay the higher interest rates.  While those who don’t want the money bad enough to pay the higher interest rates will let someone else borrow that money.  If few people want to borrow money interest rates fall.  To entice those people back into the credit markets who had decided not to borrow money when interest rates were higher.

Okay, but who is out there who wants people to borrow their money?  And why do they want this?  The key to any advanced civilization and the path to a higher standard of living is a good banking system.  Because if ordinary people can borrow money ordinary people can buy a house.  Or start a business.  Not just the rich.  For a good banking system allows a thriving middle class.  As people earn money they pay their bills.  And put a little away in the bank.  When a lot of people do this all of those little amounts add up to a large sum.  Which converts small change into capital.  Allowing us to build factories, automobiles, airplanes, cell towers, etc.  Giving us the modern world.  As banks are the intermediary between left over disposable cash and investment capital.

Banks are businesses.  They provide a service for a fee.  And they make their money by loaning money to people who want to borrow it.  The more money they lend the more money they make.  They pay people to use their deposits.  By paying interest to people who deposit their money with them.  They then loan this money at a higher interest rate.  The difference between what they pay to depositors and what they collect from borrowers pays their bills.  Covers bad loans.  And gives them a little profit.   Which can be a lot of profit if they do a lot of lending.  However, the more they lend the more loans can go bad.  So they have to be very careful in qualifying those they lend money to.  Making sure they will have the ability to pay their interest payments.  And repay the loan.

With the Federal Reserve keeping Interest Rates low Investors Borrowed Money and Poured it into the Dot-Coms

Just as a good banking system is necessary for an advanced civilization, a higher standard of living and a thriving middle class so is good lending standards necessary for a good banking system.  And when banks follow good lending standards economic growth is more real and less of a bubble.  For when money is too easy to borrow some people may borrow it to make unwise investments.  Or malinvestments as those in the Austrian school of economics call it.  Like buying an expensive car they don’t need.  A house bigger than their needs.  Building more houses than there are people to buy them.  Or investing in an unproven business in the hopes that it will be the next Microsoft.

America became the number one economic power in the world because of a good banking system that maintained good lending standards.  Which provided investment capital for wise and prudent investments.  Then the Keynesians in government changed that.  By giving us the Federal Reserve System.  America’s central bank.  And bad monetary policy.  The Keynesians believe in an active government intervening in the private economy.  That can manipulate interest rates to create artificial economic activity.  By keeping interest rates artificially low.  To make it easier for anyone to borrow money.  No matter their ability to repay it.  Or how poor the investment they plan to make.

The Internet entered our lives in the Nineties.  Shortly after Bill Gates became a billionaire with his Microsoft.  And investors were looking for the next tech geek billionaire.  Hoping to get in on the next Microsoft.  So they poured money into dot-com companies.  Companies that had no profits.  And nothing to sell.  And with the Federal Reserve keeping interest rates artificially low investors borrowed money and poured even more into these dot-coms.  Classic malinvestments.  The stock prices for these companies that had no profits or anything to sell soared.  As investors everywhere were betting that they had found the next Microsoft.  The surging stock market made the Federal Reserve chief, Alan Greenspan, nervous.  Such overvalued stocks were likely to fall.  And fall hard.  It wasn’t so much a question of ‘if’ but of ‘when’.  He tried to warn investors to cool their profit lust.  Warning them of their irrational exuberance.  But they didn’t listen.  And once that investment capital ran out the dot-com bubble burst.  Putting all those newly graduated computer programmers out of a job.  And everyone else in all of those dot-com businesses.  Causing a painful recession in 2000.

Based on the Labor Force Participation Rate we are in one of the Worse and Longest Recession in U.S. History

Encouraging malinvestments in dot-coms was not the only mismanagement Bill Clinton did in the Nineties.  For he also destroyed the banking system.  With his Policy Statement on Discrimination in Lending.  Where he fixed nonexistent discriminatory lending practices by forcing banks to abandon good lending standards.  And to qualify the unqualified.  Putting a lot of people into houses they could not afford.  Their weapon of choice for the destruction of good lending practices?  Subprime lending.  And pressure from the Clinton Justice Department.  Warning banks to approve more loans in poor areas or else.  So if they wanted to stay in business they had to start making risky loans.  But the government helped them.  By having Fannie Mae and Freddie Mac buying those risky, toxic loans from those banks.  Getting them off the banks’ balance sheets so they would make more toxic subprime loans.  And as they did Fannie Mae and Freddie Mac passed these mortgages on to Wall Street.  Who chopped and diced them into new investment vehicles.  The collateralized debt obligation (CDO).  High-yield but low-risk investments.  Because they were backed by the safest investment in the world.  A stream of mortgage payments.  Of course what they failed to tell investors was that these were not conventional mortgages with 20% down payments.  But toxic subprime mortgages where the borrowers put little if anything down.  Making it easy for them to walk away from these mortgages.  Which they did.  Giving us the subprime mortgage crisis.  And the Great Recession.

So Bill Clinton and his Keynesian cohorts caused some of the greatest economic damage this nation had ever seen.  For Keynesian policies don’t create real economic activity.  They only create bubbles.  And bubbles eventually burst.  As those highly inflated asset prices (stocks, houses, etc.) have to come back down from the stratosphere.  The higher they rise the farther they fall.   And the more painful the recession.  For this government intrusion into the private economy caused a lot of malinvestments.  A tragic misuse of investment capital.  Directing it into investments it wouldn’t have gone into had it not been for the government’s interference with market forces.  And when the bubble can no longer be kept aloft market forces reenter the picture and begin clearing away the damage of those malinvestments.  Getting rid of the irrational exuberance.  Resetting asset prices to their true market value.  And in the process eliminating hundreds of thousands of jobs.  Jobs the market would have created elsewhere had it not been for the Keynesian interference.  We can see the extent of the damage of these two Clinton recessions if we graph the growth of gross domestic product (GDP) along with the labor force participation rate (the percentage of those who are able to work who are actually working).  As can be seen here (see Percent change from preceding period and Employment Situation Archived News Releases):

Labor Force Participation Rate and GDP Growth

The first Clinton recession caused a decline in the labor force participation rate (LFPR) that didn’t level out until after 2004.  Even though there were not two consecutive quarters of negative GDP growth during this time.  Usually what it takes to call an economic slump a recession.  But the falling LFPR clearly showed very bad economic times.  That began with the dot-com bubble bursting.  And was made worse after the terrorist attacks on 9/11.  Eventually George W. Bush pulled us out of that recession with tax cuts.  The much maligned Bush tax cuts.  Which not only caused a return to positive GDP growth.  But it arrested the decline of the LFPR.  But the good times did not last.  For the second Clinton recession was just around the corner.  The subprime mortgage crisis.  Created with President Clinton’s Policy Statement on Discrimination in Lending.  That unleashed real economic woe.  Woe so bad we call it the Great Recession.  The little brother of the Great Depression.

This recession not only had two consecutive quarters of negative GDP growth but five of six consecutive quarters showed negative growth.  And one of those quarters nearly reached a negative ten percent.  Which is when a recession becomes a depression.  This recession was so long and so painful because those artificially low interest rates and the pressure on bankers to lower their lending standards created a huge housing bubble.  Pushing housing prices so high that when the housing bubble burst those prices had a very long way to fall.  Worse, President Obama kept to the Keynesian policies that caused the recession.  Trying to spend the economy out of recession.  Instead of cutting taxes.  Like George W. Bush did to pull the economy out of the first Clinton recession.  Worse, anti-business policies and regulations stifled any recovery.  And then there was Obamacare.  The great job killer.  Which he helped pass into law instead of trying to end the Great Recession.  GDP growth eventually returned to positive growth.  And the official unemployment fell.  A little.  But the president’s policies did nothing to reverse one of the greatest declines in the LFPR.  More people than ever have disappeared from the labor force.  That will take a lot of time and a lot of new, real economic activity to bring them back into the labor force.  And no matter what the current GDP growth rate or the official unemployment rate are it doesn’t change the reality of the economy.  Based on the LFPR it is in one of the worse and longest recession in U.S. history.  And the worse recovery since the Great Depression.  Because of President Obama’s embrace of Keynesian policies.  Which do more to increase the size of government than help the economy.

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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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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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Without a Bill Clinton the Bursting of the Canadian Housing Bubble will be less Painful than in the US

Posted by PITHOCRATES - November 10th, 2012

Week in Review

The subprime mortgage crisis caused the Great Recession.  And bad government policy caused the subprime mortgage policy.  First with artificially low interest rates to encourage everyone to borrow money and take on enormous amounts of debt.  Then the Clinton administration took it up a notch.  By charging lenders with discrimination in their lending practices.  And if they didn’t find a away to qualify the unqualified for mortgages they would soon find themselves out of the mortgage business.  So they came up with subprime lending.  Adjustable rate mortgages (ARM).  No documentation mortgages.  Anything to get the government off of their backs.  And the government was so pleased with what they saw they started to buy (and/or guarantee) those toxic mortgages with their Government Sponsored Enterprises Fannie Mae and Freddie Mac.  Clearing those toxic mortgages from the lenders balance sheet by unloading them onto unsuspecting investors.  Clearing the way for even more toxic subprime lending.  The government was pleased.  And the bankers were making money with bad lending practices.  Something they normally would have avoided because it is very risky.  But when the government was transferring that risk to the taxpayer what did they have to lose?

Governments like a hot real estate market.  Because housing sales drives so much economic activity.  Because people put a lot of stuff into those houses.  Which is why governments are always quick to use their monetary authority to lower interest rates.  Which is what they did in the US.  Cheap money to borrow.  Lax lending practices thanks to the Clinton administration.  Creating a housing boom.  And a housing bubble.  It was a perfect storm brewing.  The only thing that it needed was a raise in the interest rates.  Which came.  Causing the subprime mortgage crisis as those ARMS reset at higher interest rates.  Leading to a wave of subprime mortgage defaults.  And the Great Recession.  Which raced around the world thanks to those toxic mortgages Fannie Mae and Freddie Mac unloaded on unsuspecting investors.

Canada did not suffer as much from the Great Recession.  Because they did not pressure their lenders to qualify the unqualified like Bill Clinton did in the US.  But they still used their monetary authority to keep interest rates artificially low.  So while they escaped the great damage the Americans suffered in their subprime mortgage they still have a housing bubble.  And it looks like it may be time for it to burst (see Analysis: Canada braces as housing slowdown takes hold by Andrea Hopkins posted 11/10/2012 on Reuters).

Long convinced the country’s housing boom would never end in a crash, Canadians have watched this autumn as a sharp slowdown in real estate spreads across the country, leaving would-be home buyers hopeful and sellers scared…

Signs are everywhere that Canada’s long run-up in house prices is over, hit by a combination of tighter mortgage lending rules and growing consumer reluctance to take on more debt. Sales of existing homes are down steeply, with condo sales hit especially hard, and some long-booming prices have started to fall…

Canadian households hold more debt than American families did before the U.S. housing bubble burst, which has led the government to tighten mortgage lending rules four times in four years…

Tal believes slower sales activity will be followed by falling prices in many cities. But he says Canadian lending standards have been higher, and borrowers more cautious, than in the United States before its crash, which will prevent large-scale mortgage defaults and plunging prices.

Mindful of what happened in the United States, the Canadian government has tightened mortgage rules to prevent home buyers from taking on too much debt. While interest rates are low and expected to stay low into 2013, the fear is that eventual rate hikes will drive borrowers out of their homes or into bankruptcy…

The last round of mortgage rule changes took effect in July, forcing home buyers to cut back on their budget and pushing many prospective first-time buyers out of the market entirely.

The Canadians may escape the damage the US suffered as Bill Clinton was an American and not a Canadian.  So they only have to suffer the effects of bad monetary policy.  Not the effects of government enforced bad lending practices.  So housing prices will fall in Canada.  And there will probably be a recession to correct those inflated real estate prices.  But housing prices probably will not fall as far as they did in the US.  For the Canadians were more responsible with their irresponsible monetary policy than the Americans were.

The lesson here is that when markets determine interest rates housing bubbles are smaller and recessions are less painful.  If you don’t believe that just ask an American with an underwater mortgage.

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The Subprime Mortgage Crisis and Great Recession was caused by Bill Clinton and Fannie Mae and Freddie Mac

Posted by PITHOCRATES - December 18th, 2011

Week in Review

The Securities and Exchange Commission (SEC) has filed civil fraud charges against Fannie Mae and Freddie Mac for their part in the subprime mortgage crisis.  The charges say they misled investors about their subprime mortgage risk exposure (see SEC charges ex-Fannie, Freddie CEOs with fraud by Derek Kravitz, Associated Press, posted 12/16/2011 on The Washington Times).

According to the lawsuit, Fannie told investors in 2007 that it had roughly $4.8 billion worth of subprime loans on its books, or just 0.2 percent of its portfolio. The SEC says that Fannie actually had about $43 billion worth of products targeted to borrowers with weak credit, or 11 percent of its holdings…

Freddie told investors in 2006 that it held between $2 billion and $6 billion of subprime mortgages on its books. The SEC says its holdings were actually closer to $141 billion, or 10 percent of its portfolio in 2006, and $244 billion, or 14 percent, by 2008.

In a May 2007 speech in New York, Syron said Freddie had “basically no subprime exposure,” according to the suit.

Not 0.2% but 11%.  Not 0% but 10-14%.  This is some serious misrepresentation of the subprime mortgage risk exposure.  It goes from virtually no risk to a risk great enough to cause, well, a Great Recession.

Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default and then sell them to investors around the world…

Fannie and Freddie had traditionally purchased a small number of subprime mortgage loans, which involved borrowers with credit problems who could not qualify for cheaper prime loans. But starting in the late 1990s many firms started purchasing subprime loans, and Fannie and Freddie followed suit.

Yes, the late 1990s.  Just after the Clinton White House began pressuring lenders to qualify more unqualified borrowers.  In their Policy Statement on Discrimination in Lending.  As noted in a previous post.

Wall Street isn’t to blame for the subprime mortgage crisis.  Bill Clinton started it with his Policy Statement on Discrimination in Lending.  And then Fannie and Freddie bought these high risk mortgages and sold them as safe investments.  If anyone is to blame for the Great Recession it’s government.  And the government sponsored enterprises Fannie and Freddie.

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After Enabling the Subprime Mortgage Crisis, Fannie and Freddie are still Losing Money and want Another Bailout

Posted by PITHOCRATES - November 13th, 2011

Week in Review

Fannie Mae and Freddie Mac are still losing money.  And are now asking for another taxpayer bailout.  Imagine that (see Falling home prices leads to bigger Fannie Mae loss; asks taxpayers for $7.8 billion more by the Associated Press posted 11/8/2011 on The Washington Post).

Mortgage giant Fannie Mae is asking the federal government for $7.8 billion in aid to cover its losses in the July-September quarter…

Michael Williams, Fannie’s president and CEO, said Fannie’s losses are increasing for two reasons: Some homeowners are paying less interest after refinancing at historically low mortgage rates; others are defaulting on their mortgages.

When property values drop, homeowners default, either because they are unable to afford the payments or because they owe more than the property is worth. Because of the guarantees, Fannie and Freddie must pay for the losses.

The problem now isn’t low mortgage rates and defaults.  That was the problem when government policy used Fannie and Freddie to create a housing bubble.  This is what gave us the subprime mortgage crisis.  Putting people into houses they couldn’t afford.  By forcing banks to qualify the unqualified.  And then having Fannie and Freddie buy these toxic mortgages from the banks.  So the banks could qualify more of the unqualified.  And continue the cycle.  All the while putting more and more risk onto the American taxpayer.  Because, as we have seen, it is the American taxpayer that bailed out Fannie and Freddie.  And now they’re asking for more money.

Government created the subprime mortgage crisis.  With their enablers of bad credit Fannie and Freddie.

Washington-based Fannie and McLean, Va.-based Freddie own or guarantee about half of all mortgages in the U.S., or nearly 31 million home loans. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past year.

Fannie and Freddie buy home loans from banks and other lenders, package them with bonds with a guarantee against default and sell them to investors around the world. The companies nearly folded three years ago because of big losses on risky mortgages they purchased.

This wasn’t the banks on Wall Street causing this mess.  The deed was already done by the time they sold those toxic mortgages.  For had it not been for Fannie and Freddie they would have been no toxic mortgages for Wall Street to sell.  And no subprime mortgage crisis.

And there would have been no Fannie and Freddie mess without their overseers.  The federal government.  And their policy to put as many people into houses.  Whether they could afford it or not.

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Bill Clinton created the Subprime Mortgage Crisis with his Policy Statement on Discrimination in Lending

Posted by PITHOCRATES - November 6th, 2011

Week in Review

The proof is in the pudding.  And that pudding is the Federal Register.  Or as some would say the smoking gun in the subprime mortgage crisis (see Smoking-Gun Document Ties Policy To Housing Crisis by PAUL SPERRY posted 10/31/2011 on Investors.com).

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

The threat was codified in a 20-page “Policy Statement on Discrimination in Lending” and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.

The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies.

“The agencies will not tolerate lending discrimination in any form,” the document warned financial institutions.

So this is where it all started.  In 1994.  When the government pressured lenders to qualify the unqualified.  To put people into houses they couldn’t afford.  Or else.

The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.

It took private analysts, as well as at least one FDIC economist, little time to determine the Boston Fed study was terminally flawed. In addition to finding embarrassing mistakes in the data, they concluded that more relevant measures of a borrower’s credit history — such as past delinquencies and whether the borrower met lenders credit standards — explained the gap in lending between whites and blacks, who on average had poorer credit and higher defaults.

The study did not take into account a host of other relevant data factoring into denials, including applicants’ net worth, debt burden and employment record. Other variables, such as the size of down payments and the amount of the loans sought to the value of the property being bought, also were left out of the analysis. It also failed to consider whether the borrower submitted information that could not be verified, the presence of a cosigner and even the loan amount.

When these missing data were factored in, it became clear that the rejection rates were based on legitimate business decisions, not racism.

Still, the study was used to support a wholesale abandonment of traditional underwriting standards — the root cause of the mortgage crisis.

So there was no racism.  No redlining.  Just good mortgage lending practices.  But good mortgage lending practices don’t buy you votes.  Or get you kickbacks from mortgage lenders.

Confronted with the combined force of 10 federal regulators, lenders naturally toed the line, and were soon aggressively marketing subprime mortgages in urban areas. The marching orders threw such a scare into the industry that the American Bankers Association issued a “fair-lending tool kit” to every member. The Mortgage Bankers Association of America signed a “fair-lending” contract with HUD. So did Countrywide.

HUD also pushed Fannie and Freddie, which in effect set industry underwriting standards, to buy subprime mortgages, freeing lenders to originate even more high-risk loans.

So how do you qualify the unqualified and avoid the wrath of the federal government?  That’s easy.  You create the subprime mortgage market.  And then you get Fannie Mae and Freddie Mac to buy these toxic mortgages and pass them on to unsuspecting investors.  Freeing up the mortgage lenders to make more bad loans.  And putting the world on a course to financial calamity.

All in a day’s work for an activist, corrupt, Big Government.

Clinton’s task force survived the Bush administration, during which it produced fair-lending brochures in Spanish for immigrant home-loan applicants.

And it’s still alive today. Obama is building on the fair-lending infrastructure Clinton put in place.

As IBD first reported in July, Attorney General Eric Holder has launched a witch hunt vs. “racist” banks.

“It’s a more aggressive fair-lending enforcement approach now,” said Washington lawyer Andrew Sandler of Buckley Sandler LLP in a recent interview. “It is well beyond anything we saw during the Clinton administration.”

Guess we haven’t learned the lessons of the subprime mortgage crisis.  Or we have and just don’t care.  Because buying votes and getting kickbacks from mortgage lenders is more important than preventing another subprime mortgage crisis.

All of this, of course, means that Wall Street didn’t cause the mess we’re in now.  Bill Clinton did.  And his racist lending policies.  To correct for a racism in mortgage lending that wasn’t there.  By qualifying the unqualified.  And putting them into houses they couldn’t afford.  Which the Obama administration appears to be doubling down on.

Boy.  I’d hate to be in our shoes.

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The Problem with the Occupy Wall Street People is that they don’t Know the Difference between Capitalism and Crony Capitalism

Posted by PITHOCRATES - October 15th, 2011

Bank Tellers have a Job because they didn’t go to College to get a Philosophy or an English Degree

Another proud day for American public education and American colleges (see Protesters arrested in bank march, party in Times Square by Georgett Roberts, Jennifer Bain and Kevin Fasick posted 10/15/2011 on the New York Post).

The “Crossroads of the World” were jammed when thousands of anti-greed protesters brought their party to Times Square, capping a day of marches marred by the arrest of more than 20 who stormed a Citibank branch.

And what do they want?  A lot of free stuff.  The greedy little bastards.

Brought their ‘party’?  Yeah, that about sums up these beatniks on Wall Street.  For them life is nothing but a party.  And a protest is an even better party.  I mean, look at them.  They’re having the time of their lives.

Earlier, 24 protesters were arrested when a mob stormed a LaGuardia Place Citibank and shouted slogans as two demonstrators closed their bank accounts in protest just after 2 p.m.

I hope they find a safe place for that money.  There are a lot of desperate people out there who need money.  And it would have been a lot harder for them to get at that money if they had left it locked in a bank.

They were screaming and chanting while they were going in. Security told them to leave, but they didn’t. They stood in a group chanting things to the tellers. There were locked in, and then they were taken away.”

If I’m not mistaken bank tellers aren’t part of that superrich 1%.  No.  They’re probably a part of that 99%.  Like the protesters.  Only they have a job.  Unlike the protestors.  Because they didn’t go to college to get a philosophy or English degree.

“We went into the bank to peacefully protest,” she said. “People were standing in the bank giving testimonials, speaking about their student debt, some of which is held by Citibank and a few undercover police officers came into the bank”

These people partied for 4 years (or more) while going to college getting their worthless degrees.  And learning how to hate America.  And the man.  And now they’re bitching to complete strangers about their own bad decisions?  Taking on debt for some BS degree?  Mom and Dad probably warned them not to do that.  To get a degree in something useful instead.  Like business.  Accounting.  Chemistry.  Something that has value in the economy.  But did they listen?  Apparently not.

He said he paid $559 annually in fees to the bank, including late charges.

“I’ve been wanting to move my money for awhile. But this opened my eyes,” he said of his experiences. “I’m going to use a community-based bank for my funds.”

This is just like someone living in East Berlin at the height of the Cold War waiting for their chance to escape to West Berlin.  To scale the Berlin Wall.  Before the East Germans shot him.  Or her.  Of course, there are some subtle differences.  East Germany was an oppressive police state that killed people trying to escape.  While America is a free county.  With a free market.  Where you can move your money to any bank you wish.  Without the threat of being gunned down by the state.

We call this free market capitalism.  Businesses compete for you business by pleasing you more than their competition.  You don’t need a law to make banks please you.  If you don’t like how a bank is treating you, leave.  All you have to do is open a new account.  Withdraw your money from the old account.  And deposit it into the new account.  It’s that easy.  It sure is a hell of a lot easier than trying to
climb a barbwire wall under withering machine gun fire.

If Government Favoritism Bothers you Perhaps you should Direct your Angst at Washington D.C. at the Next Election

These protestors may hate capitalism.  Because they were taught that on our college campuses.  But they sure love some of its billionaires.  Even though they belong to that 1% (see Protesters should not target entrepreneurs like Steve Jobs by Antony Davies posted 10/12/2011 on The Morning Call).

Steve Jobs, the co-founder of Apple who died last week at age 56, left the world a better place than he found it — and not just because of the treasure trove of gadgets he shepherded into creation.

Mr. Jobs’ life is a testament to what economists have long been telling us — that wealth and plunder are not the same thing. Plunder is what you get when you take from others. Wealth is what you get when you give to others.

Due to his commercial success, Mr. Jobs accumulated $8 billion of wealth over his life. But you won’t see Occupy Wall Street protesters coming after Jobs or Apple because it is so obvious that we freely gave our money to him in exchange for his products. We don’t view Jobs’ wealth as plunder, but as one-half of a transaction. We gave him $8 billion and he gave us the world that science fiction authors promised.

We voluntarily gave our money to billionaire like Steve Jobs.  The Occupy Wall Street mob is trying to take money from others.  The Steve Jobs of the world create wealth because they please us.  People like those on Wall Street threaten us for plunder or else.  Steve Jobs good.  Plunderers bad.

The young protesters currently occupying Wall Street should be careful where they direct their ire. People like Steve Jobs who gained their wealth by providing value to others — including the protesters using iPhones to call their friends — shouldn’t be the subject of protest. The protesters should focus their ire on those who use the political process to gain plunder by forcing the rest of us to subsidize their losing business models.

Some of these pirates can be found on Wall Street. They benefited when the government forced taxpayers to underwrite Fannie Mae and Freddie Mac’s largesse, and they benefited when the government forced taxpayers to bail out the companies that bet on that largesse.

But they’re not just in New York City.

Let us not forget that Fannie Mae and Freddie Mac are Government Sponsored Enterprises.  With close ties to the government.  Executing government policy.  And being under the official oversight of the government.  In particular, at the time of the subprime mortgage crisis, Barney Frank and Chris Dodd.  Who kept saying there’s nothing wrong with Freddie or Fannie.  That they were both as sound as a pound.  All the way up to the Great Recession.  Which they caused.

Pirates can be found on Main Street, where businessmen ask the government to create an unfair licensing system that will hamstring their competitors. They can be found in the public sector, where public unions ask the government to maintain a system that forces us to use the U.S. Postal Service to send first-class mail. Some can even be found on the farm, when they fight to maintain government requirements to put ethanol in our gas tanks and pay huge tariffs on imported sugar.

Here’s my point. Pirates can be found in all cities, and in all sectors, but their power to plunder has its source in one city: Washington, D.C. The federal government and the businesses that use political ties to force their products on consumers aren’t creating value — they’re enriching themselves at our expense. If protesters want to stop the plunder, then they are protesting in the wrong place.

That’s right, it takes two to tango.  And to plunder.  Lobbyists can’t lobby politicians unless they’re for sale.  Corporations can’t plunder unless they have cronies in Washington letting them.  By restricting competition.  And this is the key difference between capitalism (such as Steve Jobs used) and crony capitalism (such as what everyone is pissed off about).  It’s is crony capitalism that gets special favors from government.  In exchange for campaign contributions.

So if this kind of government favoritism bothers you, perhaps you should direct your angst to those who make the rules.  Washington D.C.  And by that I mean at the voting booth at the next election.  The way real democracy works.

The Occupy Wall Street Protestors have no Idea about Capital, Labor, Regulatory, Distribution, Insurance or Piracy Costs

And speaking of piracy, let’s talk about that a little.  And I’m not talking about bootlegging music or movies.  I’m not about literal pirates on the high seas (see Prepare to repel boarders posted 10/13/2011 on The Economist).

SOMALI pirates can be persistent. They have attacked the Maersk Alabama, a container ship owned by an American subsidiary of Denmark’s Maersk Line, no fewer than five times, most recently in May. In the first attack, in 2009, the captain was held hostage until the US Navy rescued him. Then Maersk put private armed guards on the ship. Since then, it has successfully repelled all boarders.

Maersk says it is only arming a few ships plying the pirate-infested waters off East Africa. But the practice is spreading rapidly among shipping firms despite the cost, which can run to $100,000 per voyage for a four-man team. That is because the number of attacks, off Somalia and elsewhere, has kept growing despite the strengthening of naval patrols (see chart). The European Union’s NAVFOR task-force, NATO warships and other navies patrol the waters off Somalia, but this has only pushed the pirates out into the open ocean, extending their attack zone towards India’s coast and as far south as Mozambique’s. This has forced the shipping industry, its insurers, and the national and international authorities that oversee them to accept that private armed guards are a necessity.

American ships plying these waters are bringing American-made goods to overseas markets.  Which everyone agrees is vital to our economy.  A positive balance of trade.  More exports.  Less imports.  And here we are trying to deliver our exports.  And having our ships hijacked by pirates.

Protestors hate corporations.  Because that’s where rich people sit back with their feet up on their desk puffing away on their fat cigars.  While counting their money.  At least, that’s what the protestors think.  They have no idea about the capital costs for plant and equipment.  Labor costs.  Regulatory costs.  Distribution (container ships ain’t cheap).  Insurance.  And, of course, piracy on the high seas and ransom demands.

Protestors are no fans of military spending, either.  They think the military is used just to invade other countries so we can steal their oil.  Well, they can’t blame this Somali piracy on America.  For the Somalis are stealing from anyone.  And nations everywhere have banded together to try and protect their trade routes.  But can’t.  Which is pretty sad.  Because during World War II we eventually defeated the U-Boat menace in the North Atlantic.  Of course, back then, we spent what was necessary on the military to win.  Unlike today.  Where the military budget is just a source of funds the Wall Street protestors want to plunder.

The Occupy Wall Street protestors are Acting like Spoiled Children, Like a Bunch of Eric Cartmans

The Occupy Wall Street protestors hate banks.  Capital formation.  Corporations.  That is, capitalism.  How do we know this?  Because they have told us.  Via Twitter.  Blogs.  YouTube.  Which they wrote and/or recorded on their Apple products.  And uploaded it to the Internet.  That we then downloaded on our Apple products.  Or other devices.  All of which made possible by banks, capital formation and corporations.  That is, capitalism.

These kids love capitalism.  They love the toys capitalism offers.  They just hate not being born into privilege.  Where they can afford to satisfy every want and urge as soon as they have it.  Without having to work hard or wait until they can afford to pay for these things.  They’re acting like spoiled children.  Like a bunch of Eric Cartmans.  Except for that part about being a bunch of filthy, stinking hippies.  For everyone knows that hippies are the bane of Cartman’s existence.  But apart from that one difference, these protestors are Eric Cartman.

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