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Archive for the ‘Mortgages’ Category

Government Again Pushing Mortgages to Those Who Cannot Afford Them

Posted by Steve Markowitz on May 18, 2015

In 2008 the world economies encountered the worst financial crisis since the Great Depression.  In a supposedly effort to repair the economies, governments transformed them through huge stimulus spending, low interest rate policies and bailouts.  These interventions have contributed to the ongoing weakness in economic recovery since.

The main cause of the 2008 meltdown was the subprime mortgage lending practices that led to loans being hustled to millions who could not afford to pay them back.  When the housing market slowed leading to depreciated housing values, homeowners could no longer refinance, further eroding housing demand that led to many homeowners owing more on the homes than they were worth.  Many walked away from the loans leading to the meltdown, putting at risk nearly most of the world’s largest financial institutions.

Given 2008 is only eight years ago, logic would dictate that we learned a lesson about imprudent financial behavior, at least for a generation.  However, once governments intervene, logic and economic reality take a backseat.  In fact, we are currently traveling down the same road, again fermented by governmental policies.

News.investors.com reported that the US government is again cajoling financial institutions to give mortgages to those that cannot afford them.  Specifically, the Consumer Financial Protection Bureau warned (threatened) lenders that they would be investigated for discriminatory practices if they do not count government assistance payments to lower income individuals as real income.  In announcing this policy, Bureau Director Richard Cordray used the following incredible logic:

The bureau has become aware of one or more institutions excluding or refusing to consider income derived from the Section 8 HCV Homeownership Program during mortgage loan application and underwriting processes.”  …. “Consumers should not be put at a disadvantage just because they receive public assistance.”

So, using the government’s logic, individuals who need governmental payment assistance are worthy of obtaining mortgages.

Once again politicians and bureaucrats are manipulating economic practices and reality in order to further social goals.  Prudent financial practices not only protect financial institutions, but also borrowers.  Instead, the government is placing people in mortgages they are unlikely to be able to repay.  In addition, this policy leads to bad investments decisions for some consumers when housing prices depreciated in the future.  If this occurs on a large enough scale, it will create another housing bubble and melt down mirroring that which occurred in 2008.

There is a flaw in the premise used by the Consumer Financial Protection Bureau.  Inherent in this policy is the view that lending institutions discriminate on people based on noneconomic factors, which is economic lunacy.  Those in the mortgage industry make money offering mortgages.  The more they write the higher the profits, assuming that the mortgages are prudent.  Forcing lenders to make imprudent mortgages will improve the short-term profitability of the mortgage industry, but ultimately hurt those that invest in buying these assets on the secondary market; i.e. pension funds, etc.   That is precisely what in the meltdown of 2008.


Posted in Debt, Mortgages | Tagged: , , , | 1 Comment »

The Goldman Sachs Fraud Charges: Covering Up the Next Bubble

Posted by Steve Markowitz on April 19, 2010

The Securities and Exchange Commission (SEC) has charged Goldman Sachs (GS), America’s largest investment bank with fraud.  Before getting into details, the timing of these charges is at the least curious.

1. It is reported that the SEC’s GS investigations has be ongoing for about nine months.  Why did they wait so long to file the charges?

2. The Progressives just past the healthcare reform bill making sweeping changes to the healthcare industry, about one sixth of the American economy.

3. The Obama Administration has jumped from one crisis another in its drive to fundamentally change America.  As Rahm Emanuel, President Obama’s Chief of Staff said: “”Never let a serious crisis go to waste.  What I mean by that is it’s an opportunity to do things you couldn’t do before.” We had the Stimulus Package crisis, the General Motors bailout crisis, the climate crisis, and the healthcare crisis.  Starting to see a pattern?

Is President Obama going after GS now for the good of the country or in his never-end quest to grab power and bring more of the economy under federal government’s control?  As they say, if it quacks like a duck it’s not a buffalo!

Irrespective of the President’s motivations, the larger investment banks’ greed has been out of control.  These banks helped facilitate the dot.com bubble, then the datacom bubble and more recently the housing bubble.  They gave us the creative financing and counter-party insurance that made highly risky investments look safe to many investors.  While possibly not illegal, the obscene profits the banks made on the bubbles doesn’t pass the smell test.

OK, so we started questioning the government’s motives in prosecuting GS.  Then we questioned the banks huge profits made on other peoples’ miseries.  Now it’s time to go full circle and looked to the root causes of the meltdown, the actions that let the bankers act on their greed.  This goes back to the same government now prosecuting the GS.

The government’s complicity on creating the modern bubbles goes back to the stock market crash of 1987.  The Dow dropped 22% in one day.  However, instead of letting the market sort itself out and rebalance itself naturally, the Federal Reserve (Fed) panicked and flooded the world with liquidity.  This led to a positive short-term result with the Dow actually being up for the year, even with the crash.  But there was a dark side to this intervention.  It sent a message to investors that in the future the Fed would come to their rescue should there be further serious market disruptions.  This inevitably made investors less diligent and got us started on a slippery slope that continues building ever larger bubbles.

In the late 1990’s we had other major disruptions in the economy; the dot.com and telecom bubbles were created and popped.  Then 9/11 caused a rapidly forming recession.  Instead of allowing this recession to rebalance the economy naturally, the Fed dropped interest rates to historic lows and kept them there for an extended time.  This cheap money policy was directly responsible for the housing bubble, the largest one to date.  It led to cheaper mortgages that facilitated the purchase of more homes than were needed with speculators entering the market.  Also, since returns on safe investments went so low, investors were made easier prey for riskier investments that offered greater returns.  Finally, the low Fed rates facilitated the investment banks’ quest to sell collateralized debt obligations to investors.  It were these risky investments that were sold as safe and ultimately led to the implosion of economies worldwide.

There was another major way that government intervention into the markets helped create the housing bubble and its subsequent popping.  By changing the charters of Fannie Mae and Freddie Mac to promote home ownership to people that could not afford mortgages, they created higher artificial demand for homes that led to higher prices, speciation and refinancing.  The artificial demand was destined to evaporate during the next economic downturn; and it did just that.  The rest is history.

Now back to the SEC’s charges against Goldman Sachs.  The SEC complaint in essence states that GS did not properly disclose information about sub-prime mortage investments that they were packaging and selling to investors.  The most damming charges include the claim that GS engaged a firm to put these investment packages together, who at the same time was betting that these same investments would go down in value.  If true, such action does not pass the smell test in perfume shop.

What can be concluded from this convoluted story?

1. The Obama Administration is out for another power grab.

2. The investment banks used their size and greed to take advantage of investors.

3. The government is in a conflict position going after Goldman Sachs since they are complicit in costing investors billions.

What corrective actions should be taken:

1. The prosecution of GS should go forward full speed.  However, it should be removed from the politicized SEC.  They are biased not only because they ultimately report to the President, but because they misread the tea leaves so badly as the bubbles were growing.  Need I mention Bernie Madoff?

2. Enforce the anti-trust laws already on the books  to break the large banks into smaller ones that we allow to fail in the future.  If these large banks were too large to fail in 2008, why hasn’t the Obama Administration taken this action by now?  This lack of action indicate a more nefarious motivation on the Administration’s part.

3. A truly non-partisan team of outsiders needs to be formed to create a new regulatory environment for banks going forward. Incredibly, Senator Chris Dodd who got the sweetheart personal mortage from Countrywide Financial, another corporate player in this mess, and Congressman Barney Frank who played a key role in changing Fannie Mae’s and Freddie Mac’s charters, are currently in charge of creating new banking regulations.  Talking about the foxes guarding the henhouse!

While prosecuting banks that broke laws must be done, it is being used by President  Obama to cover up an even larger bubble that his Administration is in the midst of creating: the government debt bubble.  This debt bubble is being created by bailing out industries and individuals who got burnt in the housing bubble, moving bad private debt onto the government’s balance sheet and printing money to pay for various programs.  The housing bubble had to dwarf the dot.com and datacom bubbles that preceded it since only a larger bubble could prolong our false sense of economic prosperity.  Similarly, this debt bubble is already dwarfing the housing bubble.  It’s hard to see a larger bubble coming along that would bail us out from this latest bubble.  And so the insanity continues!

Posted in Bubbles, Debt, Deficits, Governmental Intervention, Mortgages | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment »

Bailout for Mortgagees: Here We Go Again, Part II

Posted by Steve Markowitz on March 26, 2010

Yesterday’s posting reviewed the problems related to the newest bailout for people behind on mortgage payments.  This program being announced by the Obama Administration is actually its second effort to bailout those who took on loans they could not afford.

In February 2009, President Obama announced the Home Affordable Modification Program (HAMP) that offered to reduce eligible homeowners’ monthly mortgage payments to 31% of their incomes, funded by the Troubled Asset Relief Program (TARP).  Irrespective of one’s view of the justification for bailing out imprudent behavior, this first attempt was a dismal failure.  CNNMoney.com posted a story titled: “TARP watchdog slams Obama foreclosure program” that includes the following comments and conclusions (full posting linked below.):

  • According to the Special Inspector General for TARP, Neil Barofsky, HAMP “may even do more harm than good”.
  • The Treasury Department’s targets weren’t “meaningful,” mismanaged the implementation of the program, and now risks a substantial number of “re-defaults,” says Barofsky.
  • Barofsky claimed the Administration did a poor job rolling out the program and made loan modifications before documentation and verification of incomes were completed.
  • According to the Treasury Department, 40% of homeowners in the HAMP program will re-default.
  • Absent a thorough review of HAMP and its goals, the program risks helping few, and for the rest, merely spreading out the foreclosure crisis over the course of several years, at significant taxpayer expense,” Barofsky said.

The conclusions of the TARP Inspector General are sobering.  They are but another example of the Obama Administration’s lack of experience and naive belief that they can will their way to problem resolution.  In a more general sense, HAMP’s failure is another example of governments’ inability to control economic realities and the laws of Supply and Demand.  Just think what their meddling will do for healthcare!

The storey of HAMP’s failings does not end here.  When questioned about Barofsky’s criticism of the Program, Assistant Treasury Secretary Herbert Allison disagreed with the usual bureaucratic excuses and then made the following statement:

“The success of HAMP should be measured by how many eligible homeowners are able to avoid the pain and stigma of foreclosure by reducing their mortgage payments to affordable levels while either remaining in their homes or transitioning with dignity to more suitable housing.”

This is remarkable and revealing.  When President Obama unveiled HAMP he sold it to Americans based on the fear that without it more serious economic calamities would occur.  Well, the program did not work and guess what, the calamities did not occur.  Further, the Assistant Treasury Secretary now says that HAMP’s success will “be measured by how many eligible homeowners are able to avoid the pain and stigma of foreclosure by reducing their mortgage payments”.  Did HAMP’s goals change since Obama announced the Program or was the President being disingenuous when he stated the reasons for it?  In either case, assisting those who acted imprudently was not what the American people bought into.  And these knuckleheads in Washington wonder why the anger is building.

TARP watchdog slams Obama foreclosure program

Posted in Bailouts, Banks, Mortgages, Wasteful Government Spending | Tagged: , , , , , , , , , , , | Leave a Comment »

Bailouts for Mortgagees: Here We Go Again

Posted by Steve Markowitz on March 25, 2010

When the President signed the healthcare reform bill this week he instituted historic changes to America’s healthcare system, about one sixth of the Country’s economy.  Anyone who thought that Obama and his Progressive friends in Congress were finished were dead-wrong.  Even before the ink was dry on the bill they are on to the next major realignment of capitalism.

The New York Times just reported that the Obama Administration will introduce a major initiative offering substantial assistance to those behind on their mortgages or even if they are merely underwater, owing more on the mortgages than the current value of the homes.  According to the Times, the program will include:

1. The government encouraging lenders to write down the loans.

2. The government repackaging millions of loans for borrowers whose home values have gone below the amounts owed on the mortgages.

3. Holders of the affected mortgages will be asked to take losses, but less than if foreclosures were forced to occur on the homes.  The newly repackaged loans will then be insured by the Federal Housing Administration; i.e. taxpayer guaranteed.

4. Lenders will be cajoled into reducing payments for unemployed workers for some period of time.

The Obama Administration’s wading into the mortage market with what is another bailout is a further march down a path that is destroying capitalism.  First, we bailed out the banks that created this mess in the first place.  Then we rewarded auto companies who produced cars that consumers did not want with a bailout.  And now we will bail out people who barrowed too much for houses they could not afford; yes others who helped create the housing bubble.

The bailouts are all justified by Progressives as saving us from far worse disasters.  This argument has proven fallacious by the fact that each bailout is succeeded by yet another one.  We are traveling down a slippery slope of never ending bailouts.  But, they will be forced to end at some time, unless you believe in perpetual motion.

When the government gives a bailout it can be funded in two ways.  Taxes can be used in which case the government charges the people who do not receive bailouts.  In other words the government taxes those who used prudent behavior to pay for those that were imprudent.  The alternative is to barrow funds and charge the next generation for this generation’s foolish behavior.  Neither choice can be morally or economically justified.

Capitalism, while imperfect, is the most efficient system for regulating a complex and dynamic economy.  It accomplishes efficiency by rewarding individuals who produce things of value; i.e. goods and services, better than others.  However, it is equally important that capitalism punish those that make poor decisions that are not productive, often referred to as the moral hazard.  Bailouts remove or lessen the punishment for bad decisions, leading not only to inefficiencies in the economy, but more significantly to more imprudent behavior by capitalist as the fear of the consequences of failure fades.  Without punishment, capitalism will not work, period.

President Obama is fully aware of the negative consequences of bailouts.  His continuance down the bailout trail can only be because of: 1) a lack of political courage to correct our economic problems that will require pain, or 2) because this trail leads to socialism, the Holy Grail for the Progressive movement.

Let us recall the words of Peggy Joseph shortly after Barrack Obama was elected (video below).  This was the young lady that with tears in her eyes said “I won’t have to worry about paying my mortgage” referring to the result of Obama’s election.  It seems Ms. Joseph understood the President-elect better than many who voted for him.

Posted in Bailouts, Business, Capitalism, Mortgages, Progressives | Tagged: , , , , , , , , , , , , | Leave a Comment »

US Government Battles the Market

Posted by Steve Markowitz on December 10, 2009

Today’s Wall Street Journal reported on a relatively new trend in the United States.  A growing percentage of homeowners whose mortgages are underwater are walking away from their houses and renting even nicer properties at lower total monthly costs.  Given California’s trendsetter history, it is likely that this phenomenon will make its way across the United States.

The Bad

Bad things occur when homeowners walk away from underwater mortgages.  Lenders take losses and property values go down depressing the housing market.  In addition, mortgage holders are given bad credit ratings.

The Good

There are also positive effects for the economy when borrowers get out from loans they cannot afford.  For example, when a borrower cuts the monthly mortgage payment by renting, let’s say from $4,000 to $2,000, that household then has $2,000 more per month to spend on other goods and services allowing the economy grow.

The Ugly

The government helped create the housing bubble, an economic imbalance, by making interest rates artificially low earlier in the decade.  This was done to avoid a previously needed correction to our economy.  Unfortunately, that action led to the housing bubble that then popped.  In other words the government’s intervention or tinkering with the market led to an even worse problem then the issue they “cured”. Read the rest of this entry »

Posted in economics, Governmental Intervention, Mortgages | Tagged: , , , , , , , , , , , , , , , | 1 Comment »

The Mortgage Crisis – Barney Frank Wants to Keep on Giving

Posted by Steve Markowitz on September 14, 2009

The housing bubble and subprime mortgage mess has been “ground zero” for the financial collapse that led to current recession.  While greed played a role in the financial collapse, government intervention was certainly fuel for the fire.  This intervention included artificially low interest rates pursued by the Federal Reserve and the availability of low-cost and teaser mortgages that required little or no down payments.

fannieFannie Mae and Freddie Mac are government backed corporations who play significant roles the mortgage markets.  Like many other entities when the government is involved, Freddie and Fannie started as good ideas, but lead to bad and unintended consequences as they supported the special mortgages that we now call sub-prime.Freddie

While charged with financing the mortgage markets, Fannie and Freddie were supposed to do so using sound business practices.  The sound practices began to unravel when the Community Reinvestment Act of 1977 was made law.  It encouraged commercial banks and savings associations to assist borrowers in all segments of communities, including lower-cost neighborhoods.  This lead to loans being made to people who could to afford them and then increased housing demand that led to inflated prices.  This politicization of Fannie and Freddie’s missions without regard to economic consequences was the slippery slope that led to the financial meltdown.  The rest, as they say, is history.

Politicians on both sides of the aisle backed the Community Reinvestment Act of 1977.  Washington politicians find it hard to say “no” to a supposed free lunch for constituents.  One strong backer over the years of Fannie and Freddie has been Congressman Barney Frank of Massachusetts.  His backing continued even after signs of potential problems became evident.  For example, in January 1999, barney2the director of the Office of Federal Housing Enterprise Oversight (OFHEO), James B. Lockhart, informed the Senate via letter of questionable accounting practices at Freddie.  Even after that and other warning signals, Frank made the following statements: Read the rest of this entry »

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