Obama Administration Campaigns for another Housing Market Crash
They say history oft repeats itself. Let’s hope that adage isn’t true of the housing market crash of 2008 – a year in which over 1 million lost their homes and over 2 million lost their jobs.
“The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place,” reports the Washington Post.
Help power recovery? More like lead us back down the drain. Apparently Obama’s advisers are so concerned with the young people “left behind” by the current housing rebound that they have forgotten what happened just 8 short years ago.
Administration officials are persuading banks to lend to a broader range of borrowers by utilizing taxpayer-backed programs (such as those offered by the Federal Housing Administration) that insure mortgages against default. Meanwhile, housing officials are begging the Justice Department to give nervous banks some sort of assurance that 2008 won’t happen all over again if they start offering loans to riskier borrowers.
“The financial risk of just one mistake has just become so high that lenders are playing it very, very safe, and many qualified borrowers are paying the price,” says David Stevens, former FHA commissioner. Last time I checked, there was nothing wrong with renting for a few years until you save up enough money to purchase a house.
In his State of the Union Address, Obama promised to put more Americans in homes. Critics say that encouraging banks to lend as widely as the administration now hopes will plant the seeds for another housing disaster.
“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,” says Ed Pinto, a former Fannie Mae executive. In response, the administration claims it is only trying to allay the unnecessary hesitation now displayed by the nation’s banks.
“There’s always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s,” said a senior administration official.
The housing market has been surging for the past year, at least for investors and established homeowners with good credit. It is still difficult for those of low- and moderate-income to buy or refinance homes, says President John Taylor of the National Community Reinvestment Coalition.
Before the crash of ’08, nearly 40% of those purchasing a house were first-timers. That percentage has dropped to about 30%.
“If the only people who can get a loan have near-perfect credit and are putting down 25 percent, you’re leaving out of the market an entire population of creditworthy folks, which constrains demand and slows the recovery,” argues former White House adviser Jim Parrott.
Policymakers aruge that as Millennials move out of Mom and Dad’s house they are forced to rent instead of buy, which means less housing activity and less construction. “I think the ability of newly formed households, which are more likely to have lower incomes or weaker credit scores, to access the mortgage market will make a big difference in the shape of the recovery,” explains Federal Reserve Governor Elizabeth Duke. “Economic improvement will cause household formation to increase, but if credit is hard to get, these will be rental rather than owner-occupied households.”
In my opinion, deciding which individuals qualify for a loan should be left to the private market. But ever since 2008 when the government had to step in and save the banks, the feds have insured nearly 90% of all new loans. These mortgages are facilitated through the Federal Housing Administration and taxpayer-fueled mortgage giants like Freddie Mac and Fannie Mae.
“My view is that there are lots of creditworthy borrowers that are below 720 or 700 – all the way down the credit-score spectrum,” says FHA Commissioner Carol Galante. “It’s important you look at the totality of that borrower’s ability to pay.”
Obama’s mortgage agenda is downright frightening. If he gets his way, no doubt we’ll be seeing “The Big Short II” pop up in theatres sometime during the next few years.