One thing I have learned over the years is that every decision has consequences. If I choose to spend my entire savings on a new car and then the air conditioner breaks, I have to live with the consequence of spending all my savings on the new car and will have to figure out a way to pay to fix my air conditioner. Unfortunately, those in elected office don’t seem to face the same consequences for their decisions.
Case in point: HUD quotas and government-sponsored agencies (GSEs). HUD quotas and GSEs drove the housing crisis. From The Financial Crisis on Trial (WSJ):
For the first time in a government report, the complaint has made it clear that the two government-sponsored enterprises (GSEs) played a major role in creating the demand for low-quality mortgages before the 2008 financial crisis. More importantly, the SEC is saying that Fannie and Freddieâ€”the largest buyers and securitizers of subprime and other low-quality mortgagesâ€”hid the size of their purchases from the market. Through these alleged acts of securities fraud, they did not just mislead investors; they deprived analysts, risk managers, rating agencies and even financial regulators of vital data about market risks that could have prevented the crisis.
The GSEs began acquiring large numbers of subprime and other low-quality loans in the mid-1990s, as they tried to comply with the government’s affordable-housing requirementsâ€”quotas for mortgage purchases imposed by the Department of Housing and Urban Development (HUD) under legislation enacted by Congress in 1992.
These quotas initially required that, of all the loans bought by Fannie and Freddie in any year, 30% had to have been made to borrowers earning at or below the median income in their communities. The quotas, however, would increaseâ€”they rose to 40% in 1996, 50% in 2000, and 55% in 2007. HUD also added and raised quotas for “special affordable” loans that were to be made to borrowers with low or very low incomes (in some cases a mere 60% of the area median income).
In other words, the government essentially created the demand for subprime mortgages and then when everything imploded, they hauled in all the evil bankers for questioning. This is typical.
Please note that I am not taking the bankers’ side on this. I am not saying that bankers and loan originators were not greedy. What I am saying is that HUD’s desire for affordable housing was the match that lit the fire.
Foreclosures are setting new records again, this time not in their overall numbers, but in the time it is taking for all of these properties to be processed through the legal system. The average loan in foreclosure has now been delinquent a record 631 days, according to a new report from Florida-based Lender Processing Services.
…we are now beginning to see the effects of ineffective loan modifications. Repeat foreclosures made up nearly 45 percent of new foreclosures in October. Of the 2.1 million modifications since the start of 2008 more than 10 percent were in foreclosure with another 27.4 percent delinquent 30 or more days, as of the end of the third quarter of this year, according to the Office of the Comptroller of the Currency.
This should not surprise any of us. I said a long time ago that these modifications were only going to stretch this crisis out. We should have allowed the market to take care of this mess for us. All the money and time spent modifying loans could have been used to give loans to qualified buyers to purchase foreclosure inventory. Instead, we directed money to help keep people in homes that they could not afford. It would be like me getting help on a loan for a $10 million mansion. As much as it hurts, we have to allow the housing market to capitulate. Prices drop enough, there will be buyers.
About 4 million homeowners who may have been improperly foreclosed upon in 2009 and 2010 are getting an opportunity to have their cases reviewed. Whether they will be reimbursed is up to the same lenders who are accused of moving too swiftly to seize their homes.
The Office of the Comptroller of the Currency said Monday that mortgage services will begin sending out letters this month that ask borrowers if they want their case reviewed.
The nation’s 14 largest mortgage servicers â€” including Citibank, Bank of America, JPMorgan Chase and Wells Fargo â€” were ordered to offer to review cases after the government found that some rushed the foreclosure process without carefully reviewing documents. Source: 4 million foreclosures subject to review
FOUR MILLION! That’s a large number. Piecing together stats for 2008 – 2010 via Google search, I was able to come up with roughly 10,000,000 foreclosure filings over those three years (Sources: 2008, 2009, and 2010). So, 4,000,000 reviews implies roughly 40% of all foreclosure filings. That’s a lot! How much is this going to cost? Who’s going to pay?
We ordered my wife one last weekend. Her other iPhone was the 3Gs and was well over 2-years old. I think she’ll be impressed with the new phone. We shall see.
Switching gears to the “Occupy” movement…
Here is an interesting piece in today’s WSJ by American Enterprise Institute’s Peter J. Wallison titled Wall Street’s Gullipble Occupiers, which echoes my thoughts regarding our government’s and politicians’ involvement in helping create the crisis.
Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.
It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.
Fannie and Freddie were not the only government-backed or government-controlled organizations that were enlisted in this process. The Federal Housing Administration was competing with Fannie and Freddie for the same mortgages. And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served.
That, my friends, is how the crisis got started. No, it wasn’t the entire cause but it did kick it off. I read something very similar in Thomas Sowell’s The Housing Boom and Bust: Revised Edition*, a must-read if you desire a different take on the creation of the housing crisis. Thomas Sowell does an excellent job and he uses about 1/4 of the book to list his sources.
All these different bailouts are getting old. Here’s the latest. The details are vague:
One proposal would allow millions of homeowners with government-backed mortgages to refinance them at todayâ€™s lower interest rates, about 4 percent, according to two people briefed on the administrationâ€™s discussions who asked not to be identified because they were not allowed to talk about the information.
…Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.
I almost think we would have been better off had we just allowed foreclosures to happen and let the housing market capitulate. I think all this government involvement has only made things worse by stretching out the inevitable.
The Mortgage Bankers Association said 12.87% of mortgage loans on one-to-four-unit homes were 30 days or longer past due or in the foreclosure process at the end of the second quarter, representing more than 6.3 million households. The second-quarter figure was down from 14.4% one year earlier but up from 12.84% at the end of March.
The figures offer the latest sign of how the slumping job market threatens to create new problems for the fragile housing market. The nation’s unemployment rate ended the quarter at 9.2% after beginning the period at 8.8%.
The uptick stems from an increase in newly delinquent borrowers. Nearly 4.8% of mortgage borrowers had missed two or fewer payments at the end of June on a seasonally adjusted basis, up from 4.7% at the end of March and 4.6% at the end of last year. Those are still down from year-ago levels of 5%. Indiana, Mississippi and West Virginia saw the biggest increases in new delinquencies.
The article doesn’t mention it but I wonder how many of these delinquencies are by people who previously received help.
I wish we could just get this mess behind us. We have to allow housing to hit bottom before the housing market (and the economy) can recover.