The Housing Bubble

A report from the Washington Examiner. “When President Obama signs a new financial regulatory overhaul bill this week, he’ll have a new reform measure to campaign on. The wide-ranging bill creates a new consumer protection agency, overhauls the process for getting a mortgage, gives the government new powers to stave off industry collapse, regulates the derivatives market, limits credit card fees and more. ‘This recession was not the result of your typical economic downturn,’ he said. ‘It was the result of recklessness and irresponsibility in certain corners of Wall Street that infected the entire economy.’”

The Washington Post. “‘We would have loved to have something like this for Lehman Brothers,’ said Hank Paulson, who served as Treasury secretary when the financial system melted down in 2008.’ And he’s right: The next time there’s a financial crisis, regulators will say a quick prayer of thanks to Sens. Barney Frank and Chris Dodd for giving them the power and information to quickly figure out what’s happened and how to respond”

“Many of the weaknesses and imbalances that led to the financial crisis escaped this regulatory response. The most glaring omission: Fannie Mae, Freddie Mac and the crazed housing market that led to the crash.”

The Daily World. “Currently, the long-awaited comprehensive financial reform bill awaits the president’s signature. No sooner was the agreement reached in the House than Sen. Christopher Dodd, chairman of the Senate Banking Committee, admitted ‘no one will know until this is actually in place how it works.’”

“I think the citizens of this great country should reserve judgment regarding the details of the 2,000 page bill that has emerged. At issue are several points: whether ‘de-supervision’ rather than ‘de-regulation’ were the proximate cause of the crisis, whether regulators and politicians owe a fiduciary duty to taxpayers and should be held accountable to their actions in the same manner as trustees of private financial institutions, and whether the true cost of taxpayer financed safety-net bailouts should be disclosed by private sector firms.”

“According to the Center for Responsive Politics, at least 56 financial services industry lobbyists have served on the personal staffs of the 43 Senate and House members who worked up the legislation. In addition, the members of Congress who negotiated the reconciliation have received more than $112 million in campaign contributions from the financial services industry over the last 20 years.”

The New York Times. “The new consumer bureau mostly will be staffed with employees transferred from the consumer divisions of the existing banking regulators, which have been excoriated by Congress and other critics for failing to protect borrowers from obvious and widespread abuses. Administration officials said they were confident that providing new leaders for those employees and granting them new powers, would produce better results.”

“It creates a council of federal regulators, led by the Treasury secretary, to coordinate the detection of risks to the financial system, and it provides new powers to constrain and even dismantle troubled companies. It also creates a powerful new regulator, appointed by the president, to protect consumers of financial products, which will be housed in the Federal Reserve. The first visible result may come in about two years, the deadline for the consumer regulator to create a simplified disclosure form for mortgage loans.”

“‘The financial industry is central to our nation’s ability to grow, to prosper, to compete and to innovate. This reform will foster that innovation, not hamper it,’ Mr. Obama said Thursday. ‘Unless your business model depends on cutting corners or bilking your customers, you have nothing to fear.’”

From Veterans Today. “The underlying problem is that the bill doesn’t do anything to change the basic balance of power between Wall Street and Washington, which is partly based on the fact that it’s a lot better to be a banker than to be a regulator, and the only reason to be a regulator (if you believe in free-market incentives) is so you can then become a banker. As Bill Gross, king of the bond market and no one’s populist, said to The Wall Street Journal, ‘Wall Street still owns Washington. Better to have appointed [Former Federal Reserve Chairman Paul] Volcker ‘Dictator-In-Chief’ than to have let the lobbyists dilute what needed to be done.’”

“I’m still sticking to my position that the bill is better than nothing. The alternative was sticking with the environment that gave us a bloated, predatory financial system and the financial crisis. But it’s still a missed opportunity.”

The Commercial Appeal. “The bill is named for Rep. Barney Frank, D-Mass., and Sen. Chris Dodd, D-Conn., chairmen of the main congressional committees that wrote the 2,319-page bill. Old system: A key cause of the financial meltdown stemmed from subprime mortgages, which are home loans with high interest rates made to people with bad credit scores. Lenders were allowed to engage in NINA loans (No Income/ No Asset), where the borrower didn’t have to prove he could pay back the loan.”

“New system: Mortgage lenders now must obtain proof of a borrower’s ability to pay back the loan. Borrowers will have to provide proof of income. Mortgage lenders must disclose how high the interest rate can go in an adjustable rate mortgage.”

The Pittsburg Post Gazette. “Before the last Senate vote was cast, Republicans vowed to rescind the measure. House Minority Leader John Boehner (R-Ohio) called for a repeal, and several Senate Republicans joined him. If they gain control of Congress in November, GOP lawmakers said, they will try to roll back elements of the bill. For the second week in a row, Obama took on Boehner directly, saying in a statement touting the bill’s passage that the top House Republican is out of touch. Last week, Obama knocked Boehner for comparing the Wall Street reform bill to ‘killing an ant with a nuclear weapon.’”

“‘Now, already the Republican leader in the House has called for repeal of this reform,’ Obama said. ‘I would suggest that America can’t afford to go backwards, and I think that’s how most Americans feel, as well. We can’t afford another financial crisis, just as we’re digging out from the last one.’”

“But Senate Minority Leader Mitch McConnell (R-Ky.) said the bill would not address the root cause of the crisis — namely, the lending practices of housing giants Fannie Mae and Freddie Mac — that nearly brought down the U.S. economy. McConnell called it ‘a bill that was meant to rein [in] Wall Street’s biggest banks but which is now supported by some of Wall Street’s biggest banks and opposed by small community banks in my state.’”

The Aiken Standard. “Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said, ‘There is little in this legislation that will fundamentally change the way that Wall Street does business. There is probably no economist who believes that this bill will end the risks of too-big-to-fail financial institutions. The six largest banks will still enjoy the enormous implicit subsidy that results from the expectation that the federal government will bail them out in the event of a crisis.’”

From Reuters. “Faced with a lose-lose proposition, Congress put off its decision on the fate of mortgage finance companies Fannie Mae and Freddie Mac, perhaps hoping the housing market recovers before losses get too big. Both political parties agree a hybrid system that lets shareholders profit in the good times while taxpayers pay in the bad is unsustainable. But neither has come up with a workable plan to do that without inflicting more harm on the still-suffering housing market and the broader economy.”

“Given the bruising fight that took place over new rules for Wall Street in the wake of the worst financial crisis since the Great Depression, wholesale changes to the U.S. housing finance system could be too much for Congress to handle. Edward Pinto, a former top official at Fannie Mae who now works as a consultant to private sector mortgage lenders, notes that each passing day makes it harder to change the system.”

“‘The longer this goes on the less likely they are going to be able to undo Fannie and Freddie and we are going to get stuck with them in some sort of zombie-like structure,’ Pinto said.”

“The government is now directly or indirectly backing 97 percent of newly issued mortgages, including loans backed by the Federal Housing Administration, which has 30 percent market share. That’s up from just a few percent during the housing boom years. Some analysts see the market share of the FHA, which insures loans, climbing to as high as half of all new mortgages.”

“‘Uncle Sam is likely to be the lender of choice for the foreseeable future,’ said Howard Glaser, a former housing official in the Clinton administration. ‘It’s very hard to see what a normal market looks like anymore.’”

The San Francisco Examiner. “President Barack Obama lauded Senate passage of the Dodd-Frank financial overhaul, saying that ‘because of this bill, the American people will never again be asked to foot the bill for Wall Street’s mistakes.’ That statement is untrue.”

“The only thing Dodd-Frank has changed on bailouts is this: Before the bill was passed, bailouts had to be approved by Congress, as with the $700 billion Troubled Asset Relief Program first proposed by President George W. Bush and then extended by Obama. But in the future, thanks to Dodd-Frank, instead of congressional votes, Treasury Department bureaucrats will unilaterally decide under the bill’s ‘orderly liquidation process’ how much of the taxpayers’ money to hand out to troubled firms.”

“Worse yet, according to the Judicial Conference of the United States, Dodd-Frank makes tax-paid bailouts of selected corporations permanent in a manner that overrides the bankruptcy process established by the U.S. Constitution. ‘This is a substantial change from the bankruptcy law because it would create a new structure within bankruptcy court and remove a class of cases from the jurisdiction of the bankruptcy code,’ the Conference said in a recent letter to Senate Judiciary Committee Chairman Patrick Leahy.”

“To paraphrase Mark Twain, despite consuming more than 2,300 pages, Dodd-Frank bears the same relationship to reform as ‘lightning’ does to ‘lightning bug.’”

“Nor does the bill do anything to remove the elephant in the living room, the Fannie Mae/Freddie Mac bailout. The costs of this will reach nearly $400 billion, according to the Congressional Budget Office, and could approach $1 trillion before all is said and done. Roughly 70 percent of all U.S. mortgages are held by Fannie and Freddie, which between them hold $5 trillion in their investment portfolios. Fannie and Freddie are still losing billions by the month on bad mortgage investments and taxpayers are still on the hook. This means the housing crisis is far from being resolved, and, thanks to the continuing high rate of foreclosures, could plunge the economy back into recession at any time.”

The Star Tribune. “After nearly two years of recession and a jobless economic recovery, record numbers of Minnesotans are filing for personal bankruptcy. The state has never seen so many people go bankrupt during the first half of a year since it began tracking the number in 1982.”

“Years of super-sized lifestyles on borrowed money, a depressed housing market, persistent high unemployment and stock market losses are fueling the increases. People in industries once considered secure and well-paying — real estate agents, financial industry workers, tool-and-die makers, plumbers and chiropractors — are filling attorneys’ waiting rooms after being out of work or making do with reduced incomes for too long.”

“During the boom, Maggie Miley bought a house for $245,000 with an option-ARM mortgage. The payments were affordable, especially with her boyfriend paying half. But then he moved out and her hours performing facials were cut. She tried to sell, but owed far more than her St. Paul house is worth today. With a new commission-based job as an educator and salesperson for a skin care company, she hoped to modify her loan but was denied. The only way to get out from under the $50,000 second mortgage was bankruptcy.”

“Before housing values plummeted and the recession settled in, ‘I had never paid a bill late.’”

“Bankruptcy attorney Barbara May said her once middle-class clients used to have an average debt level of $70,000. But that’s rocketed to $100,000 in this recession, as jobless or house-poor clients used credit to hold onto their lifestyle. There is one thing May is seeing less of in her Roseville office: shame. ‘They come in and say ‘What else can they do to me? I’ve lost my job. My house is in foreclosure,’ she said.”

The Chicago Tribune. “”For the year ended March 31, personal bankruptcy filings nationwide rose 28 percent, to almost 1.5 million cases, according to the administrative office of the U.S. Courts. Cash-strapped, jobless and denied a loan modification, Del Phillips faced the same straits as millions of homeowners who risk losing their homes to mortgage lenders. Phillips decided he wanted revenge and was willing to ruin his credit record for it. When a short sale didn’t work out as planned, the 32-year-old Chicagoan opted for Chapter 7 bankruptcy liquidation. That will leave Phillips with little except for the scant possessions in his one-bedroom condo. It also will leave his lender, Chase Bank, with little except for, eventually, a condo that has lost value.”

“Meanwhile, Phillips continues to live there, mortgage-free. ‘I don’t feel shameful for what I’ve done,’ Phillips said. ‘I’ve gotten past being shameful.’”