By this time, everyone should be aware of the federal policies that precipitated the housing bubble and its collapse — the push by Congress and two administrations to push higher-risk lending in order to expand home ownership, as well as the effort by Congress to get Fannie Mae and Freddie Mac to spread that risk through mortgage-backed securities. While Wall Street made the situation worse by developing risky derivatives on those securities and failed to recognize the risk inherent in the securities themselves, the collapse wouldn’t have occurred at all had the federal government not intervened to distort lending for their own social-engineering goals.
Michael Bloomberg tried to explain that to Occupy Wall Street protesters this morning, and pointed out the contradiction between their protests and their demands:
“I hear your complaints,” Bloomberg said. “Some of them are totally unfounded. It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp. Now, I’m not saying I’m sure that was terrible policy, because a lot of those people who got homes still have them and they wouldn’t gave gotten them without that.
“But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and congress certainly isn’t going to blame themselves. At the same time, Congress is trying to pressure banks to loosen their lending standards to make more loans. This is exactly the same speech they criticized them for.”
Bloomberg went on to say it’s “cathartic” and “entertaining” to blame people, but the important thing now is to fix the problem.
It’s even more important to not make the same mistake again, which is exactly what the OWS crowd wants. They want Congress to intervene even more heavily to lower lending standards as a policy of “fairness,” which is exactly what Congress did in the late 1990s, and which started the housing bubble that nearly destroyed the financial sector in 2008. And Investors Business Daily claims that they have the “smoking gun” that shows exactly how the government created the bubble in the first place by intimidating banks into distorted lending practices — based on a flawed study:
At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.
The threat was codified in a 20-page “Policy Statement on Discrimination in Lending” and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.
The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies. …
The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.
It took private analysts, as well as at least one FDIC economist, little time to determine the Boston Fed study was terminally flawed. In addition to finding embarrassing mistakes in the data, they concluded that more relevant measures of a borrower’s credit history — such as past delinquencies and whether the borrower met lenders credit standards — explained the gap in lending between whites and blacks, who on average had poorer credit and higher defaults.
The study did not take into account a host of other relevant data factoring into denials, including applicants’ net worth, debt burden and employment record. Other variables, such as the size of down payments and the amount of the loans sought to the value of the property being bought, also were left out of the analysis. It also failed to consider whether the borrower submitted information that could not be verified, the presence of a cosigner and even the loan amount.
When these missing data were factored in, it became clear that the rejection rates were based on legitimate business decisions, not racism.
Lenders faced a nightmare regulatory threat and so began to “bend” their lending standards to demonstrate compliance. Congress helped by authorizing Fannie and Freddie to buy up subprime mortgages at a higher rate in order to incentivize compliance. That opened the floodgates, as Fannie and Freddie essentially ended any risk for lenders in the subprime market, and it also opened up a significant incentive for so-called “predatory lending.” After all, why not give consumers more credit than they could handle if the original lender didn’t have to bear the cost of failure?
As a result, demand accelerated, and so did prices. They got disconnected from their usual tie to the rate of inflation, soaring far above normal valuation. People believed they had acquired a windfall of real equity and began either trading up or opening up home-equity lines of credit to fuel consumer spending. In 2008 the bubble popped, and a lot of homeowners found themselves unable to make their payments as jobs disappeared and property values rapidly descended.
And that may not be over, either:
The besieged housing market has even further to fall before home prices really hit rock bottom.
According to Fiserv (FISV – News), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.
Several factors will be working against the housing market in the upcoming months, including an increase in foreclosure activity and sustained high unemployment, explained David Stiff, Fiserv’s chief economist.
Should home values meet Fiserv’s expectations, it would make it the third (and lowest) trough for home prices since the housing bubble burst.
In June I also made the same observation, based on projecting normal inflation without the bubble from 1998 onward. Rapid job growth could change that, but since we don’t see any indication of that on the horizon, CNN Money’s prediction is likely to come true.