BOHICA – Here comes housing bubble Part 2
By now it’s pretty clear that the collapse of the housing bubble, created by foolish government policy, was largely responsible for the economic disaster we’re in. Fannie Mae and Freddie Mac failed spectacularly after gorging on toxic loans which may ultimately put taxpayers on the hook for up to $1T. While they continue to suck up more taxpayer bailouts (more here and here) for their worthless portfolios, the government has not addressed the core issue of promoting home ownership for all (more here).
With Fannie & Freddie already overstuffed with bad paper, one would think that there just isn’t room to continue this horrendous home ownership for all nightmare. But we’re talking about the federal government here – there’s always room for more FAIL. According to this article (from the American), the government has been playing hide the salami behind the scenes by getting the FHA to pick up where Fannie & Freddie left off. BOHICA!
It is hard to believe, but it looks like the government will soon use the taxpayers’ checkbook again to create a vast market for mortgages with low or no down payments and for overstretched borrowers with blemished credit. As in the period leading to the 2008 financial crisis, these loans will again contribute to a housing bubble, which will feed on government funding and grow to enormous size. When it collapses, housing prices will drop and a financial crisis will ensue. And, once again, the taxpayers will have to bear the costs.
In doing this, Congress is repeating the same policy mistake it made in 1992. Back then, it mandated that Fannie Mae and Freddie Mac compete with the Federal Housing Administration (FHA) for high-risk loans. Unhappily for both their shareholders and the taxpayers, Fannie and Freddie won that battle.
Now the Dodd-Frank Act, which imposed far-reaching new regulation on the financial system after the meltdown, allows the administration to substitute the FHA for Fannie and Freddie as the principal and essentially unlimited buyer of low-quality home mortgages. There is little doubt what will happen then.
Since the federal takeover of Fannie and Freddie in 2008, the government-sponsored enterprises’ (GSEs’) regulator has limited their purchases to higher-quality mortgages. Affordable housing requirements Congress adopted in 1992 and the Department of Housing and Urban Development (HUD) administered until 2008 have been relaxed. These had required Fannie and Freddie to buy the low-quality mortgages that ultimately drove them into insolvency and will cause enormous losses for the taxpayers.
The latest regulatory change does not reduce the total losses that taxpayers will suffer from HUD’s policies; those losses, estimated at about $400 billion, are baked in the cake. But the higher lending standards now required of Fannie and Freddie should reduce future losses.
Not so for the FHA. While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage initiatives to FHA, the government’s original subprime lender. Along with two other federal agencies, FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations. This amounts to more than $1 trillion and is rising rapidly. The administration justifies this policy by saying it is necessary to support the mortgage market, yet borrowers are once again receiving high-risk loans.
OK, so I guess there were no lessons learned from the first housing bubble. Let’s just continue these idiotic lending policies and see if we can achieve a catastrophic FAIL. Perhaps a total collapse of the US economy. Thanks to the Dodd-Frank fiscal irresponsibility bill (more here, here and here), this is a distinct possibility.
The Dodd-Frank Act, however, exempts FHA and other government agencies from appropriate standards on mortgage quality. This will give low-quality mortgages a direct route into the market once again; it will be like putting Fannie and Freddie back in the same business, but with an explicit government guarantee.
For example, thanks to expanded government lending, 60 percent of home purchase loans now have down payments of less than 5 percent, compared to 40 percent at the height of the bubble, and the FHA projects that it will increase its insured loans total to $1.34 trillion by 2013. Indeed, the FHA just announced its intention to push almost half of its home purchase volume into subprime territory by 2014-2017, essentially a guarantee to put taxpayers at risk again.
We simply cannot afford more FAIL like this.