Friday, October 17, 2014

Anatomy of the next train wreck

They who forget their history, are bound to be bullied into repeating it by the next politician who comes along;
Fannie Mae , Freddie Mac and mortgage lenders are nearing an agreement that could lower barriers and restrictions on borrowers with weak credit, a move that would expand access to home loans amid the sluggish housing recovery.
Which worked out soooooo well, the last time.
The move by the mortgage-finance giants and their regulator, the Federal Housing Finance Agency, would help lenders protect themselves from claims of making bad loans, according to people familiar with the matter.
Well, we couldn't have anyone blamed for doing something that, the last time it was tried, nearly destroyed the economies of numerous nations. Someone's feelings might get hurt.
In previous years, Fannie’s and Freddie’s regulator had tried to shrink their outsize role in the mortgage market. However, under new director Mel Watt, who took office in January, the FHFA has turned to expanding mortgage access, partly to ensure that tight credit doesn’t stifle the housing recovery.
That's the same former congressman Mel Watt who Republicans objected to being named to head the agency, because they feared exactly this kind of thing.
“He is a good man up for the wrong job,” Sen. Lamar Alexander (R-Tenn.) said.
Said Senate Minority Leader Mitch McConnell (R-Ky.): “America needs someone with technical expertise and experience to run Fannie and Freddie's conservator and ensure that we don’t repeat the same mistakes that led to the last financial crisis. And taxpayers need someone who will protect against future bailouts. This is the second FHFA nominee that President Obama has sent who did not meet those standards."
And, how did Watt get confirmed when the Democrats didn't have the 60 votes necessary to overcome the Republicans threat to filibuster his nomination?  They changed the rules, that's how;
In October, Watt failed to clear a 60-vote threshold necessary for his nomination to advance. But a recent controversial Senate rule change, which requires only a simple majority vote to get around procedural hurdles, cleared the way for Watt’s confirmation.
This is where we came in;
It is the thesis of this paper that, in an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s. The decline in mortgage underwriting standards was universally praised as an 'innovation' in mortgage lending by regulators, academic specialists, GSEs, and housing activists. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The bubble increased the number of housing speculators with estimates indicating that one quarter of all home sales were speculative sales prior to the bubble bursting.
And when that bubble burst....

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