Undaunted by the housing market collapse that crashed mortgage banks, cut the rug from underneath homeowner equity and slammed taxpayers for billions in bad loans, the Obama administration now has launched a major push for banks to hand out mortgages to those with “weaker credit,” including some on public assistance.
Edward Pinto, a former top executive at Fannie Mae, now with the American Enterprise Institute, confirmed to WND the government’s adoption of a strategy that requires banks to lend to less qualified borrowers or face discrimination complaints.
Just like before.
He is outraged, as are other housing industry experts and economists.
“This push by FHA will continue to set up for failure the very families and neighborhoods its mission is to help,” he told WND.
Economist Stan Liebowitz told WND the move is an “unnecessary risk being imposed on the economy for no gain except some political chits being generated by politicians for their own venal purposes.”
Liebowitz, an economics professor at the University of Texas at Dallas, said the federal government is once again pushing banks to lower lending standards, which is “exactly what the government did starting in the mid 1990s.”
Yet the worst problem with the administration’s approach could be that it fails to resolve a disturbing underlying issue: the large number of homeowners with negative equity – or homes on which they owe more than the value.
Nobel Prize-winning economist Vernon Smith told WND that 22 percent of homeowners are in negative equity, which places the nation in bad company.
“This household condition means that their too-big-to-fail banks have similar balance sheet stress, and these twin problems are significant in explaining why the U.S. economy is stuck,” he said. “Our evidence indicates that for two decades Japan has been stuck in low growth for the same reasons.”
The administration is reportedly seeking to “encourage safe lending to borrowers who have the financial wherewithal to pay.”
Liebowitz calls that representation “George Orwell doublespeak.”
“Banks are always happy to make safe loans, since it is in their self interest to do so. They do not need to be pressured to do so,” he explained. “The only reason pressure is currently needed is because these are not safe loans and banks know it.”
Pinto noted that the government “is actively encouraging lenders to originate loans that have a 15, 20, even 25 percent chance of foreclosure.”
A Journal of Business Inquiry report in 2009 explained that the nation’s recession, from which it still has not recovered fully, began in December 2007.
There were four causes, including “relaxed standards for mortgage loans.”
“Relaxed mortgage lending standards were primarily the result of government influence,” the study said. “Standards for mortgage loans were relaxed as a result of the the following factors: new governmental policies aimed at fostering an increase in home-ownership rates among lower-income households.
“Standards for mortgage loans were fairly consistent in the decades prior to the development of the housing bubble. Most mortgages were 30-year fixed rate loans requiring a down payment of at least 20 percent or mortgage insurance if the 20 percent down payment requirement were not met. The borrowers also had to prove that their income was sufficient to ensure that the monthly mortgage payments would be manageable.”
But then “the Community Reinvestment Act was modified to compel banks to increase their mortgage lending to lower-income households.”
That created an industry in subprime mortgages, which historically had a foreclosure rate “about 10 times higher than prime mortgages.”
“Subprime mortgages increased from 5 percent of new home loans in 1994 to 20 percent in 2006.”
The very purpose of Fannie Mae and Freddie Mac was to encourage first-time home purchase. Now, after a housing meltdown that it in part caused, the federal government is once again maneuvering for first-time home purchases.
The Community Redevelopment Act was widely acknowledged by top economists to have “led to riskier lending by banks” on behalf of officially disadvantaged groups.
Even so, the Obama administration is “doubling down on the disastrous policy mistakes that led to the mortgage crisis and Great Recession by pressuring lenders to finance homes for people who can’t afford them,” according to Paul Sperry, a Hoover Institution media fellow and author of “The Great American Bank Robbery.”
Sperry told WND that under “federal orders issued by the Justice Department, the biggest mortgage lenders in the country – including Wells Fargo and Bank of America – are being forced to advertise in minority media and offer loans even to people on public assistance.”
He said the coercion placed on banks is severe: “They have to adopt minority-friendly loan programs over the next several years or face investigation for discrimination.”
The coercion comes “not just from FHA and Justice and HUD but from the entire regulatory complex of federal financial agencies – including the powerful new Consumer Financial Protection Bureau.”
Indeed, Attorney General Eric Holder has made clear that affirmative action has just begun.
“Affirmative action has been an issue since segregation practices,” Holder said. “The question is not when does [affirmative action] end, but when does it begin? … When do people of color truly get the benefits to which they are entitled?”
Sperry believes the current policy is nothing less than a “shakedown” to force banks to give “easy credit.”
Concerns about a racial gap in home ownership fueled the first subprime mortgage debacle.
Columnist Thomas Sowell, an early critic of lax lending practices, noted statistical studies about “disparities between blacks and whites in mortgage loan approval rates might be said to have ‘jump-started’ the housing crusades that began in the 1990s.”
“Loudly proclaimed concern for the poor and minorities gave impetus to the drive for over-riding traditional mortgage lending standards,” he said, which housing speculators then took further advantage of by flipping homes.
In what could turn out to be a repeat of past policy, the Washington Post described a scenario in which federal bureaucrats are “encouraging lenders to use more subjective judgment in determining whether to offer a loan.”
The president himself had a hand in pressuring banks for subprime mortgages. An investigation by The Daily Caller shows President Obama “was a pioneering contributor to the national subprime real estate bubble.”
As a young attorney, in the only private sector job he has held outside of college, Obama and the firm he worked for sued Citibank. The suit claimed that Citibank discriminated against 186 people by rejecting them for mortgages.
After suing banks to force them to lend loosely, some of Obama’s former clients now think banks should not be allowed to lend loosely.
“If you see some people don’t make enough money to afford the mortgage, why would you give them a loan?” asked John Buchanan, one of Obama’s clients. “There should be some type of regulation against giving people loans they can’t afford,” he told The Daily Caller.
Liebowitz warns that “a potential disaster … could happen again” if there would be a downturn in housing prices.
He also blasted the media for empowering government regulators.
“The administration can call dangerous loans ‘safe’ till they turn blue in the face, but it isn’t true,” he said. “Unfortunately, most of the mainstream media will go along with their doublespeak, because that is what the mainstream media does.”
Strong institutional pressures affect bankers who are tied into government-backed mortgages. Liebowitz warned that these pressures virtually guarantee that dissent against subprime mortgages will be non-existent within the banks.
Bankers, he said, “who don’t go along will be replaced since these extremely highly regulated institutions know that they must go along with government to survive.”