Stop Insuring Mortgages

The folly of government intervention in the housing market

The Federal Housing Administration announced this week that it wants tougher rules on mortgage lenders. It's about time.

Maybe FHA got spooked by the recent New York Times story titled "Easy Loans to Wealthier Areas," which said: "In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default."

The Times explained that San Francisco, one of the priciest real estate markets in the country, had no government-insured mortgages two years ago, but now "the government is guaranteeing an average of six mortgages a week here. ... The Federal Housing Administration is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling."

And some of those loans are surely questionable.

The Times explains that 27-year-old Mike Rowland and his friends were able to buy a two-unit apartment building for almost a million dollars. "They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary."

"It was kind of crazy we could get this big a loan," Rowland said.

Yes, it was crazy. Such policies do not end well. Young Rowland gets that. Even the Times does: "With government finances already under great strain, the policy expansions are creating new risks for American taxpayers."

But our leaders plunge ahead, with your money. Has the administration forgotten that today's financial mess was precipitated in part by government's moves to encourage mortgage lending to unqualified or at best unproven borrowers? In the 1990s, the Federal Reserve Bank of Boston, concerned that blacks and Hispanics were "underserved," issued guidelines to banks stating: "Policies regarding applicants with no credit history or problem credit history should be reviewed. Lack of credit history should not be seen as a negative factor...."

Soon, the lower standards spilled into the prime-mortgage market. The risk to lenders seemed small because government-sponsored Fannie Mae and Freddie Mac happily bought the dubious loans. An entire financial edifice was built on these securitized mortgages and derivatives based on them.

Then the good times ended. Interest rates rose. Home prices flattened and then declined. Then those AAA mortgage-backed securities became "toxic."

After all that, it's crazy that government still subsidizes housing rather than letting the market work. The economy will recover from recession only when it is allowed to discover the real value of assets like houses. But the government refuses to allow this to happen. FHA has been blowing air into another bubble, while other agencies do everything they can to boost prices.

This includes leaning on and bribing banks to ease mortgage terms for people in default. The Obama administration announced that it would increase that pressure because "the banks are not doing a good enough job," said Michael S. Barr, assistant treasury secretary for financial institutions. Some Democrats want to go further. They demand that the government compel mediation over defaulted mortgages or empower judges to change the terms.

This sounds humane, but it is typical political shortsightedness. When government helps delinquent borrowers to get easier loan terms, it simultaneously makes it harder for marginal borrowers to get loans in the first place. That's because lenders must now factor in the likelihood of a judge changing the terms.

The know-it-alls in Washington "help" Americans by hurting them.

Why won't the government let housing prices seek their own level? After a Washington-inflated bubble, that would seem to be the wise thing to do. Sure, some people get hurt when prices fall, but others—prospective home-buyers—are helped. By artificially raising prices, the Realtor-Construction-Banking-Big Government Complex cheats honest low-income people who would otherwise have been able to afford a first home without begging the government for help.

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  • Johnny Longtorso||

    Bank of America Corporation Q3 2008 Earnings Call Transcript

    http://seekingalpha.com/articl.....transcript

    ...We continue to see deterioration in our community reinvestment act portfolio which totals some 7% of the residential book. Additionally, California and Florida which combined comprise 42% of the legacy Bank of America balances drove 62% of the net losses through August.

    The annualized loss rate from the CRA book was 1.26% and represented 29% of the residential mortgage net losses. ...

    Federal Reserve Report on The Performance and Profitability of CRA-Related Lending

    http://www.banking.senate.gov/.....rb-cra.htm

    ...* By every measure, CRA loans are not as profitable as non-CRA loans.

    * No institution reported that CRA lending was more profitable than non-CRA lending for home mortgage, refinance, home improvement, or small business loans.

    * For home purchase and refinance lending, three times as many institutions reported their CRA-related loans not profitable as compared to non-CRA-related loans.

    * One out of three large institutions report that CRA lending in the home mortgage and refinance markets is not profitable.

    * Three times the value of CRA home improvement loans are not profitable as compared to non-CRA loans.

    * Delinquency rates for CRA loans in the home purchase and refinance market are twice that for non-CRA loans.

    * Among all institutions, about 40 percent of CRA special lending programs are not profitable. For large institutions, 58 percent report that their CRA special lending programs are not profitable. This is inconsistent with the safety and soundness requirements of CRA. ...

    ... Delinquency rates for CRA loans are twice that for non-CRA loans in the market for home purchase and refinance (1.57 percent v. 0.79 percent)....

  • Old Mexican||

    The Federal Housing Administration announced this week that it wants tougher rules on mortgage lenders.

    . . . Except for lending to Acorn members, of course . . .

  • Kevin||

    I don't think "tougher rules on mortgage lenders" translates to "tougher rules on borrowers."

  • Death Panelist||

    I'm beginning to suspect that if Stossel had his druthers, the government wouldn't do anything.

  • Beezard||

    I think in a general way he wants the federal government to only do what it's allowed to by the Constitution...it's a novel concept, I know...

  • Brian Trust||

    Nothing more than the original framers of the Constitution specified, at any rate.

  • Ratko||

    If the Constitution was obeyed "..the government wouldn't do anything."

    Well, not much of anything. Sentiments toward government in general, such as those expressed by Thomas Paine who wrote that:

    "SOME writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our happiness positively by uniting our affections, the latter negatively by restraining our vices. The one encourages intercourse, the other creates distinctions. The first is a patron, the last a punisher."

    - were common among the Founders and Framers, they weren't stupid men, and only stupid, or institutionalized people believe others can make better choices for themselves than themselves. So it's highly unlikely it was their intentions to give anything beyond the powers defined in the Constitution to government.

    It's sad how many Americans have already become fully institutionalized as a result of "entitlements" they were never entitled to receive in the first place. Now, just like their prison and mental institution equivalents, they will lie, cheat, commit crimes, whatever it takes to gain the sense of security they find in not having to make choices and be responsible for themselves.

    No government that cared about it's people could ever purposely do anything to so damaging to the mental health of so many just to expand it's powers.. No institutionalized individual with anything left resembling a conscience could ever drag so many healthy people to their destruction when they could just as easily get the free food, medical, dental and everything else they feel entitled to by simply getting themselves placed in a prison or mental asylum, dragging no one down but themselves.

    Healthy populations are the product of benevolent governments that generally don't "do anything."

    Difficult to see how a good end for society can result from any of this, for a malevolent government, however, it is ideal.

    By the way, efficient state of the art systems designed by experienced social engineers have little use for positions titled "death panelist." When the organism no longer has value simply shorten the period until it's expiration by injecting it with inexpensive neuron seizing chemicals and Viola! It's instantly converted into an easily managed and warehouse storage friendly form All without messy "death panels" or those selected for culling complaining they are "humans" or other similar "demented" nonsense.

  • ||

    No, he wants it to do what it does more efficiently than free markets;)

  • ||

    I don't think "tougher rules on mortgage lenders" translates to "tougher rules on borrowers."

    Think again. Higher standards for lenders means higher standards for borrowers.

  • ||

    Except for when Uncle Sam forces lenders to lend to people who can't pay them back.

  • Warty||

    Keep twirling your moustache, Stossel, you glibertarian bastard.

  • ||

    He's part of the Glib-Glam wing of libertarianism.

  • ||

    John Stossel doesn't understand much:

    http://en.wikipedia.org/wiki/Redlining

  • ||

    I'm pretty sure Stossel has heard of redlining, actually. It's pretty hard to not hear about it unless you live under a rock.

    But the government's efforts to lean on banks to ease loan terms and increase lending go WAY WAY beyond the CRA. The entire reason for the existance of FMAE and FMAC is to "promote homeownership". Not just for minorities, but for whites as well.

    Given that "housing starts" are so widely used as a leading economic indicator, promoting new home building has become a favored means for the government to stimulate (or simulate) economic growth.

  • ||

    John Stossel is colorblind, just like Stephen Colbert.

  • ||

    You ought to read the article more carefully:

    "History of the practice"

    "In 1935, the Federal Home Loan Bank Board (FHLBB) asked Home Owners' Loan Corporation (HOLC) to look at 239 cities and create "residential security maps" to indicate the level of security for real-estate investments in each surveyed city. Such maps defined many minority neighborhoods in cities as ineligible to receive financing. The maps were based on assumptions about the community, not accurate assessments of an individual's or household's ability to satisfy standard lending criteria."

    Key Points:
    1) The FEDERAL GOVERNMENT initiated the practice of redlining, not those greedy, racist, capitalist lenders
    2) The redlined districts were NOT based on "accurate assessments of ability to satisfy standard lending criteria"

    "Retail"

    "Retail redlining is a spatially discriminatory practice among retailers, of not serving certain areas, based on their ethnic-minority composition, rather than on economic criteria, such as the potential profitability of operating in those areas."

    Key Point: "based on their ethnic-minority composition, rather than on economic criteria"

    "Credit Cards"

    "Credit card redlining is a spatially discriminatory practice among credit card issuers, of providing different amounts of credit to different areas, based on their ethnic-minority composition, rather than on economic criteria, such as the potential profitability of operating in those areas."

    Key Point: "based on their ethnic-minority composition, rather than on economic criteria"

    So tell me, how is pressuring lenders to ignore standard lending criteria going to alleviate this practice, when the practice has nothing to do with standard lending criteria?

    Looks like you're the one who "doesn't understand much".

  • Colonel_Angus||

    "tougher rules on mortgage lenders" also translates to more statism. Who thinks the tougher rules won't include more protection and subsidy for deadbeat "homeowners"?

  • T||

    You mean it's not the federal government's business whether or not I get a home loan? Or whether or not I pay that loan back? Shocking. Next you'll try to tell me Congress is limited by some piece of paper.

  • Fluffy||

    The CRA story is a gigantic red herring designed to steer blame away from where it rightly belongs: with the Federal Reserve's monetary policy and with the Bush administration's fiscal policy.

    The only data point that means anything is the foreclosure rate data from the bubble years. Following the Fed's post-9/11 rate cuts and the Bush administration's blow out of the deficit, foreclosure rates fell to history-making lows, and continued to decline every year. In that environment, lending standards were going to be catastrophically weakened system-wide, and CRA rules had absolutely nothing to do with it.

  • ||

    Fluffy, it's true the Fed is the elephant in the room, and if you pulled the plug on fiat interest/currency the problem would be solved. But CRA was a major factor. You can think of CRA/FNMA/FNMC policy as deliberately weakening a section of the baloon in order to profit thereby.

    The Fed of course was blowing into the baloon, but the particular hernia in the baloon was created in a specific place deliberately.

    In any case I think John understands all this. I do wish people would talk more about the Feds primary role.

    Because we're doing it more and on steroids now.

  • Fluffy||

    Oh, and when they say "Tougher rules for mortgage lenders" what they really MEAN is:

    "The state is going to micromanage who can and cannot be approved for a mortgage, so that lending standards won't be loosened even if us statists decide to create bubble conditions all over again!"

    Because that's what's really being argued here: that if the Federal Reserve creates bubbles with loose monetary policy, and if the federal government overstimulates the economy with massive deficit spending, the solution isn't to fix either of those things, but to pass regulations designed to try to stop people from speculating based on those macroeconomic facts. Because the problem is those damn speculators, and not the statists. Always.

  • ||

    Right, like if we fix prices for something, and people stop producing those goods as a result, the problem is those greedy producers, always wanting to make a profit, and not the idiot government, fixing the prices.

    In fact, it's pretty much exactly the same problem only in reverse. Sort of a credit version of the government fixing prices too high and causing overproduction of something. In this case houses.

  • ||

    "The state is going to micromanage who can and cannot be approved for a mortgage, so that lending standards won't be loosened even if us statists decide to create bubble conditions all over again!"
    Unless you know, conditions change and looser lending standards are judged appropriate. Meet the new crisis, same as the old crisis.

  • ||

    "The state is going to micromanage who can and cannot be approved for a mortgage, so that lending standards won't be loosened even if us statists decide to create bubble conditions all over again!"
    Unless you know, conditions change and looser lending standards are judged appropriate. Meet the new crisis, same as the old crisis.

  • ||

    "The state is going to micromanage who can and cannot be approved for a mortgage, so that lending standards won't be loosened even if us statists decide to create bubble conditions all over again!"
    Unless you know, conditions change and looser lending standards are judged appropriate. Meet the new crisis, same as the old crisis.

  • Johnny Longtorso||

    The only data point that means anything is the foreclosure rate data from the bubble years.

    High CRA default rates when a bubble (NASDAQ in 2000, housing in 2008) pops shows the CRA, in addition to low interest rates and "smart growth" policies, contributed to the bubble.

    The bubble masked default rates since you don't default on a loan when you can sell the underlying asset for a large profit.

  • Colonel_Angus||

    CRA was a minor contributor to the problem, manipulating lenders to extend credit to people who shouldn't be taking out loans.

  • Evil Banker||

    The mortgage tentacles were wrapped around all financial institutions in some way.

    Thornburg Mortgage, the premier jumbo prime mortgage REIT, declared bankruptcy in 2008 with a portfolio of privately financed high-end real estate.

    Bad risk assessment and poor capital planning/ratios were the downfall of the industry.

    But you won't see Stossel writing a column on how Lehman and Bear failed - because he can't blame government.

  • ||

    I can't speak for Stossel but I don't have a problem with Lehman and Bear failing, just with them being bailed out.

    If the investments they made went bad they deserved to fail.

    That's what's great about the market. It tells the fuckups when they've fucked up.

  • Evil Banker||

    And those failures would have been fine in isolation but they were obligated for over $1 trillion in counterparty payments (along with AIG and Merrill). LIBOR jumped to over 5% for three months and the system froze completely. Bank runs were in process - thus the $700 billion TARP package to provide temporary liquidity to the system.

    100 million depositors unable to retrieve funds will make even the most hardened free-market advocate like Paulson do that.

  • ||

    Ah, yes, because that Paulson is such a "hardened free-market advocate".

    Sometimes I think I only read Hit and Run for the comic relief provided by commenters like you.

  • ||

    "LIBOR jumped to over 5% for three months..."

    OH NOES!! Banks were charging 5% interest to lend to other banks?!?!

    I can see how the world nearly ended.

  • ||

    A large pct of mortgage rates are tied to the Libor rate. Also, if banks charge one another 5% for 90day funds, what do you think they will charge Joe Sixpack for 30 year home loans??

  • Jordan||

    If a private company fails, it's not news.

  • Chris||

    That's right ALL of these financial institutions should be allowed to fail. An economist friend of mine was a proponent of bailing companies out, he was concerned about the frozen credit market at the time. I was naive, so I agreed with him. Now I am firmly convinced that these bailouts were a huge mistake, we ended up rewarding mismanagement, and poor decisions (I am looking at you CitiBank).

  • ||

    because he can't blame government.

    Of course it was the government. The Fed priced risk way too low. Lehman and Bear had to compete in a hyperbolic bubble with institutions that were connected and would get bailed out.

    There was no irrationality. People were reacting entirely rationally given a massively distorted market.

  • ||

    CRA was a minor contributor to the problem, manipulating lenders to extend credit to people who shouldn't be taking out loans.

    The CRA was one of several govt initiatives pushing the housing market in the same direction, and you have "smart growth" policies and a bubblelicious interest rate on top of that.

  • Colonel_Angus||

    I would add tax credits, taxes should not be used to influence market decisions.

    Another factor, government threatening to impose regulations on lenders if they didn't "voluntarily" extend more credit.

  • ||

    Agreed. Mortgage deduction doesn't help.

  • Evil Banker||

    The CRA was one of several govt initiatives pushing the housing market in the same direction, and you have "smart growth" policies and a bubblelicious interest rate on top of that.

    Republicans always fail to mention the American Dream Downpayment Act - a 2003 Bush led program.

    "The American Dream Downpayment Act will provide a maximum downpayment assistance grant of either $10,000 or six percent of the purchase price of the home, whichever is greater. In addition, the Bush Administration is committed to reforming the homebuying process that would lower closing costs by approximately $700 per loan, further stimulating homeownership for all Americans."

    (HUD web site).

    The CRA is a tired excuse.

  • Chris||

    The reoccurring theme you should take away from this is this:

    Government involvement in the market ALWAYS creates problems. It does not matter whether someone with a parenthetical "R" or "D" behind his or her name is leading the parade.

  • Chris||

    ... and if you haven't noticed, there are not a whole lot of people who are fans of GW's fiscal policy either.

  • Chris||

    whole lot of people here

    that should read

  • ||

    Ah, yes, if you are not a Democrat, you must be a Republican.

  • ||

    Google Tu Quoque.

    Google Libertarian.

  • ||

    Republicans always fail to mention the American Dream Downpayment Act - a 2003 Bush led program.

    I'm not a Republican, and I'm perfectly happy to mention that program as one of the CRA-like initiatives that contributed heavily to the housing bubble.

    Support for idiocy like the CRA is a bipartisan issue.

  • Mary Stack||

    I can't take john Stossel seriously. He used taxpayer money to pay off his own mortgage. I don't care if he learned his lesson and did not rebuild.
    http://abcnews.go.com/Business.....y?id=94181

  • ReAnimator||

    I have to excuse him on this one. I think the majority of even the staunchest of libertarians would take that money after their house washed away if it was guaranteed by the government, even if they disagreed with using tax dollars to subsidize loss of private property.

  • Colonel_Angus||

    As long as the government is stealing my money from me, why shouldn't I (or Stossel) take advantage of ways to get it back?

  • Colonel_Angus||

    (@ Mary Stack)

  • Beezard||

    Generally, I think this is a regressive attitude, but I can't claim to be morally above reproach.

    A roommate of mine kept getting multi-thousand$ checks in the mail via FEMA because he was a Katrina refugee and had initially requested some specified amount. The checks kept coming, no questions asked. It was kind of scary, really.

    Of course, being a 20 something from New Orleans: he spent it on blow...and as his roommate I accidentally did a whole bunch (it was left on the dining room table and I slipped).

    Cocaine induced paranoia helped me convince him to put a stop to getting the checks, which is more than I can say for his friends back in NOLA. They called shamelessly called the checks their "FEMA babies"...probably still getting them.

    None of the money went to anything useful (like rent), and he was in jail a few months later. So thank the Federal Government for the $2500 coke orgy...

  • Colonel_Angus||

    Those of us who think government entitlement programs are wrong are far outnumbered by people who think its perfectly alright, or worse, people like Choad and Stephen D. who think I owe them directly. I'm not going to just let them walk all over me. I have the moral high ground.

    You won't get people to stop drinking the government tittymilk. The only way to stop it is to cut its tits off.

  • Mary Stack||

    As long as the John Stossel is stealing my money from me, I would prefer a check in the mail & a thank you card

  • ||

    In one of his books he expressed regret about being bailed out by taxpayers via govt. insurance after his house was flooded over. It was built at the worst possible location, if I recall correctly. His point was that there's no incentive to avoid mistakes like this if the government is willing to bail you out.

  • Mary Stack||

    Lee, I hate devil made me do it converts.
    The former smoker: ban smoking. The former fat person: ban junk food. the former "government encourages us to take it excuse guy" : you don't take it.

  • ||

    "Lee, I hate devil made me do it converts.
    The former smoker: ban smoking. The former fat person: ban junk food. the former "government encourages us to take it excuse guy" : you don't take it."

    What exactly is wrong with that? John Stossel used to be your typical "consumer" reporter that demonized businesses and called for stringent government regulation. Then he gradually discovered that the government actually hamper economic growth take away our freedom. He tunred libertarain after he finally saw the errors of his former ways.

  • Mary Stack||

    What exactly is wrong with that? It is the height of arrogance to have done all the shit you wanted to do and then turn around and say don't do it! Did he pay the money back? Hell no. Reminds me of George Washington freeing his slaves after he died. Contrition needs to proceed seeing the light. Btw, what the heck are you doing up at 3:52AM?

  • ||

    I'm changing my name to 'Pingback'. Not my user ID here, but my given name. It will make me the most popular guy on the internet.

  • Colonel_Angus||

    Every single one of the fucking pingbacks are to garbage bot sites.

  • ||

    Except for providing an avenue for dealing with fraud (by lenders, appraisers, borrowers, etc,), government has no business regulating shit in lending. I'm not even sure the safety and soundness regulations are worth the price, especially since private sector entities could handle the role of rating/certifying banks and lending institutions.

  • ||

    FOR THE LOVE OF ALL THAT IS HOLY, BLOCK THE STUPID "PINGBACK"!!!!

  • Ryan||

    I think it's really easy for people to forget that the government goes out of its way to make people dependent upon it. Those criminals who create and profit from the negative feedback loop are the ones who deserve our ire, not those who are unable to resist the carrot dangled in front of their nose. I've tried to discourage people from taking advantage of government programs, but they have children to feed, bills and taxes to pay.

    As time goes on, I'm becoming inclined to encourage people to take advantage of government giveaways: it's too late to stop and change course so the faster everything grinds to a halt and we are forced to reset, the better.

    If it lasts too long, we'll wind up like those poor people behind the iron curtain who had no institutional memory of self government by the time to Soviet Union collapsed. We still have law abiding entrepreneurs here, the only entrepreneurs in Eastern Europe were well established on the dodgy path by the time they were able to ply their trades openly. There was little incentive for them to turn away from crime: the black market was still more profitable and their exposure to risk was greatly diminished.

  • Fiscal Meth||

    Seems like quite a few people think Stossel is a glibertarian. What does that mean? Me too I guess. I agree with almost every word that escapes that mustache.

    This message was intended to be read in "Stossel-voice"

  • Mike||

    Its not just loan guarantees that are the problem. Subsidizing low interest rates is a big problem, along with non safety zoning. The result was absurd prices, and de facto debt slavery for life for the median person.

    Let the free market work in housing. Let the market set interest rates, set loan standards, and determine what is built with no interference.

  • Tony||

    It's good to see FHA working hard to make the situation better. Lenders sometimes don't do a great job, that's why rules must be made

  • ||

    Relax. The government is there to do just this kind of thing, redistribute wealth and risk, and when we stop subsidizing energy we can stop subsidizing housing.

  • abercrombie milano||

    My only point is that if you take the Bible straight, as I'm sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won't get the full deal by just doing regular skill english reading for those books. In other words, there's more to the books of the Bible than most will ever grasp. I'm not concerned that Mr. Crumb will go to hell or anything crazy like that! It's just that he, like many types of religionists, seems to take it literally, take it straight...the Bible's books were not written by straight laced divinity students in 3 piece suits who white wash religious beliefs as if God made them with clothes on...the Bible's books were written by people with very different mindsets.

  • nike shox||

    is good

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    http://www.reversemortgagelend.....dvantages/
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