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In Advance Of Tomorrow's "Future Of Housing Finance" Kabuki Theater; Or Why The GSE Zombies Will Suck The US Middle Class Dry Forever, Amen
Tomorrow, a variety of luminaries, such as Bill Gross and Mark Zandi, will be panelists in a worthless and futile spectacle titled "Conference on the Future of Housing Finance" which has the aim of doing something or another to extend and pretend the ticking timebomb that are the bankrupt GSEs. It will most certainly succeed in that regard. What it will definitely fail at, is to provide some resolution to the $7 trillion mortgage "holding" problem, which incidentally was the first domino to fall in 2008, which just so happened nearly took down western-style capitalism with it (and morbidly, it should have: the result would have been a system infinitely better). Yet as we prepare for this hearing (and try to track down Mr. Gross' testimony to validate his previous statement that absent an implicit government guarantee he would buy MBS/Agency securities only with 30% down), here is another view, this one from none other than Edward Pinto, who himself was an executive vice president and chief credit officer at Fannie Mae in the late 1980s. As Pinto says, echoing the previous high dB statements by Rick Santelli, "We'll never get a rational mortgage system until the government's affordable housing mandates are ended." We couldn't agree more.
From The Future of Housing Finance, by Edward Pinto, posted on the WSJ:
Today [August 17] the Obama administration will begin a discussion on how to overhaul our nationalized housing finance system. Moderated by Treasury Secretary Timothy Geithner and Shaun Donovan, secretary of the Department of Housing and Urban Development (HUD), the "Conference on the Future of Housing Finance" seeks answers to what went wrong in the U.S. housing market. This promises to be the next big domestic policy debate—one that could mold housing finance for a generation or more. But the early signs of where policy makers might be headed are not promising.
A consensus is building around a three-part grand bargain:
• An explicit federal guarantee of a large portion of the mortgage-backed securities created to finance American's home mortgages;
• A tax on these securities to fund low-income housing initiatives; and
• A requirement that issuers of securities meet affordable housing mandates.This is a dead end for two reasons. First, while supporters of an explicit federal guarantee tell us it will never be called upon, Americans have read this book before and know how it ends.
The second is much less well known but equally deadly: the central role in the recent real estate collapse that was played by the federal affordable housing policy created by Congress and implemented since the 1990s by HUD and banking regulators.
In 1991, the Senate Committee on Banking, Housing, and Urban Affairs was advised by community groups such as Acorn that "Lenders will respond to the most conservative standards unless [Fannie Mae and Freddie Mac] are aggressive and convincing in their efforts to expand historically narrow underwriting."
Congress made this advice the law of the land when it passed the inaptly named Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (GSE Act of 1992). This law imposed affordable housing mandates on Fannie Mae and Freddie Mac.
Thus, beginning in 1993, regulators started to abandon the common sense underwriting principles of adequate down payments, good credit, and an ability to handle the mortgage debt. Substituted were liberalized lending standards that led to an unprecedented number of no down payment, minimal down payment and other weak loans, and a housing finance system ill-prepared to absorb the shock of declining prices.
In 1995, HUD announced a National Homeownership Strategy built upon the liberalization of underwriting standards nationally. It entered into a partnership with most of the private mortgage industry, announcing that "Lending institutions, secondary market investors, mortgage insurers, and other members of the partnership [including Countrywide] should work collaboratively to reduce homebuyer downpayment requirements."
The upshot? In 1990, one in 200 home purchase loans (all government insured) had a down payment of less than or equal to 3%. By 2006 an estimated 30% of all home buyers put no money down.
"[T]he financial crisis was triggered by a reckless departure from tried and true, common-sense loan underwriting practices," Sheila Bair, chair of the Federal Deposit Insurance Corporation, noted this June. One needs to look no further than HUD's affordable housing policies for the source of this "reckless departure." If the mortgage finance industry hadn't been forced to abandon traditional underwriting standards on behalf of an affordable housing policy, the mortgage meltdown and taxpayer bailouts would not have occurred.
Compounding HUD's forced abandonment of underwriting standards was a not-unrelated move to increased leverage by financial institutions and securities issuers. They were endeavoring to compete with Fannie and Freddie's minimal capital requirements. The GSEs only needed $900 in capital behind a $200,000 mortgage—many of which had no borrower down payment. Lack of skin in the game promoted systemic risk on both Main Street and Wall Street.
How should we go about repairing this dysfunctional housing finance system?
The goals should be larger down payments, stricter underwriting standards, reliance on the private sector and private capital, and the removal of affordable housing mandates. If there is to be an affordable housing policy, it should not be implemented by hidden subsidies and loose lending standards, but instead made transparent and funded on budget by the government.
Getting there will take time—probably a 15-year rebuild that fosters an orderly phase-out of government guarantees and a transition to a deleveraged, market-based system. This will require both long- and short-term policies.
Long-term we should consider ideas such as: the proposal by Columbia University's Charles Calomiris to increase minimum down payments by 1% per year over 15 years, bringing them back to 20%, where they had been for decades. Peter Wallison of the American Enterprise Institute has suggested that the private sector be encouraged to grow by reducing the GSEs' maximum mortgage amount by a percentage every year until it matches the Federal Housing Administration's (FHA) reduced limit, at which point the GSEs disappear. I have suggested that the FHA be returned to its former role of serving the low-income market over a five-year period, but with a higher minimum down payment so borrowers have more skin in the game.
Finally, the property appraisal process should be re-engineered along the lines suggested by the Collateral Risk Network, an organization representing the nation's leading appraisal experts. The boom was promoted by appraisal practices that relied on one input—the latest prices that were the result of an overheated market. A return to traditional appraisal theory based on price trends, replacement cost and value as a rental is necessary.
To get the housing finance system out of intensive care, short-term policies need to be implemented that promote deleveraging. Perhaps some of the excess supply of foreclosed properties should be sold to buyers who agree to put 40% down and use the properties as rentals. Josh Rosner, managing director of the research firm Graham Fisher, has suggested that homeowners who voluntarily pay down a portion of the principal on their underwater mortgage receive a tax credit also applied to their mortgage principal. In return, they would forgo future tax deductions of their mortgage interest payments.
While the road to housing hell may have been paved by the government, the road back will be built by the private sector.
Mr. Pinto, a consultant to the mortgage finance industry, was executive vice president and chief credit officer at Fannie Mae in the late 1980s.
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The American nightmare of home ownership for all (owner-ship, maritime law folks, you do not own, only hold in lien, the evidence is everywhere!!!) will only go away when people wake up.
And they are lip-sticking the pig while the CRE elephant in the room quietly munches away at the strawberries.
Kabuki indeed.
ORI
http://aadivaahan.wordpress.com
Dave Bowman: Hello, HAL. Do you read me, HAL?
HAL: Affirmative, Dave. I read you.
Dave Bowman: Open the pod bay doors, HAL.
HAL: I'm sorry, Dave. I'm afraid I can't do that.
Dave Bowman: What's the problem?
HAL: I think you know what the problem is just as well as I do.
Dave Bowman: What are you talking about, HAL?
HAL: This mission is too important for me to allow you to jeopardize it.
Dave Bowman: I don't know what you're talking about, HAL.
HAL: I know that you and Frank were planning to disconnect me, and I'm afraid that's something I cannot allow to happen.
Dave Bowman: Where the hell'd you get that idea, HAL?
HAL: Dave, although you took very thorough precautions in the pod against my hearing you, I could see your lips move.
Dave Bowman: Alright, HAL. I'll go in through the emergency airlock.
HAL: Without your space helmet, Dave, you're going to find that rather difficult.
Dave Bowman: HAL, I won't argue with you anymore. Open the doors.
HAL: Dave, this conversation can serve no purpose anymore. Goodbye.
More important will be HD's "Yearnings" and how the market reacts to it.
I would buy a ton of shit at HD if the 'helpers' looked like that. Clearly to cause a spending increase would require more hotties..
That's the stimulus we need, damnit.
I saw her at our local HD, she heads up the screw dept.
that's hysterical
I have a really bad feeling by the time today is over you're going to get a really long hard look at Home Depot's nut today. They are going to go full peanut butter kind of nuts today.
She would make a pretty good export in a post economic collapse nation...just like the Ruskies did.
Any Californication Mail Order Bride websites up-n-running yet...if not, watch this space.
Maybe Katy Perry should sing about that one in her next piece of shit Adfomercial song.
In such an environment, I'm guessing the public colleges in the south would get a helluva lot more attention... implosion of the plastic surgery biz and all. I would start with the "dumbest" public colleges and work your way up... absolutelyfuckingunbelievabletalent.
Are you a HOME Wrecker too, Robot?
That is how it works. Gotta love South Park.
How could they possible "get it:, Matt and Trey aren't Phds in econ!
It is doubly funny that SouthPart creators get it and can explain the absurdity of the banking/financial system and the idiotic Goobermint intervention, YET we have geniuses in DC that think they are actually smart enough to figure this crap out, yst come up with the most corrupt and stupid ideas in God's creation.
Season 13, Episode 3 'Margaritaville' has passed into legend.
That would be Andy Cuomo's HUD, and now we can watch the dumb ass voters in NY make him governor!!!!
For a look into the future ... see Detroit 1967!!!
The idea that we can engineer out of this mess is getting less credible with each passed opportunity.
Oh I don't know, Habitat for Humanity has done a damn good job of engineering home ownership out of a housing mess.
They are the 4th largest home builder in the USA now, with the lowest number of forclosures in this current housing mess.
Guess O'l Jimmy Carter had it right, but the right shot him dead over anything it could.
They will decide that subsidizing housing in Detroit would be a good thing. They could offer 50% subsidies for the poor and only pay $10.00 per home, and they are buying the worst homes next to a better economically endowed country-Canada
$10 per home in detroit is underwater.
Heh...
"We'll never get a rational mortgage system until the government's affordable housing mandates are ended."
Too bad we now have a president who is trying to expand those mandates to all other areas of life in this country.
What could possibly go wrong?
I believe this is called "one more nail in the coffin", or several billion more if one takes the time to count.
While it is possible that Acorn type borrowers are the only reason the housing bubble exists, perhaps someone could explain to me the following numbers.
Between 2001 and 2008 the total value of US mortgages increased from $7T to $14T. That works out to 1 trillion a year in new mortgages. Are you saying that Acorn and other similar organizations originated $1T a year in new mortgages? I don't think so.
You all know that average folks whose home increased in value by 10% a year went out and remortgaged their home and bought SUVs and iPhones. Lots of poor folks got mortgages, but a lot more middle class folks bought bling.
Pretending the problem began and ended with poor folks does not explain the numbers.
Making all your investment decisions based on the belief that Obama is out to destroy the American dream is a sure way to end up in a van down by the river - broke.
The US housing bubble burst. The current bunch are doing damage control, in the belief (perhaps mistaken) that any fix is better than complete collapse. Would you all be happier if McCain/Palin had won and given you a complete collapse? Any fix they tried would be much like the fix we are getting now.
The "affordable housing" clients at the bottom enabled the vast "trade up" market. Hence the bubble.
People on this blog talk about the marginal productivity of increasing debt, but the real issue is increasing cost of each marginal Democrat vote.
With about 70 millions on one or more types of welfare, the ship of state will sink.
"increasing cost of each marginal Democrat vote" LMAO. PROFOUND
I find it funny that you got junk comments because what you have said is true.
Hello, Bernanke and geithner are republics (bernanke appointed by Bush).
If the "crisis" was confined to subprime there would not have been a crisis. they were the canary in the coal mine and because they had the least reserves so stresses provided the first warning signs.
While home ownership appears to be the cause of the crisis the real cause of the crisis was simply overleverage in the financial system. It wouldn't have mattered if you had any systemic institution with so little capitial. for gods sake if the banks and homeowners had the same leverage speculation to tulips you would have the same problem.
As long as fed policy is designed to not deal with the real issues and prop up asset prices we will continue to falter. this is the lesson. (which the fed and our government don't want to hear). It is the bubble and the leverage that causes the problems. Of course under the current system odf cleaning up bubbles the bankers get to make money on the way up, and then get tossed free money to cushion the blow. Heads I win, tails you loose.
That my friends is the never ending scam of our system.
We continue to prop up fannie and freddie to continue to prop up the banksw and prevent housing from reaching it's true price level. It isn't to help the economy (although it is sold as that). It is another scam to keep the money flowing in wall streets direction.
I'm all for hating on the government but the government did not cause Countrywide and all its brethren to abandon all underwriting standards in mortgage lending. It was the fact that the originators were originating to sell to securitizers, rather than to hold the mortgage for its term.
Countrywide, AIG, et al expected Uncle Sugar to bail them out if things went pear-shaped, just like the govt bailed out S&Ls, LTCM, etc.
And the govt did so.
Countrywide didn't steal your money, your Congressman gave it to them. Yet you blame Countrywide, AIG e al for acting in a perfectly rational manner.
Absofuckinglutely...YES
Are these guys idiots?
I mean, talk about sucking at being evil overlords. Requiring a 20% down payment will cause the housing market to continue to decline, causing more trouble for the state gangs and their property tax-looting requirements.
The Final Solution will be to allow every dog and parakeet to get a NINJA ultra-jumbo 0% ARM.
I assume that is a rhetorical question?
all I want to do is tap tap tap tap
and [left] click
and take your money
Let me be clear...this is an unprecedented act of F'ing LUNACY. If, as The One claims, it was the repubs who ran the car into the ditch, then these clowns are dousing it with gasoline and throwing matches at it. C'mon everybody, lets all blow really hard and see if we can re-inflate this bubble...gotta make those HELOCs available so people can do 125% to make 30 years worth of payments on a meal that they crapped out last week.
The GSEs have always been a mechanism to help the banksters to the detriment of working Americans.
Imagine this: You demand a raise, and instead of a raise your boss gives you a low- interest credit line (you will pay interest to him). The following year, you still don't get a raise, just an even lower interest rate. How many times are you gonna fall for this?
The only purpose GSEs ever served was to keep wages low by allowing people to go further and further into debt. "Affordable housing" is housing that people can afford and has nothing to do with artificially propping up prices with credit that is ultimately paid for by the taxpayer. How can we not get that?
Because credit cards have merged with debit cards and they look and act the same to the end user - except the one which makes you go into DEBT is called a CREDIT card and the one which has actual CREDIT is called a.... DEBIT card! Talk about a mind-twist for the ignorant masses.
The GSEs have always been a mechanism to help the banksters to the detriment of working Americans.
Imagine this: You demand a raise, and instead of a raise your boss gives you a low- interest credit line (you will pay interest to him). The following year, you still don't get a raise, just an even lower interest rate. How many times are you gonna fall for this?
The only purpose GSEs ever served was to keep wages low by allowing people to go further and further into debt. "Affordable housing" is housing that people can afford and has nothing to do with artificially propping up prices with credit that is ultimately paid for by the taxpayer. How can we not get that?
Exactly but this is too simple an explanation for all the haters of Barney and Nancy. Barney and Nancy played a very minor role in this scheme. The haters will next try to show how Barney and Nancy destroyed the commercial real estate market.
The whole banking and financial system has devolved into a massive scam to loot the taxpayer. This crisis is 1000x worse than the S&L crisis which was another massive scheme by the Banksters. The Bansters needed more loans to securitize than any rationally managed system could ever supply. Their solution was to generate massive amounts of loans by paying bribes to congress, senate, regulators and the ratings agencies. The fact they were able to pull it off shows the massive level of corruption in this country and the sheer stupidity of the American populous.
Very true. Assigning blame is a fool's errand.
Oh yes, they are above reproach and have always acted in the best interests of their constituency and the people at large. Yeah, right....
Not the point.
Gross to recommend nationalization of GSEs
Vote out all incumbents and roll over the entire federal bureaucratic workforce. ...And no reach-around
I like that statement much better!
Why would a voter who has his lips firmly affixed to the government nipple want to vote out all incumbents?
You and I and other productive members of society who fill up the milk bottle are the ones who will be hoping for a reach-around.
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