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Most grownups now have some grasp of the way government and de facto government agencies created the subprime lending bust. But few, other than regular readers of Reason, understand that the feds are working harder to debase lending standards now than they were during the boom. 

What could possibly go wrong?

Ed Pinto, last seen in these parts exposing the hidden subprime gems in Fannie Mae and Freddie Mac's portfolios, shows how the GSEs, the Federal Housing Finance Agency and the Federal Housing Administration are still committed to putting suckers into houses they can't afford:

Let's start with the latest pieces of evidence. The Dodd-Frank Bill, signed in July 2010 by the president, omitted both an adequate down payment and a good credit history from the list of criteria indicating a lower risk of default as regulators sought to define a qualified residential mortgage…

This was no oversight. Republican Senator Robert Corker and others proposed an amendment that would have added both a minimum down-payment requirement and consideration of credit history along with the establishment by regulators of a "prudent underwriting" standard. This amendment was defeated.

In early September 2010, Fannie and Freddie's regulator, the Federal Housing Finance Agency, following requirements set out in 2008 by Congress, finalized affordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddie's taxpayer bailout. As required by Congress, these new goals almost exclusively relate to very low- and low- income borrowers. Meeting these goals will necessitate a return to dangerous minimal down-payment lending, along with other imprudent lending standards.

Of course, FHFA Director Edward DeMarco notes that Fannie and Freddie aren't to undertake risky lending to meet these goals. As has already been noted, Congress doesn't consider low down payments and poor credit as indicative of risky lending. How convenient.

Return to Subprime

The Federal Housing Administration, in its actuarial study released late last year, projected that it will return to an average FICO credit score of 635 by 2013. This signals the FHA's intention to return to subprime lending. Once again, Dodd-Frank supports this policy change.

The FHA, the Veterans Affairs Department and the Agriculture Department's grip on the home-purchase market increases month by month. They now guarantee more than half of all home-purchase loans. However, skin in the game isn't a requirement. For example, the FHA's average down payment is just 4 percent. Even this meager amount disappears after adjusting for seller concessions and financed insurance premiums.

Seeking Alpha's Reggie Middleton charts what is increasingly looking like a jumbo-single-dip recession. In all the discussion of L-shapes, W-shaped, U-shaped, V-shaped, double-dip, or dipsy-doodle price behavior, one scenario you rarely hear about is the big bubble followed by a smaller bubble. Since government programs seem to be better at propping up asking prices than increasing actual sales, we could very easily end up with a bounce back to 75 percent or 80 percent of 2006 house prices, then find that even that level can't be sustained.

NEXT: Update on the Impending Budgepocalypse: U.S. to Run Second Largest Deficit in 65 Years

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  1. Can we get a list of the senators who are up for re-election who voted against the Corker amendment?

  2. Big bubble followed by smaller bubble? What is the smaller bubble going to be?

    It seems to me big bubble followed by biggest bubble, US bonds.

    1. This is specifically housing: The bonds are a whole different bubble.

  3. Whoa whoa whoa whoa.

    The Dodd-Frank bill section in question regulated, for the first time, the underwriting standards of private banks.

    That is not a libertarian piece of legislation.

    And now Reason is complaining that it failed to do enough to dictate to private individuals the standards they must employ when underwriting loans?

    It sounds like Reason also may have a problem with the narrative of the subprime collapse.

    You’re basically buying into the idea that the Fed policy and Treasury policy that led to the disaster all would have worked out fine, if it weren’t for those Damn Speculators.

    Reason has now joined the camp of the Leninists.

    1. Yeah, I was kinda head-scratching there.

      If you favor less regulation, it also means you have to get rid of the possibility of bailouts when, at the end of the day, the crooks who knowingly wrote bad loans still got their paydays.

      This is the strangest piece ever in Reason. A call for more regulation, sort of?

      1. I look at it this way: The government is never going to NOT bail out the banks, and the banks are never going to NOT take that bail out. So long as banks are willing to willing to suck on the government tit (yeah, I said tit), then MORE regulation may be the only thing that saves us.

        If we could ever get the government to STOP guaranteeing bank stupidity, my guess is that the banks would stop being stupid.

        1. See also, Depression, Great.

          So that would be a “no”.

      2. Actually, now that I think about it — Cathy Young’s frighteningly pro-Israel, pro-Iraq war screeds are pretty weird. But on economic matters, this is definitely out there.


    2. You’re basically buying into the idea that the Fed policy and Treasury policy that led to the disaster all would have worked out fine, if it weren’t for those Damn Speculators.

      Actually, I do buy into this. High volume speculators bubbled every market (real estate, energy, stocks, etc.) to the point

      a> in real estate, I do NOT AGREE with the lending policies and Lowering the standards of lending.

      However, the regular Joe couldn’t buy a house with the high prices that were juiced by by the Damn Speculators.

      Real Estate should have NEVER been used as a Casino. Clinton should have NEVER taken away the capital gains tax on selling primary home. He invited speculators by doing that.

      b> a companies stock price is no longer represents the company in any way/shape/form. One is suppose to buy a stock (with extra disposible income) in an effort to fund the companies ventures and enjoy the a piece of the profits. It’s not suppose to be the CRAP shoot it is today…thanks to the DARN SPECULATORS.

      1. Alice,

        The speculators are you and me. It wasn’t like a bunch of people in top hats and monocles were buying houses for jacked up prices. Ordinary people were buying houses to flip them. And once that started we were screwed. An honest person will always get outbid by the similarly situated jackass who takes out an irresponsible loan.

        And this may come as a shock to you, but many of those “speculators” were the very same loan income people that were getting loans they shouldn’t have gotten.

        1. Re: John,

          It wasn’t like a bunch of people in top hats and monocles were buying houses for jacked up prices.

          Seems to me you’re preaching in the desert – Alice really does believe in the “evil speculator” canard, and I would not be surprised if she fancies them being top-hatted, monocle-wearing plutocrats, all of them.

          1. I flipped by CSPAN a few months ago and they had some guy from the NYT who had written a book about the mortgage issue talking. He told the story of this poor exploited El Savadorian family. They had bought a house in Manassas, VA for $50K back in the day and flipped it for $250K and bought a McMansion for $650K with their winnings. Now the McMansion wasn’t worth a half a million and these poor Salvadorians were being evicted. This guy told the story like these people were victims. Bullshit. They were just greedy.

            That is the typical “speculator” Alice Bowie is so concerned about. And they never gave me any of the money when they were making money. So, I don’t see why I owe them dick now that they have lost money.

            1. I agree with you. However, the climate to do such a thing was created by the CDO/CDS speculative traders as well.

              Can you call them greedy…well, yes. But didn’t Michael Douglas (Milkin) give a ‘GREED is GOOD’ speech that most libertarians adore?

              1. Michael Douglas (Milkin) [sic]

                I can’t tell if you are implying that Gordon Gecko was modeled after Michael Milken, or that you actually think that Douglas’ character was Milken. But you’re insane, so I suppose it doesn’t matter either way.

              2. Greed IS good. The fact is that flipping houses wouldn’t have been profitable if not for illogical federal policies.

          2. and furthermore, we should ban top hats and monocles!

            1. But then what shall I wear to sneer at the lumpy proles? It just doesn’t have the same effect if you’re not wearing the top hat and monocle.

        2. I completely agree with you John. Nonetheless, no one should be encouraged to flip real estate.

          1. Re: Alice Bowie,

            Nonetheless, no one should be encouraged to flip real estate.

            That’s exactly what the true market interest rate is supposed to do – DIScourage people from flipping real estate. But since the Fed exists, all bets are off…

            But didn’t Michael Douglas (Milkin) give a ‘GREED is GOOD’ speech that most libertarians adore?

            Greed IS good – provided risk aversion remains healthy. What’s bad is the manipulation of the market sponsored by Big Daddy Government, which creates Moral Hazard.

    3. You slay me!
      I’m dying!

      Noooooooooooooooooooooooooooooooooooooooooooooooooooo!

      1. On what basis am I fighting a straw man?

        The article complains about the financial regulatory bill for not going far enough.

        I read this article in Reason magazine.

        How is this not worthy of comment?

        1. Uh, no?

          The article complains of mandated standards being put upon banks that will allow for losers like you to take loans they cannot afford, setting the stage for another government bailout.

          1. No, moron.

            Previously, banks set their own underwriting standards.

            Entities that bought loans on the secondary market also set their own underwriting standards.

            This bill tells banks that they can’t set their own underwriting standards, even if they don’t want to sell the loans in question to the government-run agencies in the secondary market.

            That is an unprecedented expansion of government power.

            The author of this article is complaining that the new restriction on the right of private banks to set their own underwriting standards didn’t go far enough.

            The bill did not remove one single solitary plank of the structure that creates overinvestment in real estate or limit in any way the ability of the Federal Reserve to expand the money supply and create asset price bubbles. Rather than get rid of any of it, it left it all in place and chose to deal with the problem of bank bailouts by getting rid of the freedom of individual banks to set their own underwriting standards, whether they had been bailed out or not.

            And this article is complaining that the bill didn’t go far enough in doing so.

            Don’t like bank bailouts? Simple. Stop bailing out banks. Problem solved.

            But don’t bail out banks, and then come around and tell me, “Wow, those bank bailouts sure were expensive. We now demand new powers to microregulate lending decisions at ALL banks, including the ones that didn’t need bailouts!”

            1. Perhaps if you weren’t so busy licking your own asshole you may have noticed that this article was mostly a quote from an Bloomburg opinion piece.

              That does not mean that Reason was complaining about the regulation not going far enough, it was Bloomberg.
              Reason was thoughtful enough to quote Bloomberg piece in order to show some of the shenanigans going on in D.C.

              If you weren’t so busy flossing with your scrotum hairs you may have noticed that.

          2. Oh wait, you’re even more stupid than I thought you were.

            You don’t even understand the article a little bit.

            The bill created NEW regulations that TIGHTENED the restrictions on bank underwriting. And the author is complaining that it didn’t make those new restrictions restrictive enough.

            You think the bill is ordering banks to loosen their underwriting standards. Holy shit are you an idiot.

            Try to understand the basics of the discussion before you comment, OK?

            1. I’m a moron?

              In early September 2010, Fannie and Freddie’s regulator, the Federal Housing Finance Agency, following requirements set out in 2008 by Congress, finalized affordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddie’s taxpayer bailout.

              Notice the word mandate.

              You say “The author of this article is complaining that…”

              What you meant to say was “the author of this article quoted by Reason is complaining that…”

              What a fuckload you are.

    4. You’re basically buying into the idea that the Fed policy and Treasury policy that led to the disaster all would have worked out fine, if it weren’t for those Damn Speculators.

      The “damn speculators” you speak of were actually suicidal bureaucrats with infinite cash that the US government to prints for them.

      The fact is if the US government started buying poison then the price of poison would go up. Not only that but in reaction to the new government love of poison businesses would follow suit. New poison manufacturers would emerge, investors would shift their portfolios to get some of that poison action.

      If the government started buying enough poison our whole economy could shift its focus on producing and investing in poison. Of course the poison does nothing but kill poeple. So now you have this huge poison market that does absolutely nothing. The whole thing is a house of cards built on the promise of government will pay for it.

      The key feature here is the poison market is not a natural market. It is built on government money. It is a phantom market that has no reason to exist in the real world.

      The sub-prime market is the exact same thing.

    5. I don’t see a contradiction here. Libertarians object to Fannie and Freddie already, but since such things are politically untouchable, they are objecting to having them operate with overly-loose standards that are likely to set them up for another fall. It’s a call for “more regulation” only in the sense that it puts rules in place closer to market rules, rather than politically-motivated rules that go against basic economic principles.

      What am I missing…?

    6. I feel what you’re throwing down, Fluffy, but I think the narrative here is part acceptance, part here’s-not-what-to-do.

      The acceptance is that the Feds are underwriting mortgages. The here’s-not-what-to-do part is at least make sure those underwritten mortgage loans are made to people who can, you know, pay them back.

  4. It’s not predatory lending when the FHA does it.

  5. First, Dodd-Frank doesn’t set maximum underwriting standards it sets minimum standards.

    Second,

    early September 2010, Fannie and Freddie’s regulator, the Federal Housing Finance Agency, following requirements set out in 2008 by Congress, finalized affordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddie’s taxpayer bailout.

    Even with “likely” as a modifier, this isn’t true.

    Third, “big bubble followed by a smaller bubble” is what a ‘W’ shaped recover is.

    1. First, Dodd-Frank doesn’t set maximum underwriting standards it sets minimum standards.

      Ummm…yeah.

      The article is complaining that the bill didn’t set the minimum standards high enough. The author seems to have wanted credit score and max LTV standards set by law also.

      So we have a libertarian publication complaining that a regulatory bill that expanded the power of government failed to expand it far enough. Does. Not. Compute.

      1. I’m not positive, but I think the minimum requirements have to do with risk retention requirements. In other words, if the loan is not qualified, the originator has to retain a portion of the risk (5% or whatever). Obviously it would be tied in to the government controlled subsidized investors (Fannie & Freddie) can buy as well, which is the real problem here.

      2. So we have a libertarian publication complaining that a regulatory bill that expanded the power of government failed to expand it far enough. Does. Not. Compute.

        Good observation.

      3. So we have a libertarian publication complaining that a regulatory bill that expanded the power of government failed to expand it far enough. Does. Not. Compute.

        I think the complaint is that the gov power is being expended in a way that we know will produce bad results, whereas the argument by Pinto is that it should be expanded in a way that makes some sense. Also, Tim didn’t really comment on the need for any gov intervention. He was just highlighting the fact that the government is promoting the exact same lending climate it promoted to cause the bubble. Tim was pointing this out by excerpting Pinto, and at worst, the excerpt says that the gov had a chance to pass a bill that would have promoted sensible lending standards, but instead chose to pass the bill that promotes the exact same lending standards that are generally accepted as one of the primary causes of the housing bubble. I don’t really see Reason pimping the better bill in this blog post.

      4. No, we have a libertarian publication quoting from an article in Bloomburg.

        Fuckwad.

      5. So we have a libertarian publication complaining that a regulatory bill that expanded the power of government failed to expand it far enough.

        Question, Fluffly? Does a bill that restricts the power of government-sponsored (and government bailed-out) agencies expand or shrink government?

        Would a bill that applied additional restrictions and regulations to the US Postal Service expand or shrink government?

        Would you argue, Fluffy, that a bill imposing additional regulations on the interrogation techniques of the CIA and CIA contractors would “expand government?”

        1. It’s not just bailed out institutions, it’s any residential mortgage put into a securitization that is originated or sold in the US.

          Anyway – largely useless. Washington will always be at least 2 steps behind the financial magicians of the finance world.

    2. It’s not a ‘w’ shaped recovery. It’s a “moribund” recovery, and sometimes described as “turgid” recovery.

      It could also be described as a ‘down-escalator recovery’, or possibly a back-side-of-a-motocross-jump recovery.

      I like “blue-run ski-slope recovery turning to occasional green run slope recovery”.

      At least from the stories the MSM is a-spittin’ out.

      I’m waiting for them to craft a term for “reverse recovery”. It’s fun watching the media craft terms in general which describe a non-recovery, but make sure they keep the word ‘recovery’ in the phrase.

      1. I’m not saying that’s what we’re in, simply that Tim’s ‘big bubble begets little bubbles’ would most likely be a W shaped recovery – hence already listed and not novel.

        1. I see it as an inverted W recovery… say, a very low profile ‘M’ shaped recovery, but definitely lower case, and with very ‘streamlined’, aerodynamic humps, but where the right tail trails off downward into an undefined, murky place. Like the pen just kind of ran out of ink or something.

          1. I think it’s a 4th grader writing cursive on the chalk board recovery. Starts high, squigles and jumps randomly, and slowely gets lower on the board as his* arm tires.

            *Fact: boys have worse cursive.

  6. “As required by Congress, these new goals almost exclusively relate to very low- and low- income borrowers.”

    I am not following that. I could get a fannie or freddie loan as a first time home buyer today if I wanted one. And I am not a low income borrower.

    That is the one part of this whole story that doesn’t make sense. Creatures like Dodd and Frank don’t give a shit about the poor. They want money and votes. I can’t see how if Fannie and Freddie were truly for low income people they would be so popular with politicians. The only thing that is that popular with politicians are programs that get them votes, i.e. middle class entitlements.

    1. FHA is supposed to be primarily for low income borrowers. A Fannie/Freddie gauranteed loan has to be conforming which means the house has to be under a certain price point based on median home sales in your county, but a couple hundred k is by no means for ‘low income’ borrowers, but rather for the middle class.

      That said, FHA insured loans while designed for lower income borrowers take up much greater market share in today’s environment. Right now private MI has better pricing than FHA on 680+ FICOs, but requires a minimum of 5% down whereas FHA is about 2.5% and VA is 0 down (for first time home buyers). Seller concessions can reduce that for some FHA borrowers.

      1. That is just it. I think it has become a middle class entitlement. And that is why people like Frank and Dodd fight so hard to save it. If it really did benefit the poor, who have no money and generally don’t vote, Fannie and Freddie would have been killed years ago.

  7. P Brooks: You are a genius. Predatory spending. The attack slogan for unseating the nastier spendaholics.


  8. Most grownups now have some grasp of the way government and de facto government agencies created the subprime lending bust.

    Actually, only grown-ups that really don’t understand synthetic securitization believe that government and de facto government agencies created the subprime lending bust.

    1. The securitization boom was a symptom of the underlying Federal Reserve monetary policy error and resulting real estate bubble and not a cause.

      It’s really easy to create a new class of high yield securities backed by real estate loans when fed policy has resulted in ahistorically low foreclosure rates across all borrower classes.

      1. No.

        In classic securitzation, the loans exist. In sythetics, the underlying loans don’t exist…just the traunches exist. This is what motivated that fiscally conservative GWB to make the following speech and encouraged the FED in lowering of lending stands.

        http://www.youtube.com/watch?v=GkAtUq0OJ68

        1. The fact that you think GWB is fiscally conservative indicates you are completely clueless.

          1. I was being sarcastic. However, I’m sorta clueless.

            1. Alice does have a point though. There were other causes as well (many the govt’s fault)… a few:

              1) Law that there are only 3 recognized rating agencies.
              2) Reserve requirements based on these agencies’ ratings.
              3) Stupid investors.
              3b) Smart investors.
              4) A long period of rising home prices and low unemployment resulting almost always in gains – and hence unreasonable expectations (thrifts were a blip)
              5) Yes, cheap money
              6) Over leveraged govt, corporate, and consumer balance sheets.
              7) a recession

    2. Re: Alice Bowie,

      Actually, only grown-ups that really don’t understand synthetic securitization believe that government and de facto government agencies created the subprime lending bust.

      The CRA and Freddie/Fanny massive underwritting notwithstanding . . .

      “Nothing to see here! Please disperse! Please, disperse!”

  9. Who told you SOB’s that I wanted my username italicized?

    1. ** giggles **

  10. The Dodd-Frank Bill, signed in July 2010 by the president, omitted both an adequate down payment and a good credit history from the list of criteria indicating a lower risk of default as regulators sought to define a qualified residential mortgage[.]

    And here we go again!

  11. As a raging alcoholic, I happen to know that the hair of the dog is the best cure. Now where the hell did I put my mini-keg of natty?

  12. Why doesn’t the government just do with housing what it does with everything else. Set a price floor for houses and call it done.

    1. Maybe the government will copy FDR’s brilliant agriculture policy by buying empty houses and razing them.

  13. Amusingly, one of the most obvious indicators of default risk is the expected value of the property. Anyone familiar with Detroit ought to know that people with decent incomes and good FICO scores would absolutely give the damn property back to the bank in a heartbeat if the property value starts dropping like a rock – most borrowers aren’t going to throw good money after bad.

    I’ll also point out, especially to Fluffy, that the “lending standards” in the bill mostly apply to government agencies. Personally, I’m in favor of massive regulation of government agencies – so massive that they can’t function. As long as the FHA is going to insure mortgages with MY MONEY, they goddamn better be saddled with punitive underwriting standards.

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