Economics, Pethokoukis

Obama to loosen lending standards to boost home ownership. What could go wrong?


After a near-depression and worst-ever financial crisis that cost the US economy as much as $14 trillion, one might think Washington would be careful to avoid repeating the same policy mistakes. One might think, for instance, Washington would think twice and then thrice before loosening mortgage lending standards to boost home ownership, particularly among low-income borrowers. Because, you know, loosened mortgage standards seem to have played some role in helping set the stage for the catastrophic mortgage meltdown.

Recall three conclusions from the National Commission on the Causes of the Financial and Economic Crisis in the United States:

1.) From the majority report: “We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.”

2.) From one of two dissenting reports: “The causes of the mortgage bubble and its relationship to the housing bubble are also still poorly understood. Important factors include weak disclosure standards and underwriting rules for bank and nonbank mortgage lenders alike, the way in which mortgage brokers were compensated, borrowers who bought too much house and didn’t understand or ignored the terms of their mortgages, and elected officials who over years piled on layer upon layer of government housing subsidies.”

3.) From the other dissenting report by AEI’s Peter Wallison: “… I believe that the sine qua non of the financial crisis was U.S. government housing policy … which sought to increase home ownership in the United States through an intensive effort to reduce mortgage underwriting standards.”

So surely government regulators would avoid taking any action to reduce lending standards again, right? Better safe than maybe $14 trillion in the hole, right? Not so much. From the Wall Street Journal story “In Reversal, Administration and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery”:

The Obama administration and federal regulators are reversing course on some of the biggest postcrisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery. On Tuesday, Mel Watt, the newly installed overseer of Fannie Mae and Freddie Mac, said the mortgage giants should direct their focus toward making more credit available to homeowners, a U-turn from previous directives to pull back from the mortgage market.

And who have been the folks crying about those tightening standards, such as forcing borrowers to put 20% down if the bank didn’t retain at least 5% of the loan before it was sold to investors. The usual suspects, (via the WSJ):

The March 2011 proposal triggered a huge outcry from lawmakers, affordable-housing groups and the real-estate industry, all of whom said it would put the brakes on homeownership for millions of credit-worthy borrowers, particularly first-time buyers and minorities.

Here is AEI’s Ed Pinto: “This is ‘deja vu all over again.’ It will put into motion policies which will fuel another housing boom—in the effort to put families with limited resources and poor credit histories into highly leveraged loans. This policy has been a failure since it began around 1960. It places low income borrowers with a high degree of income volatility into loans with the greatest amount and varieties of leverage so as to enable them to buy homes in neighborhoods with the highest levels of house price volatility.”

My take: this is one party cronyism and one part the left-wing again trying to stream the welfare state through the housing market via government subsidized and enabled mortgage credit, what social scientist Monica Prasad has termed “mortgage Keynesianism.” This may not be the worst economic policy Team Obama has dreamed up, but it’s sure hard to think of one as bad.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

13 thoughts on “Obama to loosen lending standards to boost home ownership. What could go wrong?

  1. BHO certainly doesnt believe in once bitten twice shy; not in economics, not in politics, not in foriegn policy…what a doof.

    • /Twice bitten, three times shy? What happened a few years back is what happened in the 10′s. I took a real estate law class in 1980. What happened that caused the great depression was excactly what happened in the mid 90′s. The laws that were put in place to prevent the kind of mortgages and irresponsible behavior were eliminated by Clinto os the dream (nightmare) of home ownership could be obtained by everyone. After the latest bubble burst, the laws were not replaced to keep it from happening again. Now they want to eliminate the one real roadblock. HOW STUPID CAN A PRESIDENT BE!!!!!!!! Is vote buying that important? Just my opinion

  2. The total mortgage debt in the US in 2006 was 10 trillion.

    The total credit default swap market, sold by Wall Street that same year was

    sixty two trillion.

    Yet it’s the housing market, right?

  3. Everyone continues the fight over loosening or tightening lending standards, because too many special interests don’t want to subject housing to an innovative marketplace: one that could be just as substantial as the digital gains of recent decades, were it allowed.

  4. Guess what schmuck said this?

    “The reason we have been in such a enormous economic crisis was prompted by reckless behavior across the board.

    “Now, it wasn’t just on Wall Street. You had loan officers were — that were giving loans and mortgages that really shouldn’t have been given, because the folks didn’t qualify. You had people who were borrowing money to buy a house that they couldn’t afford. You had credit agencies that were stamping these as A1 great investments when they weren’t.”

    Hint: he shares the same initials as “Body Oder”

  5. The first housing debacle can be laid directly at the feet of Obama and his lawsuit in Chicago which forced housing sales to unqualified buyers! Why would anyone be surprised that he is doing it again, after all the first time it won him the Presidency!

  6. What a steaming pile of dog do Mr P serves up here,
    The change? Fannie softened the rules surrounding its ability to force loan originators to buy back bad loans. Old rule, the “put back” club goes away after 3 years of on time payments. New rule, originators can skate after 3 years as long as the borrower has made 34 of 36 payments on time.

    This has exactly zip to do with funding marginal buyers in marginal neighborhoods. It affects almost everyone. In today’s mortgage market, you aren’t obliged to prove you don’t really need the money, but it helps.

    As to whether, looser underwriting “seemed to play a role” in the bust, as the blogger writes, we get three guesses from 2011 rather than this recent study (among a score with the same conclusion) from the Minneapolis Fed:

    “In total, of all the higher-priced [sub-prime] loans, only 6 percent were extended by CRA-regulated lenders (and their affiliates) to either lower-income borrowers or neighborhoods in the lenders’ CRA assessment areas, which are the local geographies that are the primary focus for CRA evaluation purposes. The small share of subprime lending in 2005 and 2006 that can be linked to the CRA suggests it is very unlikely the CRA could have played a substantial role in the subprime crisis.”

    The economy will not have a robust recovery until the construction industry is back to work. Idiot-baiting posts like this are a real reason we have made so little progress.

    As for Wallison, here he is in 2002 excoriating Fannie — for not doing enough for low-income homebuyers:

    “Despite Fannie’s claims about trillion dollar commitments, they are meeting their affordable and minority housing obligations by slipping through loopholes in the loosely written and enforced HUD regulations in this area. In other words, two companies that are immensely profitable and claim to have a government mission, are doing as little as they can get away with for those who most need assistance…”

    I was for it before I was I against it.

    • I’m inclined to give Pethokoukis the benefit of the doubt, but being no specialist myself, the panic over the role of the CRA seems to be a conservative staple.

      I think there’s ALOT more going on here regarding ‘subprimes’, the CRA, ‘undeserving loan recipients’, etc., than folks like Jim are willing to admit.

    • As usual, Turd failed to read the actual content of the lending rules change, and selectively opines on one miniscule aspect.

      Here is the rest of the story:

      Allowing homebuyers and people refinancing existing mortgages to make down payments of 10 percent rather than 20 percent of a property’s market value supposedly will jumpstart the weak national housing market, “a factor holding back the economic recovery”, according to Treasury Secretary Jacob Lew and Janet Yellen, Chairwoman of the Federal Reserve System.

      Gee, that worked out great last time, didn’t it Turd?

      But since all the evil mortgage brokers have been purged from the industry, this time everything will be fine, right Turd?

      We actually need less housing, not more. What we are seeing now is more malinvestment, caused by ZIRP and other destructive Oblunder policies.

      This was the first step in additional catastrophic steps to buy votes.

  7. Consider, this will buy lots of votes for D’s and the calamity won’t happen until after Obama is out of office, so there is profit to be had and the next president will get to deal with the mess. D’s will they say “well you said we couldn’t blame Bush for the mess left to Obama, so now you get to shut up!”

    Of course, politicians passing crappy law because they know they can profit immediately and they’ll be retired or dead before the poo hits the fan is par for the course.

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