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Posts Tagged ‘Mortgage’

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.

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

FHA Could Face Huge Losses

Posted by Steve Markowitz on June 4, 2013

The Wall Street Journal reported on the potential for massive losses at the Federal Housing Administration (FHA).  According to the Journal, under an extreme economic scenario the FHA could lose $115 billion over 30 years requiring substantial taxpayer funding.

The $115 billion potential loss figure emanated from a new stress test used to determine risk of FHA loans using an analysis employed by the Federal Reserve board instead of an independent actuarial review previously used.  This more realistic test nearly doubled the potential loss figure.

In addition, the FHA attempted to hide the potential losses from Congress and taxpayers.  The House Oversight and Government Reform Committee asked the agency why it had not disclosed the use loss figure.  This came on the heels of FHA internal documents suggesting that the potential loss be hidden from the public and Congress.

There are troubling aspects of this potential loss for the FHA.  First, in its first 79 years the FHA never required taxpayer support.  In addition, this is yet another example of a government or government backed agency’ lack of transparency with the People who they are supposed to be working for.

Posted in Government Ineptness, Government Waste | Tagged: , , , , | Leave a Comment »

France’s Overheated Housing Market

Posted by Steve Markowitz on April 6, 2011

On April 1, this Blog posted an article titled “Canada’s Housing Bubble” that reviewed that country’s too rapidly appreciating housing values.  Fitting of the world market, Canada is not the only country showing signs of a housing bubble.  France is experiencing an overheated housing market with the Wall Street Journal reporting the following:

  • The average prices for French homes increased by about 9% in 2010.
  • In Paris, prices have appreciated 18% in 2010.
  • Fixed-rate mortgage lending increased by 73% this February, compared to last year.

One reason for the propped up housing market is the low mortgage rate available to French buyers, 3.5% compared to 6.5% in late 2008.  With the U.S. dollar being the world’s reserve currency, the Fed’s low rate policy is exported worldwide.

But there is another, more troubling reason behind the overheated French housing market.  In 2009, France enacted a law to stimulate this market with a significant tax incentive for buyers.  This sounds early similar to the U.S. government’s meddling in our housing market by cajoling Fannie Mae and Freddie Mac to make mortgages to those that couldn’t afford them.

It is tempting to excuse France’s meddling in its housing market as merely overzealous Progressives who just do not understand the laws of supply and demand.  That, however, infers that the French government and bankers do not understand the causes of America’s housing bubble and its subsequent popping.  That would be a naïve conclusion.

The reasons behind Frances meddling in its housing market are more nefarious and similar to those behind America’s similar folly.  Western countries without significant energy exports are growing poorer, decreasing their middle classes’ purchasing power.  In an effort to offset this reality, central banks have allowed asset bubbles to grow in order to created illusions of wealth, thereby delaying the readjustment in their societies’ lifestyles.

In addition, there are cozy relationships between the political elites and large banks worldwide.  This is driven home by the fact that not one person or company has been criminally charged in the United States for their roles in the investment banks meltdown/ sub-prime mortgage mess.  It is likely that the bubbles being created in France’s housing market and other areas will make the same elites more money before popping.

Posted in Uncategorized | Tagged: , , , , , , , , | Leave a Comment »

The Flawed Housing Data

Posted by Steve Markowitz on March 25, 2011

It is well-known that the housing market has been in the doldrums for about three years. However, the depth of the downturn may be understated by the National Association of Realtors whose figures are relied on for determining total sales of existing and new homes.

MSNBC has reports that the National Association of Realtors (NAR) figures are being questioned by some economists who believe the figures are being overstated by about 20 percent.  NAR has conceded that their figures are prone to upward drift, even though they still indicated that sales of existing homes dropped by 10 percent in February and new home sales dropping to its  lowest levels in fifty years.

While NAR calculates that the unsold home inventory in the U.S. to be at about a 9 month supply, economists who track mortgage data believe this number to actually be about a 17 months’ supply.  Therefore, the downward pressure on housing values continues, which will result in more home owners seeing the value of their homes dropping below what they owe on the properties.  That will lead to still more foreclosures, as well as people walking away from their mortgage obligations.

The downward spiral in the housing market continues unabated, irrespective of all of the government’s efforts to prop up the market, which included last year’s tax rebates for home buyers.  In fact it is likely that the government’s intervention in the housing market has prolonged the downturn.  These efforts have focused on keeping home prices from falling, which actually stifles demand for homes.

The housing market is weak because supply and demand are out of balance.  There are too many homes on the market with too few buyers.  This oversupply leads to dropping values, a process that will continue until prices are low enough to attract more buyers.  Had the government stayed out of the market; i.e. did not offer the tax credit and did not hinder banks from foreclosing on non-performing mortgages, housing values would have initially dropped quicker.  However, home prices would also have reached their bottom quicker, a requirement for the housing market to come out of recession..

 

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

Mortgage Rates Spiking Up

Posted by Steve Markowitz on December 17, 2010

On December 15 we posted an article titled “World Bond Markets Indicate that Governmental Intervention Failing” that reviewed a troubling sign for the economy in rising bond prices.  These prices are on the upswing even though the U.S. government began renewed buying of Treasury bonds with printed money through quantitative easy.  In theory, the increase in demand created by the government’s purchases should have lowered their yield.  However, just the opposite occurred with yields spiking upward lowering the value of the bonds.

Today’s Wall Street Journal offered more evidence that the government’s intervention into the Treasury market has led to the unintended consequence of increasing bond yields and higher mortgage rates.  The 30-year fixed-rate mortgage Thursday reached a six-month high of 5.09%.  A Freddie Mac survey showed that mortgage rates increased by over .66% in just one month, s a huge jump for such a short period.  Closely related to mortgage rates, the 10-year Treasury bonds increased in the past two months from 2.38% to 3.47%.

Rising mortgage rates are problematic for the housing market.  As rates increase, houses become less affordable, lowering demand for them.  This leads to lower house values.  But this is not the only problem caused by the increasing Treasury rates.  As Treasury bond rates go up, they not only increase the cost of borrowing for the federal government, but also for municipalities and ultimately corporations.

There are more forces a work in the economy than governmental decisions/interventions.  It was the unintended consequences of cheap mortgages that led to the housing bubble and subsequent meltdown.  The consequences of the current governmental meddling are yet known.  But that does not make them any less hazardous than its previous meddling.

 

Posted in economics, Governmental Intervention | Tagged: , , , , , | 2 Comments »

Ireland Bailout – World Continues with Failed Policies

Posted by Steve Markowitz on November 24, 2010

Bailout Nation

Just two short years ago the world went into financial shock.  Washington politicos and the Federal Reserve took full advantage of the crisis claiming that we were heading for financial Armageddon without draconian intervention by the same folks yelling “fire”.  The tactic worked well, scaring the People into allowing the knuckleheads who caused the financial meltdown in the first place to make radical interventions into the economy that under more rational times would not have acceptable.

When questioned about the rationale behind the radical policies interventionists inevitably claim that without them our financial situation be much worse.  What a marvelous argument given it can neither be proved nor disproved.  While we cannot say with certainty what would have happened without the governmental interventions into the economy, we can see the negative consequences of these actions.

Since early in the financial crisis the plan prompted by the government has been bailouts of various kinds.  When People asked why certain individuals and entities deserved bailouts at the expense of others, the answer was inevitably “for the greater good”.  History shows that claim false.

Early bailouts started with companies, including banks through TARP.  This intervention has not worked as it was promised.  Banks continue to fail with 149 failures for the first ten and a half months of 2010.  Banks are not making loans to small businesses and others for a variety of reasons including tougher governmental capital requirements and their bad loan portfolios.  Bank lending will not increase until the bad loans are written off and this is being slowed by still other governmental interventions, such as attempting to keep housing prices from seeking their natural and lower levels.  This slows down the necessary economic cleansing process, but does not stop it from occurring, thereby extending the time period of the downward pressure.

Other interventions included the investment banks.  While the government allowed Lehman Brothers to fail, its bailout of AIG propped up other banks including Goldman Sachs (GS).  Just a year after the meltdown GS reported record profits, making $13.4 billion in 2009.  In addition, governmental actions made the remaining banks like GS, who were supposedly too big to fail before the crisis, even bigger.  Bizarre!

The government sold the People on the need to bail out General Motors and Chrysler; two poorly managed and failed automobile companies.  These bailouts have not saved any jobs, merely giving government favors (i.e. taxpayer money) to northern automobile manufacturers, favoring them over companies who build better cars more efficiently south of the Mason-Dixon Line.  Just recently it was reported that even after the $50 billion bailout, GM has a $45 billion tax loss carry-forward.  This means GM is likely not to pay any corporate income taxes for decades.  Yes, this bailout just keeps on taking.

Like addictive drugs, once bailouts start, companies continue to require them.  To satisfy this economic habit, the government got creative with programs like Cash for Clunkers and appliance rebates.  While on the surface they looked like consumer oriented programs, they were nothing more than a second round of corporate bailouts for selected companies.  These bailouts only offered short-term boosts to these companies at the expense of future sales and thus did not create any real economic growth.

Like any good drug pusher, the government expanded the bailout programs to include as many individuals as possible.  For example it increased unemployment benefits to last 99 weeks.  These extended benefits are running out and high unemployment remains.  Now the government is faced with a Sophie’s choice: extend the benefits almost indefinitely, something the Country cannot afford, or make people search for lower-paying jobs after promising them economic improvement with their various interventions.

Other programs that fall within the broad definition of bailouts include the government’s interventions into the housing market.  First, they made it public policy to get people who couldn’t afford mortgages to buy homes.  This created a bubble in home prices that ultimately popped, leading to a downward spiral of housing values.  In an effort to keep housing prices artificially high, the goventment then created programs to help consumers remain in homes whose values are already underwater.  These bailouts have robbed consumer sending from other parts of the market, another example of favoring one part of the market over parts.  In addition, it has artificially kept home values above what they should be, which has stopped investors from entering the housing market; one reason the downwards spiral has lagged on.

These are but examples of the governmental bailouts.  One additional one needs to be reviewed to show the failure of this bailout approach: the Stimulus Package.  This $800+ billion spending program was nothing more than a broad-brushed bailout.  When it was promoted in early 2009, we were told that this program would keep the unemployment rate from reaching 8%.  The Program did not and unemployment reached 10% and remains near that level today.  More to the point, had the Stimulus bailout worked, the economy would be growing today.  But it is not in any meaningful way.

It is clear that the bailouts have failed.  While revisionists can evade this reality by claiming the economy would have been worse with the bailouts, that dog no longer hunts given history.  With the failure of bailouts, reasonably minds would conclude that another approach is required to achieve better results.  However, politicians and bureaucrats are focused on retaining power and maintaining their jobs that often leads to less logical motivations.  Instead of learning from the lessons of the failed bailouts, governments worldwide are doubling down on the bet, moving from bailouts of individuals and companies to bailing out countries thereby creating the sovereign debt crisis now making headlines.

Bailout World

Bailouts by countries running deficits (which includes nearly all today) means moving debt from the private sector to the public sector.  When the United States bailed out General Motors, we barrowed money to do so thereby adding a liability to the Country’s balance sheet.  But there is no alchemy here.  Sooner or later the debt needs to be paid back.  If a country’s debt grows to the point where lenders believe they can no longer pay it back, then what may have started as private debt problems becomes a larger sovereign debt problem requiring even larger and more complicated bailouts.  This escalated sovereign bailouts already begun in Greece and Ireland.

Last May Greece became the first Western country to unravel due to excessive debt, requiring a bailout of about $145 billion from the European Union (EU).  Riots have since occurred as the Greeks fight the austerity measures required to pay down the debt.  In addition the Greek government is having difficulty meeting terms it agreed to when it received the bailout.

While the Greek crisis was unfolding last May, the currency of the EU, the Euro tanked and there was talk as to whether the EU could survive.  With the implementation of the Greek bailout, things settled down with the Euro recovering and the crisis mentality in the financial markets waned.  But that respite was short lived; Ireland was the next shoe to drop.

Ireland recently asked for a bailout from its financial mess.  This country will receive over $100 billion from the EU and International Monetary Fund.  In return, Ireland has also had to agree to implement austerity measures that include $20 billion in spending cuts and tax increases, as well as cutting 25,000 public sector jobs and lowering public employee wages.

Irish Prime Minister Brian Cowen said after announcing the cuts: “It’s time for us to confront this challenge and do so in a united way.”  Reasonable words for a country on the brink.  However, it begs the question as to why Ireland, and Greece before it, let the problems grow to the point where the countries became insolvent?

Undoubtedly Ireland will receive its financial bailout.  However, that will not end this every growing debt crisis.  It merely kicks the can down the round in keeping with the approach that has taken the world down this unsavory path.  Other European countries are likely to require bailouts also, including Portugal and Spain in the near future.  Where will the money come from to bail out these additional countries?  It will of course need to be barrowed thereby kicking the can once more in hope that we have finally invented economic perpetual motion.

The United States has also taken massive amounts of private debt and moved it on to the Country’s balance sheet.  These bailouts have been nothing more than attempts to create wealth by printing money.  It has been tried many times by different countries throughout history, but has never turned out well.

There is a lesson America needs to take from the goings on in Europe.  Our attempts at creating wealth from debt will fail.  We will either address the debt issues on our terms or have terms dictated to us by those who own our debt, the same folks we are counting on to continue loaning us money in the future.  Neither outcome will be painless.  However, addressing this problem proactively will involve significantly less pain in the long-run.

 

Posted in Bailouts | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , | 3 Comments »