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Archive for the ‘Housing Market’ Category

Fannie Mae / Freddie Mac Debacle Prove Democrat Hypocrisy

Posted by Steve Markowitz on May 25, 2012

On February 9, 2012 this Blog posted Housing Market Damaged by Ongoing Governmental Interventions concerning Fannie Mae and Freddie Mac and their roles in creating the housing market crash that led to 2008 global economic meltdown that is still ongoing.  The ongoing housing downturn is the worst in since the Great Depression.  United States government actions and interventions played a significant role in creating this mess.

In the 1934 the US government created the Federal Housing Authority.  The FHA was a backstop for mortgages that led to lower borrowing costs, governmental subsidy to promote homeownership.  The government’s actions were based the mistaken belief that home prices always increased making them a good investment for all Americans.  The meltdown of 2008 proved this to be ridiculous thesis.

Like all governmental agencies, the FHA’s reach and authority increased with time.  In 1977 Congress passed the Community Reinvestment Act promoting homeownership to lower income groups who could not afford mortgages.  Then, in the 1990’s Congress pressured Fannie Mae and Freddie Mac to offer loans to even higher risk buyers to further promote home ownership.  While the interventions were made for supposed noble reasons, their benefits mainly benefited the home building and real estate industries.  In addition, the policies led to inflated home prices making them bad investments especially for those that purchased homes in more recent years, the very group the governmental actions were suppose you help.

Finally, the government under the Bush and Obama Administrations pursued a dangerous low interest rate policy to further increase demand and consumption of all types of goods, including housing.  Like an addiction, this drug no longer offers a high and the economic downturn continues irrespective of additional interventions.

Those who believe in and promote(d) the government’s interventions are culpable for the mess we face today.  Progressives understand this and therefore deflect by creating the false narrative that the macroeconomic malady is merely the result of greedy capitalists.  The video submitted below by Blog reader John helps show the Left’s complicity in creating the housing bubble and subjecting taxpayers to huge losses at Freddie Mae and Fannie Mac.  It also shows that in opposite of the Left’s narrative, it was they who stop the Republicans from further regulating Freddie and Fannie.  Excerpts from our congressmen include:

  • Richard Baker, Rep. Louisiana – He predicted Fannie and Freddie failure in 2004 and called calls for more regulations on them.
  • Maxine Waters, Dem. California – She said that no problems existed at Fannie Mae and Freddie Mac under “outstanding leadership” of Mr. Franklin Raines and accused regulators of trying to fix something that wasn’t broke.  Waters then praised Raines for exceeding GSE Performance and further attacks regulator for impeding affordable housing mission.
  • Gregory Meeks, Dem. New York – Watch his irrational rant attacking a regulator trying to control Fannie and Freddie.
  • Ed Royce, Rep. California – He pleads for more regulations on Fannie and Freddie.
  • Lacy Clay, Dem. Missouri – “This hearing is about the political lynching of Franklin Raines”  No problem with Freddie and Fannie soundness.
  • Christopher Shays, Rep. Connecticut – Points out that that Fannie and Freddie were incredibly exempted from Sarbanes-Oxley act.
  • Artur Davis, Dem. Alabama – Beats up on a regulator who attempted to put controls on Fannie and Freddie.
  • Barney Frank, Dem. Mass. – Defended Freddie and Fannie incredibly stating that there were not issues with their “safety and soundness”.
  • Don Manzullo, Rep. IL – Attacks Fannie and Freddie for skirting the rules so that they could pay huge bonuses to their executives.

Perhaps the worst character this sordid matter is Franklin Raines who headed Fannie Mae until being forced to retire in late 2004 after the SEC began investigating accounting irregularities.  Raines, who received total salaries exceeding $90 million at Fannie is quoted: “These assets (houses) are so riskless, that their capital for holding them should be under 2%”.  This incredible example of stupidity did not stop Barack Obama from looking to Raines for advice on the housing market.

For those who would question the Left’s culpability in creating the mortgage meltdown, the video concludes with Bill Clinton clearly stating that both he and the Democrats in Congress must accept responsibility in that they resisted any Republican efforts to tighten up of on Freddie Mac and Fannie Mae.

This story is one of stupidity, greed, and the failure of government.  It has been buried by a mainstream media that no longer does any investigative journalism, especially if it may place Progressive policies at risk.  The Leftist politicians who manipulated the housing market are just as guilty as the mortgage brokers and bankers who took advantage of their ill-conceived policies.


Posted in Fannie Mae, Housing Market | Tagged: , , , , , , , , , , , , , , , , , , , | Leave a Comment »

Federal Housing Administration to Run Out of Reserves in 2012

Posted by Steve Markowitz on February 14, 2012

The Wall Street Journal reported that the Federal Housing Administration (FHA) will run out of reserves this year for the first time in its 78 year history.  Since the FHA has budget authority, it can go directly to the U.S. Treasury for funds without making a request of the Congress.  This is another example of government spending of the People’s money without Constitutional authority.

The FHA was established by the US government during the 1930’s to help facilitate homeownership in America.  This agency does not make housing loans, but instead insures lenders who make them.  Since the housing meltdown, the FHA has had its charter substantially expanded, insuring borrowers who only can afford down payments of even less than 5%.  While this type of intervention may have initially propped up the housing market in recent years, its easy and risky mortgages is cajoling buyers into making an economic decisions.  Specifically, it offers incentives to low-income buyers to purchase homes that are likely to continue depreciating some years.  This not only puts at risk the FHA’s (the People’s) money, but the underwater houses are a long-term financial burden for buyers.

Instead of recognizing the growing problem at  the FHA, President Obama is again attempting to expanded its charter.  Earlier this year the President proposed allowing underwater homeowners to refinance their mortgages through the FHA.  This will place additional risks on the taxpayers since many of the refinanced homes will continue dropping in value with their mortgages ultimately becoming the responsibility of the U.S. Treasury.

People who cannot afford to pay their mortgages and whose home values are significantly underwater need to get out from under this financial burden and that will only occur by walking away from the homes, as distasteful as this is.  The banks and government agencies that made the inappropriate loans need to eat those losses now so that the housing market can bottom and a true recovery can began.  These losses to the banks and government agencies will also be a strong incentive to not repeat similar errors in the future.  It also ensures that those that made the bad loans pay the price, not the bulk of Americans who stayed clear of imprudent financial behavior.

The problem with the housing market is an imbalance between supply and demand.  Any government intervention merely prolongs the downturn as they do not address the imbalances.  In fact they end up creating even more imbalances.  Adding insult to injury, the FHA has become an important player in the mortgage and housing markets in recent years.  When this agency ultimately retrenches in the housing market, as it ultimately must, its negative consequences on the economy will be huge, likely requiring an even large bailouts.

The FHA is another example of a failing governmental agency.  While many private companies run into economic challenges and some even fail, their failure should be viewed as the market’s cleansing of inefficiency.  While such occurrences are unhappy for the failed companies’ owners and employees, it is a healthy process for the overall economy.  This reality was understood by Americans until we started down the slippery slope of bailouts that began before the Obama came to power.  With these bailouts increasing in frequency and scope, it is easy to see that the path is unsustainable.  However, like an addictive drug, stopping the juice is a painful process and politicians are willing to offer the medicine.  The patient will have to get a lot sicker before appropriate treatment will be implemented.  That day of reckoning is coming.

Posted in Bailouts, Housing Market | Tagged: , , , , | Leave a Comment »

Housing Market Damaged by Ongoing Governmental Interventions

Posted by Steve Markowitz on February 9, 2012

Federal and state officials today announced a $26 billion settlement with five of the country’s largest home finance providers.  The settlement relates to problems with home foreclosures that have been referred to as “robosigning.”  As part of the settlement, the government indicated there will be relief offered about 5% of the homeowners underwater who owe more on the mortgages than the homes are currently worth.

In announcing the settlement, government officials bragged about its benefits that include punishment for the lenders and benefits for homeowners hurt by the housing market downturn.  Both benefits are dubious at best.  First, the penalties to be paid by the banks will be charged to their shareholders, not the employees responsible for the problematic actions.  In addition, those who had their houses repossessed inappropriately will get about $2,000, a very minor benefit. In addition, any benefits underwater homeowners receive in refinancing houses will only be an artificial incentive to stay in the dwellings whose value will fall further hurting their savings long into the future.  Such homeowners would be better served giving these houses back to the banks and forcing them to eat the losses. This would be appropriate punishment two banks who made inappropriate loans in the first place.  This is the type of punishment free markets are supposed to and out, not those dictated by government

The settlement is yet another supposedly plan by the government to help revive the housing market.  Like the previous programs, this intervention will increase the length of the housing downturn.  Inherent in any governmental economic intervention is the belief that bureaucrats and politicians understand the many complex interactions of a dynamic economy better than the free market.  It also demands belief in a “free lunch” whereas the government actions will only have positive effects.  Neither axiom is correct.

The housing downturn is going into its fourth year and is at the heart of the worldwide recession caused by the financial meltdown in 2008.  Before attempting corrective steps, governments must have an understanding of how the economy got into this morbid state.

Economic cycles affecting the housing market have occurred throughout history.  However, the current downturn is the worst in since the Great Depression of the 1930s.  As this Blog has proffered previously, the United States government shares culpability in this downturn and its extent.

In the 1934 the US government began intervening in the housing market with the creation of the Federal Housing Authority (FHA).  The FHA became a backstop for mortgages in order to lower the cost of borrowing and promote homeownership.  The government’s policy of promoting homeownership created the mistaken belief by consumers that home prices always increase making them good investments.  However, home prices increase only as long as demand outpaces supply (basic Econ 101).  An oversupply decreases prices, as occurred in 2007 that occurred because of changing demographics and other governmental interventions.

Fast forward a few decades.  Progressives pushed the FHA’s charter even further.  In 1977 Congress passed the Community Reinvestment Act promoting homeownership to lower income levels, i.e. people who could not afford the mortgages.  In the 1990’s Congress pressured Fannie Mae and Freddie Mac to offer loans to even higher risk buyers to promote more housing.  These interventions increased more demand for housing inflating home prices.

Adding to the housing bubble creation, former Fed Chairman Alan Greenspan and later President George W. Bush pushed interest rates artificially low each time the economy hiccupped.  It also further breached the moral hazard by seemingly indicating that the government through low interest rates can and will resolve any future market disruptions.  The rest is history, as they say.

Remarkably, with the repeated failures of governmental market interventions, the government has doubled down on this same bet with more interventions.  The negative consequences include a lengthening of the housing downturn and more problems to come.

Since his election, President Obama and other Progressive politicians have offered various programs to “fix” America’s housing downturn.  They all failed because they stopped the markets from correcting the imbalances in supply and demand.  Had these interventions not occurred, while initially housing problems would have been greater, it is likely that we would now be in recovery instead of the ongoing housing downturn.  At the appropriate prices as determined by the markets, investors would be buying houses for ownership and four income properties and prices would be on the rise.  This self-correcting process will not even begin until a bottom in the housing market is reached, something that cannot occur until the government gets out of the way.

The low interest rate policies inflicted on economy by the Federal Reserve’s (Fed) will have even more negative consequences.  This policy is flawed on many levels starting with the mistaken belief that the heart of the lengthy economic downturn is a problem of liquidity.  In fact, the problem is one of solvency and cheap money cannot resolve this issue.

Given the complexity of our economy it is not possible to accurately predict the negative consequences that will occur due to the low interest rate policies of the Fed.  However, we can expect more and larger bubbles as investors attempt to improve their returns during a time when they should focus on asset preservation.

Also, it is likely that the Fed’s low interest rate policy will prolong and deepen the housing downturn, inflicting long-term problems on an important part of the American economy.  Not only are current homebuyers obtaining mortgages at historically low rates, but so too are those refinancing existing mortgages.  It does not take a great imagination to understand that when mortgage rates ultimately jump back up from rates of about 3.5% to the historic norm of about 7.5%, , the cost of buying a home with a new mortgage will increase significantly.  This will reduce future housing sales as well as construction of new homes leading to a long-term and ongoing downturn in the housing market.

The law of supply and demand is infallible in the long term.  Progressives have spent trillions and offered massive failed interventions to again prove this reality.  Until governments stop the interventions and get out of the way, the economy cannot begin real recovery.

Posted in Governmental Intervention, Housing Market | Tagged: , , , , , , , , , , , , , , , , , | Leave a Comment »

FHA to Continue Insuring Houses for Flippers

Posted by Steve Markowitz on January 25, 2012

Flippers” is a term that became synonymous with the housing bubble.  During the overheated market that was mainly caused by artificially low interest rates set by the Federal Reserve, investors often purchased homes and within a few months sold them at higher prices.  This speculating accelerated the increase in housing values until the bubble burst, when the excess inventory of houses accelerated the downturn.

The FHA (Federal Housing Administration) is the government arm that insures many of today’s mortgages.  It was created to help make home mortgages more affordable, part of the government’s plan to promote homeownership for Americans.  The FHA previously determined that flippers did not fit in this mission and would not insure mortgages for houses resold within 90 days.  However, the FHA waived this rule in early 2010 in an effort to prop up the housing market.  This waiver was set to expire this month, but has since been extended by the FHA.

The FHA’s meddling has not stopped the downward spiral of housing prices.  However, that has also not stopped Acting Federal Housing Administration Commissioner Carol Galante from claiming: “This extension is intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight.”  Typical of governmental bureaucrats; when a program fails, just do it again.

Almost every time the government intervenes in the market it has promised positive results that have not materialized.  In the housing market it has made over three years of massive interventions that failed.  In addition, these interventions are creating unintended consequences that will cause even more serious issues in the future.  It remains to be seen how long the American people will continue to allow these failed policies to be repeated by the knuckleheads in Washington.

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US Housing values to Lose Nearly $700 Billion in 2011

Posted by Steve Markowitz on December 26, 2011

Zillow recently released its housing figures for 2011 that go a long way in explaining why the American economy remains weak.  According to Zillow, the total value of houses in the United States will drop by $681 billion for 2011.  While this is a huge drop, it is an improvement over the $1.1 trillion drubbing in the prior year.  Adding emphasis to the poor number, only nine out of the 128 markets polled by Zillow showed increases in values during 2011, with the biggest losers being large cities including Los Angeles, New York and Chicago.

Many economists believe that depreciation in housing values will continue for another year.  However, predictions of a bottom in the housing market has been continuously stretched out since the recession began.  In addition, the moratorium on foreclosures caused by the Robo-signing issues is ending, which will put additional housing inventory on the market during 2012.

Housing is largest asset of private Americans.  The over $1.8 trillion in housing depreciation during the last two years has sucked much of the air out of the economy.  The government has attempted to offset this loss in consumer spending with bailouts and other government handouts.  These steps have been ineffective for a variety of reasons, with a major one being that the increase in government spending has not been as large as the deleveraging occurring throughout the economy, a great deal of it caused by housing depreciation.

It is instructive to compare the size of the housing bust to that of the recently extended payroll tax break that made much political noise in Washington last week.  The total housing depreciation for 2010 and 2011 wives about $1.8 trillion, which comes to approximately $75 billion depreciation per each month during that period.  It has been reported that the payroll tax break leaves Americans approximately an additional $15 billion per month in total increased take-home pay, only about 20% of the monthly drop off in housing values.  This discrepancy helps explain the reasons behind the failure of the government’s interventions.

Ultimately, housing values will continue to fall until the excess supply caused by the bubble (i. e. low interest rates) is absorbed by consumers.  The government’s attempts to intervene in the market’s may have softened, but definitely lengthened the required correction process.  In addition, the governmental interventions will have unintended consequences that will slow other corrections needed to allow the economy to once again grow at a new store clean normal rate.  While painful in the short run, the government will have to get out a way and allow the complex and dynamic market to fix inefficiencies in part created by prior government interventions.

Posted in Housing Market | Tagged: , , , , , , | Leave a Comment »

Home Sales Figures Found to be Flawed

Posted by Steve Markowitz on December 21, 2011

The National Association of Realtors (NAR) annually publishes housing sales data.  Today, CNNMoney reported that NAR admitted it had terribly miscalculated its published numbers over the past four years.  These already dismal figures have now been revised downward by over 14%.  With little fanfare, NAR’s chief economist, Lawrence Yun, said: “The errors started in 2007 and continued to accumulate over time“, merely blaming data collection errors.

NAR’s reporting error has been repeated many times by private and governmental organizations that release all sorts of data.  The depth and breadth of these errors indicate either extreme incompetence by the economists who offer the figures and/or a more nefarious scheme to deceive.  Whichever the case, the lemmings that continually making investment decisions based on such reports will continue getting burned and then turn to the government to be bailed out.

Posted in Housing Market | Tagged: , , , , | Leave a Comment »

The Second Mortgage Conundrum

Posted by Steve Markowitz on June 7, 2011

Last week we posted an article titled “Home Prices Double Dip According to Case Shiller” with the National Index showing prices tumbling another 4.2% in the first quarter of 2011.  This resulted in total prices falling 34% since 2006.

The federal government has spent tens of billions in a failed attempt to prop up housing prices.  This effort was doomed to fail from the beginning because of governmental blinders used in creating subsidies, bailouts and special tax breaks involved with this effort.  These blinders keep the government from seeing the complex economic inter-relationships at play in the housing market.

Today the Wall Street Journal published a story about one of the key problems affecting the housing market.  Of the home owners that have second mortgages, a staggering 38% are now underwater meaning that they owe more on the houses than they are worth, compared to only 18% of borrowers being under water that didn’t take on home equity loans.  The chart shows the extent of the problem and it boils down to two words: excessive debt.  Until this debt unwound, .i.e. paid down, any governmental intervention is throwing good money away after bad.

In addition, according to the Journal second mortgages place commercial banks at greater risk than primary mortgages.  Unlike primary mortgages that are often collateralized and sold off to investors, home equity loans are typically held by commercial banks that now have about 75% of the $950 billion in home-equity loans outstanding.  Given the amount of home owners under water, these banks are at risk for requiring large additional right downs (losses).

The housing market is and will remain problematic for the overall economy until the excess inventory is sold off.  This requires more home buyers to enter the market, something which will not occur until buyers believe house values have stopped falling.  The government’s intervention efforts have slowed down the process of allowing the housing market to find its bottom and this has prolonged of the housing slump.

The government needs to get out of the economy’s way so that it can right itself.  Wasting additional billions will only make the problems worse.


Posted in Debt, Housing Market | Tagged: , , , , , | 1 Comment »

Home Prices’ Double Dip According to Case-Schiller

Posted by Steve Markowitz on May 31, 2011

The S&P Case-Shiller national home price index was just released and it’s not pretty.  For the first quarter of 2011, the average home price dropped 4.2% and reached a new low for the post bubble period.  This is the third quarter in a row that the index dropped with prices now down over 32% from their 2006 peak.  David Blitzer of Standard and Poor’s said of this latest report: “This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation“.

The report confirms that the Obama Administration’s $8,000 tax credit for home buyers in 2009/10 was a total failure, wasting over $17 billion of taxpayer money.  This, like any governmental market intervention, is doomed to fail because it was based on the disproven premise that politicians and bureaucrats can manage supply and demand better than the market.

Not only did the Obama Administration’s home tax credit fail to improve the housing market, it likely made it worse.  First, it incentivized buyers to purchase homes that are now worth less than when they purchased them last year.  Yes, many are already underwater with their mortgages.  In addition, the tax credit temporarily slowed the housing prices decline, which lengthens the overall downturn by increasing the time it takes for a bottom in prices to occur.  Only after a bottom occurs can there be a real and sustainable market recovery.

For the Progressives out there, do not fret.  Failure never seems to stop your Washington compatriots from the willingness to double down on a bet and repeat the same failures.

Posted in Governmental Intervention, Housing Market | Tagged: , , , , , , , , | Leave a Comment »

Government Again Pushing Loans to those than Cannot Afford Them

Posted by Steve Markowitz on May 12, 2011

There are various reasons behind the housing bubble and subsequent collapse that led to the largest financial crisis since the Great Depression.  Those on the Left often focus blame on greed and Wall Street banks.  While these issues played roles in the collapse, the United States government also helped sow the seeds for the meltdown.

Given the Progressives view that government can cure all societal issues, they conveniently ignore the role government played in housing boom and bust.  For example, in 1977 Congress passed and President Jimmy Carter signed the Community Reinvestment Act (CRA).  This Act required banks to make loans and mortgages in all the areas that they serve.  Progressives used this law to further their social goals that included giving more people the ability to obtain mortgages, irrespective of their ability to afford or repay them.

In addition, Congress pressured Fannie Mae and Freddie Mac to lower lending standards in support of the government’s social goals.  This artificially increased the housing demand, as well as housing prices.  Then, when the market went very soft, this guaranteed that many home owners would be underwater and unable to continue paying their mortgages.  This led to a downward spiral of foreclosures and declines in housing prices that continues to this day.

Now the Obama Administration is at it again.  Since the subprime mortgage meltdown, loans to low-income people and those geographic areas in which they reside have substantially decreased.   This is a natural free-market occurrence during a market downturn given that lending institutions tighten up standards.  This is a good thing that helps insure that those who cannot afford mortgages do not get them, especially during a time when housing prices are dropping.  This not only protects banks from making bad loans, but also protects individuals from buying depreciating homes that they cannot afford.

Progrssives, however, do not let economic realities interfere with their social agendas.  As they often do, they explain economic realities in terms of social injustices.  In the case of mortgage lending during the current downturn, they see racism.

Business Week has reported that the Federal Reserve cited Midwest BankCentre of St. Louis, MO for a practice known as “redlining”.  During the depression, the Federal Housing Administration (FHA) drew maps with red ink to delineate neighborhoods considered too risky for lending, often areas with high African-American populations.  Congress has since banned this practice.  Since Midwest BankCentre is located in a white suburb, as they have for 100 years, they have been cited for not issuing home mortgages or opening branches in minority dominated areas.

The Justice Department’s Thomas E. Perez stated the government’s position: “We are using every tool in our arsenal to combat lending discrimination.”  What a lame statement.  Banks are in the business of loaning money and making a profit, period!  They care not who the money goes to or what color their skin might be.

We are not even three years post the economic implosion caused by subprime mortgage mess, a problem caused in part by the government’s meddling in the economy to promote social programs.  The housing market is still in a tailspin with prices dropping.  Now, the Obama Administration is once again meddling in the housing market to promote the same social agenda.  Repeating the same failed policies and expecting defect results is truly insanity.

Posted in Governmental Intervention, Housing Market, Racism | Tagged: , , , , , , , , , , , , , , , , | Leave a Comment »

Housing Values Continue Dropping

Posted by Steve Markowitz on May 11, 2011

The economic news on the housing front continues to be bad.  For the first quarter of 2011, house values dropped 3%, the steepest quarterly decline since 2008 indicating that the housing market has not yet hit bottom.  To make matters worse, Zillow.com reports that 30% of homeowners with mortgages owe more than the homes are worth.

When the financial meltdown hit accelerating a decline in the housing market, the government made matters worse with various market interventions.  The worst step was a $8,000 in tax credit, an attempt by the government to bailout the housing market.  While this intervention gave a short-lived boost to the market, once the rebates ended an accelerated drop followed that continues to this day, as indicated in the Zillow chart.

According to Zillow’s chief economist, Stan Humphries, “We expected December and January to be bad” but February and March declines were “really staggering,” indicating “a reflection of the true underlying demand, which is now apparent because most of the tax credit is out of the system, and it’s being completely overwhelmed by supply.”  As a trained economist, Mr. Humphries should not have been surprised since pricing in the long-run is always “a reflection of the true underlying demand”, as taught in Econ 101.  The fact that some economics no longer understand this most basic principal of supply and demand indicates how poor Progressive economics education has become at the university level.

While President Obama cannot be faulted for the bubble and financial meltdown that led to the steep housing decline, he is responsible for wasting billions of taxpayer money on a failed attempt to prop up the market.  In addition, the interventions have prolonged the housing downturn by delaying its finding of a bottom.  Until prices fall far enough to allow demand to catch up with supply, housing values will continue to fall.  This most basic law of economics will not be denied.

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