Government Is Encouraging Lax Lending Standards
The Obama Administration is prepared to do anything, including dramatically lowering mortgage lending standards, to keep real estate prices inflated, as demonstrated by statements, reports and events in the month of October.
First came the Federal Housing Authority inspector general's report [pdf] on the FHA's lender approval process, which found that FHA was missing or ignoring relevant information, failing to document loans, not preventing convicted financial criminals from participating in its lending program, and in most other ways failing to "ensure that lenders met all applicable requirements." The IG's spot check revealed, for example, that just one out of 22 approved applications contained all the documentation needed to meet the FHA's own standard for guaranteeing a loan.
The FHA's much more serious offense against lending standards -- its dangerously low 3.5 percent down payment minimum for guaranteed loans -- became the focus of attention this month when the authority admitted it was shown to be close to bankruptcy, and Rep. Scott Garrett (R-New Jersey) introduced legislation to boost that minimum to 5 percent.
There is both anecdotal and statistical evidence that the debased lending standards being pushed by FHA and other government entities are creating a dangerous dead cat bounce in real estate markets. Anecdotally, here's a profile of a new home borrower who as of this month is paying 54 percent of her income on a house. Statistically, defaults on government-approved loans continue to rise, with Fannie Mae-backed loans now breaking through a 3.3 percent delinquency rate.
We have covered the increasing rate of mortgage redefaults here, and it's notable that all mortgage modifications are now being done under the watchful eyes of the agencies that guarantee them. Yet redefaults continue to rise, strong evidence that the standards for loan mods are getting worse, not better, under government supervision. Lax lending standards are now policy. The only question is whether the policy is official or unofficial.
That's the dead cat part. Here's the bounce: While all economic indicators, from rising unemployment through rising mortgage defaults, describe a market in collapse, real estate prices continue to increase. The Case-Schiller August index, announced today, was up 1.2 percent. The National Association of Realtors (NAR) is celebrating a 9.4 percent jump in existing home sales. This Goldman Sachs report issued last week concludes government largesse is adding a full 5 percent to current real estate prices.
How are people buying all this expensive real estate? With nearly the same ratio of debt to down payment as they had in 2005. According to NAR, the median down payment is 4 percent -- slightly above what it was earlier in the decade -- but a third of all U.S. houses are still being bought with no money down.
That's a bad bet for us, because we will be on the hook for the defaults. As this San Francisco Federal Reserve report notes, nearly all mortgage securitization is now being done by the nationalized government sponsored enterprises, and virtually none by the private sector. So lenders are not just gambling on bad credit risks, but gambling with your money. Not surprisingly, it's the administration that gets the benefit, as real estate prices, in marked contrast to unemployment, are doing better than the most-adverse projections of the bank stress test conducted earlier this year. (Calculated Risk compares the trendlines.)
I'll have more about all this in an upcoming Reason print column, assuming the United States still exists at that time. There is plenty of rich material, including the way the above efforts concentrate costs at the bottom of the market, thus condemning poor folks -- whom Democrats and watchdogs like the strangely silent Center for Responsible Lending claim to champion-- to company-store-style indentures.
Meanwhile, it appears that October may be remembered as the month that the evidence, and the statements of many officials, all pointed to the same conclusion: The Obama Administration has taken a no-parachute leap of faith that real estate will stay inflated. If you're keeping score at home, this is the precisely the behavior Sen. Obama used to blame on the "ethic of greed."
