Thursday, December 5, 2013

Housing Cause Denialist in Chief

Peter Wallison opines that the new (non) filibuster rule in the Senate is going to allow the installation of a man who was a chief culprit in creating the housing bubble to be confirmed as Fannie Mae and Freddie Mac's regulator, with all too predictable results;
Enter Mr. [Congressman Mel] Watt. The North Carolina congressman is a consistent, long-time supporter of affordable-housing quotas. He joined Barney Frank in 2003 to block the Bush administration's attempt that year to increase government oversight of Fannie and Freddie. And in 2007 he cosponsored legislation that would have pushed the two GSEs even deeper into the subprime mess. One can be sure that there will be many low-quality mortgages approved by Fannie and Freddie on his watch.
In August, the six financial regulatory agencies that Dodd-Frank directed to define a high-quality mortgage (the Federal Reserve, Comptroller of the Currency, Federal Deposit Insurance Corporation, Securities and Exchange Commission, FHFA and HUD) reported that they're quite happy with the CFPB's minimum-quality loan. Despite the mandate in Dodd-Frank, they decided not to propose a high-quality mortgage.
The six agencies reported that mortgages that met the CFPB's low standards between 2005 and 2008 had a default rate of 23%. Incredibly, they were still OK with that. Why? We are "concerned," they said, "about the prospect of imposing further constraints on mortgage credit availability at this time, especially as such constraints might disproportionately affect groups that have historically been disadvantaged in the mortgage market, such as lower-income, minority, or first-time home buyers."
As we gaze into the open credit box the financial regulators have set before us, is there any doubt where the housing market is headed?
As those old enough to remember the days of the double-feature would say, 'This is where we came in.' Wallison reminds us;
Just before the crisis, 58% of all U.S. mortgages—32 million loans—were subprime or otherwise weak. Of these, 24 million, or 76%, were on the books of government agencies, primarily Fannie Mae and Freddie Mac. This shows incontrovertibly that the government itself was the source of the demand for these low-quality loans.
Before Alicia Munnell and her colleagues launched the ship of Redlining, the American home loan industry was one of the soundest in the world. Under the rubric of increasing home ownership for those 'underserved' that changed, beginning in 1992. Fannie and Freddie had to buy weaker loans by congressional mandate, and the standards of the industry declined.

Paul Krugman has done his best to deny it, but that denial doesn't make it so.

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