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Posts Tagged ‘Community Reinvestment Act’

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 »

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 »

Employment Figures Prove Failure of Obama Policies and Keynesian Economics

Posted by Steve Markowitz on July 10, 2011

June’s employment figures released on Friday and were dismal.  While some pundits were surprised by the increase in the unemployment rate, those in the real business world were not.  First, the raw figures:

  • Only 18,000 jobs were created in June, the worst since September, 2010.
  • Private employment rose by 57,000 while government payrolls decreased by 39,000.
  • May’s jobs figure was revised downward by 29,000 jobs and April’s went down by 15,000.
  • Total unemployed is now over 14 million, and that does not count the underemployed.
  • The unemployment rate increased to 9.2%.

The numbers tell the story, period.  President Obama’s uneconomic policies that revolved around bailouts, Stimulus spending, and other market interventions have failed.  The failure is more grotesque when compared to the numbers included in the sales-pitch the Obama Administration made to the American people when promoting the Stimulus Package and other interventions.  That $787 billion Package was sold under the pretense that without it, the U.S. unemployment rate would exceed 8%.  All that money was spent and the rate spiked to over 10%.  Two years later it is 9.2% and rising.  Below is the infamous chart the Obama Administration used to sell the Stimulus Package.  The addition of the actual unemployment numbers in the red dots was added by e21.

The employment projections made by the Administration’s economic advisors with impeccable credentials in government and academia were flat out wrong.  These academics did not understand the real issue behind the 2008 economic meltdown, i.e. the excessive debt, or the effects of their junk science interventions.  In the business world these folks would have been fired long ago.  However, in the “Alice in Wonderland” world of government, they jumped ship when their policies failed, received a government pension and returned to academia to teach the next generation of economists.  Yikes!

Unfortunately there are more headwinds that will negatively impact future economic reports.  Three significant ones include:

End of QE2Quantitative Easing (QE) is in essence the Federal Reserve (Fed) buying U.S. Treasury bonds using money that they print.  If that sounds like alchemy, it is.  The Fed has supposedly stopped QE in June, which will have contractive effect on the economy going forward.

End of the Stimulus – While the Stimulus spending failed to positively impact the economy in the medium to long run, it had a short term simulative effect.  That effect is now winding down and given the current deficits, it is unlikely Congress will approve similar deficit spending.  This will be a contractive force on the economy.

State and Municipal Government Cutbacks – The prolonged economic downturn has significantly reduced tax revenues for states and municipalities.  This is forcing them to reduce expenses leading to increased unemployment of governmental employees; again a contractive force.


The underlining cause of the lengthy economic downturn is excessive debt.  In the private sector this debt became excessive by a combination of miscues that included:

  • The U.S. government intervening in the housing market, promoting home ownership without regard for a buyer’s ability to afford a home.  This creeping intervention started in 1977 with the Community Reinvestment Act.  It continued with the government changing the charters of Fannie Mae and Freddie Mac from lending to social engineering.   When housing prices declined, this made a huge number of home owners underwater causing many to walk away from their mortgages, further placing downward pressure on housing values, the largest asset in most households.
  • The credit markets were distorted by the U.S. government’s promoting artificially low interest rates.  This cheap money helped create bubbles that popped, with the largest one being the housing market.  Each time a bubble popped or the economy headed for a downturn, the government and Fed went back to the same old elixir; lowering lending rates.  These interventions and cheap money stopped the economy from rebalancing supply and demand for an extended period and ultimately led to even larger bubbles.  Supply and demand remains out of balance in many sectors of the economy, a major reason for the length of this downturn.
  • The low interest polices meant savers received very low returns for safe investments.  That led to riskier investment behavior as investors searched for improvements on the meager returns.  This also led to a great pool of finds eager to invest in the CDO’s (Collateralized Debt Obligations) offered by the large investment banks.  These CDO’s fed the housing bubble.  Eager lenders make bad decisions and lost billions when the housing market collapsed.  Investment banks including Lehman failed and other banks required government bailouts to survive.

The excessive debt in the private sector was never allowed to unwind by the painful, but necessary, controls in free market; supply and demand.  Instead, the government moved the private sector’s debt to the public’s (taxpayers) balance sheet through bailouts and other interventions.  As a result, the markets have not rebalanced.  In addition, the government intervened in the employment market, for example, by increasing unemployment benefits.  This kept the cost of employment at a level not sustainable in the weaker economy.  Finally, the government intervened once again in the housing market by offering tax credits to buyers last year and this year slowing down the foreclosures process.

While the government’s interventions can be sold to the public as seemingly being humanitarian on their face, they actually are not.  These programs do not create real wealth or economic growth.  The interventions will only prolong the downturn and make the Country as a whole poorer.  Ultimately the markets will have their way as they always do.  It is this reality that the Obama Administration’s economic team either does not understand or chooses to ignore.  It is this reality that resulted in the dismal employment figures long after the recession supposedly ended.

This posting focuses on the failed economic policies of the Obama team and the Left since they control the White House, Senate, and controlled the Congress until earlier this year.  However, the Bush Administration and Right are not blameless.  It was George W. Bush and the Republican Congress that approved the initial and ill-advised bailouts of the large banks.  They also ran deficits that while meager Obama standards, set a tone for spending the next generation’s money.

Currently, the Republicans have rightfully pushed back on government spending and the ongoing debate on increasing the debt ceiling.  However, they have been silent on the effects on the economy should the belt-tightening polices be implemented.  While the Country must cut its spending to remain solvent, in the short-term these policies are contractive and will lead to pain for the Country as a whole.  In keeping with Washington’s lame view that the American people are too dumb to hear the truth, the Republicans tell just half the storey.

Economic problems caused by excessive debt cannot be resolved with still more debt no more than a drug addiction can be cured with more of the drugs.  American society as a whole benefited from the orgy of deficit spending and related ill-advised economic policies of the past two decades.  American society as a whole will need to be part of the solution and share in the pain required to rebalance supply and demand.  In a democracy, this means solutions that are not totally palatable to any one group or party.

Any workable solution to America’s complex and huge debt problems will require solutions of simplicity to keep special interests from attempting to protect their own at the expense of others.  An example of such simplicity is a balanced budget agreement to insure that the knuckleheads in Washington can never again create this type of fiscal mess.  Another example is a simplified tax code that lowers aggregate tax rates, but eliminates all loopholes and deductions to insure that the knuckleheads in Washington cannot pick winners and losers through the tax code.

Finally, a combination of substantial spending cuts and some revenue increases will be required, with much greater emphasis placed on spending cuts.  This, coupled with the simplified tax code and balanced budget, will insure that America’s fiscal house will be brought back into order.

It is no longer a question as to if austerity will be brought to America to fix its fiscal house.  The only question is whether it will be implemented by a plan that the People create or one that is forced on the Country by the unforgiving hand of the bond markets.

The video below brings the to dismal science of economics into the modern tone of rap.   Much more interesting than this Post’s modest attempts at putting the economic choices into perspective.

Posted in Debt, Deficits, economics | 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 »