Barack Obama’s plan to bankrupt the West
The good news is that in America the housing market is seeing some strong growth. But the green shoots of recovery in the short term might develop in the medium term to be little more than knotweed
On April 3rd President Obama said he wants lending companies to lower their criteria for home loans to those with lower and poor credit ratings. The US Department of the Treasury is only happy to oblige.
According to this Treasury briefing, published in January 2013, it will “look for ways to help consumers repair their credit and regain their footing in the housing market and support neighborhood stabilization.” Moreover, there is no need to worry about those previous failures to pay since “the financial crisis caused them to miss an auto or credit card payment.” It seems with this policy they may do so again.
Could we see an instant replay of the credit crunch that came about in 2008?
The devastating recession that began back then was not necessarily down to greedy bankers, but Democrat Party meddling going back to President Jimmy Carter: the manipulation of market forces leading to reckless lending to people who did not have a prayer of ever repaying their loans.
The ‘greedy bankers’, meanwhile, just offered different insurance policy derivatives to cover bad debts and losses. They were the politicians’ useful scapegoat to deflect blame from their outrageous Ponzi scheme-cum-social engineering.
The story begins with the Community Reinvestment Act (CRA) passed in 1977 by President Carter. The act says “financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business.”
It was seldom invoked but the tsunami happened after this publication of by The Boston Federal Reserve Bank into lending patterns to various communities. It stated: “The Home Mortgage Disclosure Act (HMDA) data for 1990, which were released in October 1991, showed substantially higher denial rates for black and Hispanic applicants than for white applicants. These minorities were two to three times as likely to be denied mortgage loans as whites.”
Although the methodology was questioned, Bill Clinton became a man on a mission. In 1995 the CRA regulations were tightened up and lenders not only had to show that were looking out for qualified buyers but had to demonstrate that they had lent to low-to-middle-income householders. They had to be “innovative or flexible” too. Prudence and good practice were dispensed with.
The next step was President Clinton's National Homeownership Strategy: “This report identifies specific actions that the federal government, its partners in state and local government, the private, non profit community, and private industry will take to lower barriers that prevent American families from becoming homeowners. Working together, we can add as many as eight million new families to America's homeownership rolls by the year 2000.”
Not only did the un-creditworthy gain mortgages but those generally considered to be good risk extended their normal borrowings too.
As noted by Peter Wallison, an Arthur F. Burns Fellow in Financial Market Studies: “the 30-year fixed-rate mortgage that had always been the mainstay of the U.S. mortgage market fell from 57.1 percent in 2001 to 33.1 percent in the fourth quarter of 2006. Correspondingly, sub-prime loans (those made to borrowers with blemished credit) rose from 7.2 percent to 18.8 percent, and Alt-A loans (those made to speculative buyers or without the usual underwriting standards) rose from 2.5 percent to 13.9 percent.”
This led of course to a huge housing bubble and a crash of stunning proportions, from which we have never really recovered.
We must not forget Fannie Mae and Freddie Mac (F&F). In 1992 they included into their charter the Affordable Housing Mission and used it to steer clear of legislation stopping them from the accumulation of what became a $1.6 trillion mortgage portfolio. Deposit-less loans were granted, and F&F were by statute required to show that at least 55 percent of their lenders and just under 40 percent were from the inner cities. A quarter went to the very poorest. $1 trillion of the $1.6 trillion of lending was sub-prime and fatally toxic.
The net effect was an increase between 1997 and 2006 in real estate prices of 124 percent. But after the party came the pain. Real estate prices came down by 20 percent in 2006 and by August 2008 9.2 percent of borrowers had defaulted; by September 2009 that figure reached 14.4 percent.
To offset some of the exposure banks utilized mortgage-backed securities (MBS), credit default swaps (CDS), and collateralized debt obligations (CDO). Some of this was of dubious provenance and indifferently priced. The ratings agencies were also asleep on their watch, failing to rate banks properly.
The net effect, starting with the UK’s Northern Rock Building Society, saw a near collapse of the banking system. Like Northern Rock some banks were effectively nationalised (Citigroup, Washington Mutual and insurance giant AIG). Some were subject to fire-selling (sold at hugely discounted values) like JP Morgan Chase acquiring Bear Stearns, Barclays, and Lehman Brothers. Meanwhile, Wells Fargo took over Wachovia under the watchful eye of the government’s Federal Deposit Insurance Corporation.
I am sure you need not be reminded of the other effects: The crash of stock markets, contraction of trade, negative GDP growth rates, etc. It was a contagion that affected the whole world and we still feel the aftershocks today. We should never forget the human cost of bailiffs at the door evicting householders.
But, like a dog eating its own vomit, Obama wants to return to the good old days. Somewhere, somehow, lessons have evidently been missed.
In his State of the Union address on February 12th, Obama said, “The good news is our housing market is finally healing from the collapse of 2007. Home prices are rising at the fastest pace in six years. Home purchases are up nearly 50%."
Perhaps he hasn’t read Harvard’s State of The Nation’s Housing from 2012 which states: “Real net household wealth plummeted $14.3 trillion from 2006 to 2011, dragged down by a 57-percent drop ($8.2 trillion) in housing wealth. Home equity now accounts for the smallest share of household net wealth since recordkeeping began in 1945… CoreLogic reports that the number of underwater loans rose in the fourth quarter of 2011 to 11.1 million, representing more than one in five mortgages and some $717 billion in negative equity.”
Funded by the United States Federal Reserve, the Consumer Financial Protection Bureau (CSFPB) was set up in July 2011 to “promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services.” Amongst its aims was to toughen up lending criteria for mortgages. According to the analytics of CoreLogic over 50 percent of current lending does not meet the CFPB’s criteria. Already Obama wants to undermine his own invention.
Returning to Obama’s State of the Union Address he says, “Right now there’s a bill in this Congress that would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today’s rates. Why would we be against that? Why would that be a partisan issue, helping folks refinance? “
As Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae remarked: "If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from."
So it is all American moms’ apple pie for dessert and credit crisis hemlock for breakfast.
As with all credit booms and busts, including the Great Depression and the late noughties, it all goes wonderfully well for a few years and then the backlash is unspeakable. And if Obama was to repeat the Democrat’s obscene follies of the past, especially so soon after, he will have a long time in retirement repenting to every deity he can think of invoking.
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