Pumping Up A New Housing Bubble

The Washington Post carried a story a few days ago with a surprising headline:  “Obama administration pushes banks to make home loans to people with weaker credit.”

Wait, what is this — 1997?

The story details the Obama Administration’s concern that while the housing market is getting stronger, not everyone is benefiting.  That’s because banks are leery about making home loans to new borrowers and people whose credit scores are iffy.  As a result, the Administration is trying to encourage banks to make more loans using programs funded by taxpayers that insure banks against loan defaults, including programs of the Federal Housing Administration.  The Obama Administration wants lenders to use more “subjective judgment” in making loans and wants to make it easier for homeowners whose houses are underwater to refinance their loans.

The article further notes that, since the Great Recession hit in 2008, the government has been insuring between 80 and 90 percent of new home loans.  One of the principal federal agencies involved is the FHA, which allows borrowers with credit scores as low at 500 or down payments as little as 3.5 percent to get home loans.  Banks aren’t going down to that low end of the scale, however.  The average credit score on FHA loans now is 700, because banks are worried that if their loan portfolios are hit with defaults they’ll be held responsible — so they’re playing it safe.  From 2007 to 2012, banks rejected loans for 90 percent of applicants with scores between 680 and 620.

It’s amazing that, so soon after an economy-shaking recession that was largely caused by a massive housing bubble and ridiculous lending practices, regulators would be urging banks to loosen up their loan portfolios, make “subjective” decisions, and rely on the good ol’ taxpayer to insure them against risky lending practices.  It appears that banks have tried to learn their lesson and not repeat the practices that made The Big Short such a wild romp.  Don’t we want banks to be prudent?  And why should the federal government be insuring such a large percentage of new home loans, anyway?  If so many loans are being made to people with strong credit scores and meaningful down payments, why should taxpayers be standing behind 80 to 90 percent of those loans?  Don’t we want banks to make their own credit decisions and take their own risks?

Oh, and one other thing:  the article talks about how owning a home helps build a family’s wealth, and notes that without looser loan standards many young people will be forced to rent rather than buy.  This seems like ’90s-era thinking to me.  The reality now is that many young people don’t want to be tied down to an immobile asset that consumes a huge chunk of their monthly paycheck and won’t be paid off for 30 years.  They like renting because it gives them flexibility and the chance to pursue those good-paying jobs that are so hard to come by and might just be in another city or another state.  With some people saying the economy is teetering on the brink of another recession, can you blame them?

The Big Short

The Big Short is one of those movies that is intended to make you uncomfortable — and it succeeds, twice over.

The film tells the story of the housing bubble and sub-prime mortgage fiasco that led to the economic collapse and stock market crash of 2008. It begins with the handful of loners and clear-eyed if vulgar realists who investigated, read what others didn’t, identified the unsustainable reality, and then figured out a way to make lots of money, even as the financial and political establishment was smugly convinced that the impending disaster couldn’t possibly occur.

Don’t worry if you don’t know much about finance or economics — as the movie progresses you’ll get humorous little tutorials on the key concepts from exotic-looking women taking bubble baths, Anthony Bourdain figuring out what to do with old fish, and a prize-winning economist and Selena Gomez playing blackjack.  And, of course, all along the viewer knows the catastrophe is coming.  Even so, it’s uncomfortable to watch it unfold and to hear once again about Bear Stearns and Lehman Brothers and Countrywide and bailouts and the other events that made some people wonder if the American economy and capitalism would even survive the cataclysm.

It’s a powerful story, and The Big Short tells it well.  Its ensemble cast, which features Christian Bale, Brad Pitt, Ryan Gosling, and Steve Carell, is excellent, but it’s not an ensemble movie in the traditional sense, because some of the principal players never interact on screen.  They’re each running their own funds, dealing with their own investors and institutional pressures and insecurities, seeing the overall mess from different perspectives and wondering whether they are witnessing fraud or imbecility or incompetence.  And, as the movie reaches the point where the world economy teeters on the brink, they convincingly portray the sense of astonishment and shaken wonder at how the hell it all happened in the first place.

So, reliving those grim days when fortunes were lost and the country plunged into recession is uncomfortable, for sure.  And the second uncomfortable moment comes when the movie ends — because the final message of The Big Short questions whether the same thing could happen again and whether new bubbles are percolating even as we speak.  One of the core themes of the film is that most of the Wall Street wizards really aren’t so wizard-like after all — just greedy hustlers who don’t really sweat the details or even fully understand why they’re making the obscene amounts of money they’re making and are oblivious to the risks they are creating for the rest of us who have to deal with the aftermath.

It doesn’t exactly make you feel super secure about your 401(k) plan, now does it?

Fannie Mae, Baby Won’t You Please Sell A Home?

NPR ran a very interesting story about Fannie Mae, the government-sponsored enterprise that was supposed to support stable, affordable housing markets in the United States.  Fannie Mae itself became unstable during the economic crash in 2008.  Since Fannie Mae went into conservatorship in September 2008, taxpayers have supported it to the tune of a mind-boggling $86 billion.

What’s interesting about the NPR story is not the crushing cost of Fannie Mae — that sad story has been known for years — but the continuing costs imposed by the fact that Fannie Mae is the largest owner of foreclosed properties in America.  Fannie Mae owns a stunning 153,000 foreclosed homes, which means that it must pay to mow the yards, trim the shrubs, paint the exteriors, and engage in the other upkeep costs that normally would be borne by homeowners.  NPR estimates that Fannie Mae pays more than $36 million a year just in lawnmowing fees.  Fannie Mae also is generally considered to be the largest purchaser of paint and general appliances in America.  Of course, people in the neighborhoods where the foreclosed properties are located are counting on Fannie Mae to spend what is necessary to keep the places from becoming rundown hellholes that destroy neighborhood property values.  And, our government being what it is, one wonders how Fannie Mae decides whom to hire for all of the lawnmowing and home upkeep jobs for those many distressed properties.

Fannie Mae’s efforts clearly contributed to the housing bubble, and now those efforts leave us in the absurd position where the federal government is saddled with unwanted properties that will impose costs for years.  Our approach to government clearly has taken a wrong turn when a program, however well-intentioned, leaves our federal government owning more than 150,000 private residences and being the largest customer for home fix-up products and services in the country.