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.
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.