US pushes sub-prime mortgages (again!?!?!)

ScreenHunter_08 Mar. 19 11.54

By Leith van Onselen

Sometimes I feel like I am operating in bizarro world. Just five years ago, the US and a number of European nations experienced first hand the carnage of a full scale property bust.  These experiences should have taught the world that debt-fuelled property speculation, along with placing regulatory constraints on housing supply, is a recipe for disaster and bound to end badly. Yet, over the past few months, a number of the world’s governments, most notably the UK and South Korea, have introduced short-sighted ‘can kicking’ policies aimed at reinflating their housing markets in a bid to stimulate consumer confidence and consumption spending via the ‘wealth effect’.

Now, unbelieveably, the Obama Administration is looking to cement the US housing recovery by re-igniting sub-prime lending – one of the factors that caused the US housing bust (along with the Global Financial Crisis) in the first place. From the Washington Post:

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

…administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps.

Obama pledged in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery, but critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars.

“If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae…

“If the only people who can get a loan have near-perfect credit and are putting down 25 percent, you’re leaving out of the market an entire population of creditworthy folks, which constrains demand and slows the recovery,” said Jim Parrott, who until January was the senior adviser on housing for the White House’s National Economic Council.

One reason, according to policymakers, is that as young people move out of their parents’ homes and start their own households, they will be forced to rent rather than buy, meaning less construction and housing activity. Given housing’s role in building up a family’s wealth, that could have long-lasting consequences.

Isn’t the definition of insanity trying the same thing over an over and hoping for a different result?

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Unconventional Economist
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    • I believe it because real estate here in Nashville Tennessee is selling quick. We were looking in a suburb that use to have a bunch of short sells and foreclosures. There are none now.

      I cant believe they are going down this road again. Read today its coming from the govt and Obama administration.

      • Yeah, but in Nashville, you never had ridiculous house prices, and hence did not contribute much in the way of debt overhang in the US economy – it is California that is the real problem. The difference is that in Nashville, you let stuff get built – the same is true of most US cities by number.

        As long as you let stuff get built, not nearly the same harm will be done to your local economy; you will get real economic activity, actual building of houses, household formation, in-migration, small business start-ups, etc etc. Your housing will never be “unaffordable” and will become “even more affordable” periodically.

        The “loose credit” in your kind of market leads to a few households on $40,000 per year ending up foreclosed on over a mortgage of $150,000, perhaps after they lose their jobs. But the average mortgage foreclosed on in California is several times as large as this, because during the “bubble” phase, house prices go nuts – due to anti-growth policies.

        • PhilBest I got to disagree with you on Nashville when we moved back in Sept 09 there foreclosures and short sales everywhere. Now there isnt hardly any. Trust me there empty newly build suburbs but not at the level of California, Arizona and Florida but it wasnt good.

          • I’m just going by the annual Demographia Reports and what Nashville’s house price median multiples went up to. They never got near “4”.

            LA cities went over 10. Sydney has been around 9 for years. Every city in Aussie is over 6.

            The reason your foreclosures and short sells and empty houses clear the market so rapidly, is that “affordability” was never a problem, and when your median multiple falls from its peak of around 3.4, to 2.8 – and this is a reasonable “percentage” – your houses are an outright bargain and are quickly filled by middle class youngsters forming households sooner, and a bit of in-migration, possibly from CA.

            Prices in CA falling after the crash from a median multiple of 9 and over, to under 5, is a far bigger percentage, and hundreds of thousands more literal dollars per home of fake “equity” wiped out. And the prices are STILL seriously unaffordable, much higher relative to household incomes, and resume rising again from that high “trough”.

            The simple maths I keep asking people to do when they agonise over cities like Atlanta (and perhaps Nashville?) “building too many houses”, is this. What does more harm? Every single house in the entire market doubling or trebling in “value”? OR perhaps going up 10% in value and a couple of percent “too many” homes – at still-affordable prices – getting built?

            I think most people from most other cities in the western world could justifiably envy you. I certainly do.

          • PhilBest “The reason your foreclosures and short sells and empty houses clear the market so rapidly, is that “affordability” was never a problem, and when your median multiple falls from its peak of around 3.4, to 2.8 – and this is a reasonable “percentage” – your houses are an outright bargain and are quickly filled by middle class youngsters forming households sooner, and a bit of in-migration, possibly from CA”

            Fair point. I see what you are saying.

  1. One thing that those on the rational side of the economics science (sic) have learnt since the GFC, is never underestimate the stupidity of government, nor the power of crony capitalists.

    I fear we will go down this same path under any government: Abbott or no: e.g UK style guaranteed mortgages, $50K FHOG, 0% deposit loans, even those beautifully financially engineered Equity Mortgages.

    MY advice: do not be surprised at what is going to come down the pipeline WRT:housing in the coming years.

    • Well said.

      There’s an argument that governments face very similar incentives to highly paid executives in limited liability companies:

      Both play with other people’s money
      Both are highly paid and get golden parachutes.
      Both can inflate their respective returns and then sail off into the night with a pile of cash.

      While I understand that remuneration committees of Ltd companies try to limit these perverse incentives, when salaries are high enough it probably doesn’t matter.

      What makes matters worse is when these two groups get together and help each other out (housing-politico complex) at the taxpsayers’ expense.

    • agree CB – understand what govts will do, not what they should do. Unfortunately that understanding leaves people with a choice of 2 evils a) buy inflated asset and hope govt policies work or b) save your coins knowing govt will try to inflate away your savings and tax the bejeeses out of you.

      If your parents reward you for eating sweets and beat you for eating veges what should you do? And if they are going to use your college fund to pay to replace your sweet eating siblings rotten teeth, what do you do then??

    • I regard a Tony Abbott govt as one of the “slim chance” governments anywhere in the world, that MIGHT just do the right thing on this. I agree with you about pretty much everywhere else in the world. I don’t see the right reform happening in the USA at Federal level (some States are absolutely world leaders on the right policies, but totally ignored by the rest of the world). I don’t see it happening in the UK. Or Ireland, Spain, France, Canada, Sweden or anywhere else I look.

      It MIGHT happen in NZ.

      Germany and Switzerland MIGHT succeed in preserving their success to date, but I think they will need to do more than their policy settings that have worked OK up to recently.

    • Chris…only Abbott? You got a left lean there boy.
      What is the current STATED policy in Australia as an answer to the end of the mining boom….reignite ‘housing’

      • You must be getting heard at reading in your old age Bill!

        I did say “Abbott or no” – Gillard has proven to be no better than Rudd in approach to housing – and yes, their stated policy is to “reignite” housing.

        For the record – AGAIN – I am no fan of this government. Just because I distrust and consider an Abbott government to be worse doesn’t mean I want this one!

        Thats not left leaning mate. I know a good optometrist if you want your script re-checked….. 😀

        • ‘Abbott or no’ Dammit boy you know I’m hard of hearing…spell it out dammit!!


    • All these things remind me on “Only Fools and Horses”
      Rodney, this time next year we’ll be millionaires!

  2. Recently Fannie Mae has agreed to refinance underwater loans on high interest rates that have been well conducted over a specified period.

    If the above lending conditions of 25% down with a perfect credit score are correct, then it is a very prohibitive lending criteria and it has potential for a much wider target market whilst still maintaining a high quality loan profile.

    The danger in not allowing everyday men and women buying houses is that an ever greater proportion of housing will be owned by corporate investors who have other means of funding aquisitions.

    • The Patrician

      “The danger in not allowing everyday men and women buying houses….blah..blah”

      Do you really believe this rubbish?

      • Yes I do, but if you can prove that I’m wrong then go ahead. Show me a country where the majority rent and are happy to do that, but a country without rent controls.

        • “…German house ownership is way below 50 percent. People rent cheaply, get paid well, and then produce goods that have quality and are affordable.”

        • its 42%

          and Greece is above 80% last time study was done.

          Spain 78%….

          Renting is not a crime or a sin Peter – its a perfectly valid way of living – even for your entire life.

          High home ownership does not necessarily lead to a prosperous lifestyle. In fact it can lead to unintended consequences that we’ve seen in Ireland, Spain, Greece, most of the US and is unfolding in Canada.

          The corporate investors you took about are banks – they are the ones who “own” most of the property stock.

          • I know perfectly rational quite senior business types in Munich/Stuttgart who have told me they thought it silly to own their own place in Germany.

            The ownership ratios in Spain (certainly) should also be mulled in terms of the absolutely insane level of building which has taken place there (and has a massive housing overhand on the market) – which the govt is on the hook for, on the verge of needing EU bailout for etc etc etc.

          • There certainly is a ‘danger’ in this country of those that rent going postal if they cant find a way out of their circumstances. Australian renters are treated as second class scum. The attitude is prevalent in our social attitudes and in our laws.
            Contrast that with other nations (ie; continental western europe) where culturally, renting isnt seen as any slight at all.

          • Agree on renting Chris, and you won’t find any post where I have said otherwise.

            However every society will have an optimum balance point of owners vs renters that suits the culture and wealth of the nation. I do have concerns that our assets are being concentrated more and more into the hands of the few, that’s not healthy either.

            Agree that US banks own a very large number of houses, but they are defacto owners who will unload them as soon as possible, they are reluctant home owners. The corporations that I was referring to are typified by Blackrock Investments –
            They see a profit, and they know that most US citizens are locked out of the market because of the stringent lending requirements. Seriously 25% down and a perfect credit score is very strict – half the tut tutters here couldn’t meet those conditions.

            I see a lot of ideas put forward to fix housing here, but most of them are only bandaids. David Collyers idea of a land tax would work, but it’s politically unpalatable to both major parties, and if it can’t get support during a GFC then it will never gain the level of support that is needed.

            If we add in costs to housing such as GST and developer contributions to every new build, then that pushes up the price of all existing homes – it’s a major problem with no real answers.

            I have a brochure in front of me from a REA telling me that they achieved $1250 per week rental for 4 homes in my area – who can afford that, but obviously someone can.

            Clearly house prices are a symptom of our society.

            Is it because the tax rates for high income earners have reduced allowing them to bid up property and set prices at the margins?

            Is it because we have a lot of people earning $250K and more in mining and associated industries?

            Do we need rent controls to control asset prices?

            I don’t have the answers, I wish I did, so for now I keep observing.

          • For Pete’s sake, Peter, why don’t you ever see that “freedom to build” is the solution to “allowing everyone possible to own their own home”?

            If you care that much about “allowing everyone possible to own their own home”, why would you be agnostic about the one thing that has always allowed just that?

            I’d love to put you at a debating table with Ian Abley of AudaCity in the UK, and watch the fur fly. AudaCity is trying to get an co-operative of young people together, to build their own “illegal” houses on legally bought, $10,000 per acre farmland.

            THAT would absolutely be “housing that everyone possible could afford”. Why would anyone that alleged they cared about “allowing everyone possible to own their own home”, see this as a pointless diversion?

          • UE: That is what PF claims, but I am not sure. Mortgage broker with too much time on his hands. More like A’turfer paid by the reia and megabank.

          • Thanks for the plug, PF 10:39. I want Land Value Tax PLUS the elimination of other very bad taxes that stifle activity, funded by the LVT revenues.

            Ken Henry found 125 he wanted to remove because of their negative economic effects. A glittering prize indeed.

          • “Pete’s a mortgage broker. Enough said.”

            I don’t happen to agree with Peter’s general economic stance re housing. However UE this sort of stuff in response to his rational argument, even if one disagrees, is really BAD!

            Like a few other things that happen around here…an apology, frankly, is in order.

      • Maybe he believes it far less than the danger of massively indebted societies

        Maybe the game plan is about just finding the debt ‘sweet spot’ where the uber debtors will do just about anything employment wise to be able to sustain the debt, be perfectly bullyable in terms of desire to continue supporting that debt, and yet not quite stressed enough to complain loudly about any iniquities contained therein.

    • Chose where, carefully. Places where they allow stuff to be built, the prices won’t go up.

  3. OK, I am as bemused as anyone else here – it seems, prima facie, just crazy.

    But I find myself wondering, asking

    Is there a way to actually make it all make sense? After all these guys have had to deal with the meltdown of 2008. They couldnt possibly not understand what the implications are of what they are doing.

    Like are they effectively saying ‘ok we will give houses to virtually everyone, and force the uber rich to keep the credit flowing or in jobs or whatever’ – Like sorry (I am asking not saying that there is) is there a plausible way this can actually be made to make sense?

    …..Beyond saying we arc up economic activity to the point where the US economy is on a self sustaining recovery, and then take away the government punch powl? (which i dont think credible)

    • Buggered if I know Gunna.
      How about “there will be no securitization of sub prime mortgages in a government I lead”, therefore no problem as it was always those rotten CDO’s that were the issue.

      I’m staggered

    • Could make political sense. My interpretation is Obama’s advisors are confident the bubble won’t burst during his term, and he gets to a chance to leave on an apparently high note i.e. the president that saved the US from GFC and turned around the economy.

    • It makes sense for the cooperate investors who want to offload at higher prices – more suckers please …

      • Gunna…FWIW…the problem is, as i’ve tried to explain elsewhere, our whole economy, indeed our whole society, is so distorted that any attempt to fix anything is going to cause massive dislocation and will take generations.
        What we have is people doing the only thing that appears possible within their time frames and within the structures they find themselves.

        That’s not to say it’s not all totally insane!!!!

        The answers lie back in time.

        • P.S. In agreement with Michael below the activities of a lot of people involved in this are criminal..nothing less. Yet instead of gaoling them we gave them tens and hundreds of millions.

          Re gaoling…if I get elected dictator it won’t be just gaoling!

    • The WRR economic model (Wash, Rinse, Repeat). It is all based on government belief that they can improve their central planning. Judging by the history of the Soviet Union it may take about 70 years to disprove the model.

  4. As long as the bankers run the show people are just cannon fodder. We say that they never learn, it is going to happen again. Of course they learnt. It makes them a ton of money
    Just go back to the so called inquiry of the big banks in 2010.
    During the hearing, Angelides cast doubt on Blankfein’s defense of Goldman Sachs’ actions in the mortgage markets — such as buying parts of risky mortgages and then placing bets against such morgages — as part of their job as a “market maker.”

    “It sounds to me a little like selling a car with faulty brakes and then buying an insurance policy on the buyers of those cars,” Angelides said. “It doesn’t seem to me that that’s a practice that inspires confidence.”

    Blankfein responded that Goldman was just selling what investors wanted.

    “These are the professional investors who want this exposure,” he said. “Even today, people are coming for exposure to these very products. .. That’s what a market is.”

    • +1000 – the banking executives absolutely creamed it the first time around! Of course they are moving heaven and earth to get to this place again.

      What is amazing is that the banking shareholders – who were soundly punished the first time and in many cases only survived by the skin of their taxpayers – are lining up again to be fleeced, and the taxpayers might have tired of bailing them out this time.

      • I certainly hope the taxpayers rebel against bailing the investor class and the corrupt class out again. If investors are so stupid as to re-run this again, well, they deserved to lose their shirts in the first place, I am not sure what to say they deserve the second time around……

    • The more i think about it, the more it absolutely amazes me that no politicians want to talk about this.

      The US and Europe has had its middle class absolutely cleaned out by these policies, i would have thought there is political mileage in this? At least in Australia we could be warning the middle class or taking steps to make sure we are not next on the list.

      It’s impossible to pretend it’s not serious – the GFC/Great Recession was a significant global issue.

      Is is because in the end we still have not a liquidity issue but a solvency issue, and banks need – absolutely need – the time to roll through this or they will collapse. The politicians who listen to bankers and corporate lobbyists much more than they listen to people have had the wind put up them – do they think they have no choice but to save the banks?

      It is surreal to say the least.

  5. Alex Heyworth

    “administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.”

    Great move in a country that already has a government deficit of 10% of GDP.

  6. People are free to be STUPID!

    Take the loan, buy the material assets, go under and then give them the finger!

    Don’t sit there crying “How can they not know!”

    They know exactly what they are doing and it’s criminal.

    Ring-fence them and send them to the tower. First ten to the gallows will sort this kind of behavior out.

    Crime with no consequence is what we are seeing here. Where’s the incentive to change? It’s like saying to a scruffy teen “I’m going to give you $50 everyday until that room gets tidied, do you understand me young man!”

    • Yes, we PAY politicians and regulators and bureaucrats great gobs of our money to “make sure all goes well”, and they do THIS to us? Bring on the prosecutions for incompetence and corruption.

      Heck, it makes one wonder whether a pure libertarian economic system might be the least worst after all……

    • “First ten to the gallows will sort this kind of behavior out.”

      +1 or slow slicing aka “death by a thousand cuts”

  7. But this time it is different….

    I can’t even keep a straight face when typing that.

  8. So many smart economists yet they struggle with such a simple concept as asset prices.

    Unfortunately as a countries tradable industry becomes less competitive their non productive assets become less valuable. However the money in circulation does not simply evaporate instead more money pours into these asset classes because they are not immediately exposed to foreign competition (they are even considered safer)

    Assigning absurd values to non productive assets is all a part of the game, which we gladly participate in despite the huge declines in our relative standard of living. To act otherwise would require us to recognize the bigger systemic problems, thats hard work!

    So where are we with those low-doc no-doc loans….the smart money needs to flip their cheaply acquired houses quickly…time is money…chop-chop

    • Great point China Bob. I can’t see how anyone could change the behaviour of the individual, but it’s a great point nevertheless.

    • Yes, absolutely correct China-Bob; that is the best way to put it. I have often said that policies that make it too hard for “producers”, do tend to divert “investment” in “non-productive” directions.

      THIS is really what investors SHOULD do with their money:—Resilience/dp/160

      But why should they, when every bureaucrat in town will be out to “get” the enterprises you have invested in, over their “environmental impact”, their “health and safety”, their “workplace practices” etc etc etc.

      • The distinction made the other day in that Tullett Prebon consultants paper, between “self liquidating” and “non self liquidating” debt is important too.

    • + a score sort of like our National debt ChinaBob.
      “To act otherwise would require us to recognize the bigger systemic problems, thats hard work!”
      and would take generations to effect!

  9. There’s nowhere to go with interest rates at virtually 0%, other than make them lower in real terms. Nominal interest rates are unlikely to fall any further, anywhere – even here, which only leaves one direction left for the nominal yield curve players.

  10. The image that comes to mind after reading this is of a lab hamster being zapped by an electric charge time after time when trying to take the piece of food!
    The powers that be obviously believe the populace have the memory of hamsters and will all plunge back in.
    We may as well set off the doomsday machine now!

  11. General Disarray

    and we’re about to get a PM with hundreds of thousands in mortgage debt…

    I’ll just let that sink in.

    • Everyone with mortgage debt needs to understand that they will be MORE likely to be able to pay it off and keep their house over the next 30 years IF the economy gets the tourniquet taken off its urban economies and urban land prices FALL. The alternative is ongoing stagnation in the real productive sector and periodic destructive busts until there is nothing left. Under the latter you might “maintain your equity” but there is an exponentially greater chance you and anyone and everyone you know will end up with no job.

  12. Perhaps you might want to take a look at the chart on p9 of the January Fed Reserve Senior Lending officer survey. Banks have been tightening standards on sub prime (correctly) since 2006 and continue to do so
    Perhaps the reality is that you cant get a loan in the US unless you are prime, and perhaps that might be an overreaction.

      • Yes I read that as well. That refers to sub prime auto loans.
        Residential mortgages go thorugh banks and the reason they have been tightening standards is that they get push back from the FHA if there is an issue with default. The amount of non agency backed mortgages that dont have the FHA issue is tiny. ABS is primarily non agency backed so thats why the sub prime auto sector can grow. And in the big scheme of things, sub prime auto loans are a drop in the ocean of US credit

        • The Patrician

          Does anyone monitor sub-prime auto loans in Aus? Given the amount of “$0 deposit 0% comparison rate” shenanigans being advertised and the rocketing car sales, levels must be climbing.

  13. In a way, what can you expect of the politicians?

    Here’s “the best and brightest” analysing “housing” policy approaches in the USA.

    A Federal Reserve Board Governor gives a speech, seemingly pretty comprehensive:

    No mention of the wide disparities between housing markets in different parts of the USA, or the role that policies regarding “housing supply” play in those differences.

    House prices are “recovering”, which is a “good thing”.

    But an “affordability” problem is returning, which is a “bad thing”.

    Credit is “too tight” for many young people…….

    Soooooo, the “solution” must be……?

    DUH…! DUH….! DUH…..!

    • At least the RBA people have mentioned housing supply a few times, and for a while it looked as though they had it right. Then someone and something “got to them”…..

      Possibly the same sort of interests that always did control the establishment in the USA.

  14. The US middle class handed over their generational savings in last long con – i’m not sure they have much left to give?

    Is this just the finance world eating itself? Certainly in Australia the middle class is ripe for the eating.