May 18, 2014

The Key Lesson Hasn’t Been Learned

Readers suggested a topic on the FHFA. “I think there can be only one weekend topic this week, the nuclear bomb the PTB tried to set off: Will Mell Watt be able to keep the bubble going? I don’t think it will be enough. Last time we had an (apparently) robust economy, a much better jobs picture, and fraud out the yin yang in order to drive prices up. Now we have stocks at an obviously steroid driven high and echo bubble prices that are already starting to fall in leading edge areas like PHX. No, Mel ain’t gonna be able to do it. There isn’t the demand at these prices.”

A reply, “The problem is very clear: 1. House prices have to stay high to protect people who already bought. 2. House prices have to be low in order for more people to buy. 3. Prices are not going to go low enough for people to buy, because their PITI simply can’t compete with investor’s cash.”

“To solve this, you could prohibit investors from buying, which would drop prices low enough for people to buy. Or you could somehow give money to people but not to investors, so that people could compete. Or you could start creating well-paying jobs so people have money. Or you could sit around for a few years and debate it, and meanwhile inflation will slowly swallow the problem. This is what is happening by default.”

One said, “That only works if people’s incomes rise as well. That isn’t going to happen. If ground beef costs $20/lb, no one will have money to buy a house.”

And finally, “Do most voters realize that politicians have anything to do with house prices? It’s like the head of the FCC killing net neutrality. It’s got no political consequence, despite service which will get worse and more expensive. Regardless of the howls of those few who do understand the money, politics and technical issues.”

“There is the angle that voters vote for incumbents or challengers based on their overall sense of well-being or malaise. It’s not clear to me that releasing the housing market would be pinned on politicians.”

“The big issues is how it plays with the central bank, which creates a bank-safe/bank-friendly financial ecosystem. Central bankers wouldn’t like it. Also, the FIRE sector is one of the largest of all political contributors overall, for decades. And they wouldn’t like it. Those are the major factors in front of politicians it seems to me.”

The Credit Union Times. “Melvin Watt, the relatively new director of the Federal Housing Finance Agency, which oversees Fannie and Freddie, on Tuesday outlined a new three-part strategy designed to make more credit available to borrowers. Watt’s approach, offered during his first public appearance since taking office in January, reversed the agencies’ previous mandates to reduce their roles in the mortgage market.”

“FHFA’s first strategy, Watt said, is to maintain foreclosure prevention activities and credit availability for new and refinanced mortgages to ‘foster liquid, efficient, competitive and resilient national housing finance markets.’ Central to this strategy will be Fannie’s and Freddie’s actions to increase liquidity in the present single-family housing market, improve servicing standards and foreclosure prevention actions, and foster greater activity in the area of affordable multifamily properties. Watt said that would involve relaxing previous mortgage standards and payment history requirements.”

“In addition, the FHFA will not reduce loan limits as previously discussed, Watt said. The move comes in hopes of preventing further compromise of a housing market just beginning to emerge. Reform measures for the two enterprises seem to have stalled in Congress, while naysayers have said they worry looser standards could lead the $14.4 trillion mortgage market into another housing bubble-and-burst cycle.”

“Despite concerns, a stuttering housing market is holding back overall economic growth, according to Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob Lew.”

The Arizona Republic. “How badly does the federal government have to screw up before the politicians reach the conclusion that there is no useful role for it in the housing market? Getting a mortgage used to require a down payment of 20 percent of the purchase price. The monthly mortgage payments couldn’t exceed about a third of the borrower’s income. Defaults by those meeting those criteria were extremely rare. Housing finance was very boring, but very safe.”

“There was a movement among some private lenders to ease up on or abandon these underwriting standards. So long as housing values were rising, went the thought, mortgage lending was virtually risk-free. Fannie Mae and Freddie Mac facilitated the transfer of the risk for these substandard loans to the secondary market and began gobbling up the most risky of them for their own investment purposes.”

“Then the bubble burst. And when housing values were not increasing, but falling precipitously, the folly of abandoning strong underwriting standards was exposed and the carnage was extensive. At the time, everyone said, this can’t be allowed to happen again. The federal government shouldn’t be privatizing profits and socializing losses. But the key lesson, the importance of the federal government not undermining market-driven underwriting standards, hasn’t been learned.”

“A housing market based upon sound underwriting standards doesn’t need a federal guarantee or a government-facilitated secondary market.”

The National Review. “Tim Geithner has a new book coming out. Geithner, who was president of the New York Federal Reserve Bank when the partial correction of the real estate market began in 2006 and became President Obama’s first Secretary of the Treasury in 2009, will hit bookstores with Stress Test: Reflections on Financial Crises.”

“Stress Test is festooned with blurbs about the author’s candor and insight, and about the great debt our nation owes him. For younger readers: They’re talking about the official narrative that the TARP, the Fed’s monetary expansion, bailouts like AIG’s etc., ‘rescued’ the economy from a hyperpocalyptic catastrogeddon that was always very vaguely described but, we were assured, sure to destroy us all unless the government spent trillions on bold, persistent experimentation.”

“But former Special Inspector General for the Troubled Asset Relief Program Neil Barofsky was notably if not uniquely honest in the Obama brain trust. He correctly pointed out in 2010 that the design of federal housing efforts was to re-inflate the housing bubble — not exactly a Newtonian discovery, but something few people in government were willing to say outright.”

“You’d think seven years of economic anemia would cause even the blindest believer to wonder: Was it really a good idea to put off a much steeper credit contraction and rapid arrival at the bottom of the market in exchange for nearly a decade (so far) of stagnation and the apparently permanent hobbling of the American economy?”

Bits Bucket for May 18, 2014

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