A return to ill-conceived policies in the name of social justice will end in tears, as it did during the Great Recession.
Wchicken this is a housing strategy, the Biden administration has not yet released its cards. But, there are straws in the wind that suggest President Biden will dust off old gaming manuals and turn back the clock. Indeed, a Remark published by the American banker January 20 and report in the the Wall Street newspaper on January 22, both strongly suggest that the Trump administration’s path to housing will end.
At the center of the housing industry is finance, and at the center of mortgage finance in the United States are two behemoths: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These government sponsored companies (ESGs) are important players in the mortgage market. They buy mortgages from lenders and package them like securities.
When the housing bubble burst in 2008, the government attempted to stabilize the housing market by injecting around $ 190 billion into these giants and placing them under the supervision of the Federal Housing Finance Agency, where they now reside. ‘hui. In short, Fannie and Freddie were effectively nationalized.
Breaking with the Obama administration, the Trump administration allowed Fannie and Freddie to keep some of their earnings and be recapitalized. Efforts to privatize Fannie and Freddie, however, remained incomplete when Trump stepped down. President Biden’s advisers have now indicated they would not be in a rush to reduce the government’s role in housing and privatize GSEs. Indeed, the idea that everything will be privatized under President Biden seems rather far-fetched.
To make matters worse, the Biden administration could seek to demand – as the Obama administration did – that nearly all of Fannie and Freddie’s profits be returned to the government in the form of dividends on its senior preferred shares. . There are also drums, in the name of “social justice”, on affordable housing that can be heard in the halls of the White House.
These conjectures point to a step backwards. But when it comes to affordable housing, it’s worth considering what it would mean to go back. Let’s go back to the start of the Great Recession of 2008. Like all recessions that followed World War II except that of 2001, the Great Recession was preceded by a housing slowdown. What makes the post-Great Recession housing crisis unique is its magnitude. A huge real estate bubble had been fueled by what appeared to be an endless stream of money from home and abroad to fund mortgages in the United States. In fact, the net flow of mortgage funds increased from $ 284.8 billion in 1997 to $ 1,040.4 billion in 2006. With this mortgage fuel, home prices have skyrocketed at a pace and rates. unprecedented levels.
Just why were the mortgage floodgates opened? To answer that question, we have to go back to 1994. And this is where, we fear, President Biden could go back. On November 3, 1994, President Clinton sent a letter to the Secretary of Housing and Urban Development (HUD), Henry Cisneros, writing:
Home ownership is the American dream. The United States is the first major industrial country to make homeownership a reality for the majority of its population. However, since 1980, the national homeownership rate has been declining. Reversing this trend is vital for American families, for communities and for our economy.
It seemed like a lofty idea and goal. But, there was a significant problem: HUD would continue to use warrants designed to weaken mortgage standards to make the affordable housing dream come true.
The Cisneros-Clinton plan was soon enshrined in a National Homeownership Strategy, and the language used to promote it sounded fantastic. HUD stated that
For many potential buyers, the lack of cash available to accumulate the required down payment and closing costs is the main obstacle to buying a home. Other households do not have sufficient disposable income to make monthly mortgage payments financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address these two financial barriers to homeownership.
Yet scrutinized more closely, HUD’s own words – “lack of cash”, “do not have enough disposable income to make payments”, etc. – identified the fatal flaw in the plan.
To address these “little” issues, HUD asked GSEs to lower (read: trash can) their lending standards. Indeed, it did not matter that mortgages were granted to people who could not afford to pay. Unsurprisingly, mortgages, with the blessing of Washington, DC, have been imposed willy-nilly on people with questionable employment and credit histories and little or no assets.
In 1997, Fannie bought mortgages with a loan-to-value ratio of 97%. In 2001, she bought mortgages without any down payment. And in 2007, Fannie and Freddie were required by the HUD to show that 55% of their mortgage purchases were for low- and moderate-income homebuyers. In addition, 38% of all mortgages purchased were to come from underserved areas – typically those in city centers, and 25% were to be loans to low-income and very low-income borrowers.
The call for “social justice” had taken precedence over housing policy. As a result, a real estate bubble of unprecedented size was created and, like all bubbles, it burst. Among other things, many people who were the intended beneficiaries of US housing policies have been severely burned. And, yes, foreclosures have escalated, balance sheets have been shredded and, with that, we have seen the onset of the Great Recession.
Not only did the federal government’s housing policy trigger the Great Recession, but as night followed day, the government formed a commission to cover up who was the culprit, namely the US government itself.
The Commission of Inquiry into the Financial Crisis determined that the root of the housing problem had been “deregulation” or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives and a financial system addicted to excessive risk taking. No mention was made of HUD’s National Home Ownership Strategy (read: affordable housing strategy) and its mandates for GSEs to purchase substandard mortgages that had been imposed on people without possibility of reimbursement. It was a classic Washington camouflage.
Going back to affordable housing in the name of “social justice”, an idea Friedrich Hayek nicknamed a mirage, will end in tears, just like during the Great Recession.
Steve H. Hanke is Professor of Applied Economics at Johns Hopkins University in Baltimore. He is Principal Investigator and Director of the Troubled Currencies Project at the Cato Institute in Washington, DC Dick Lepre is Senior Loan Advisor for LendUS / RPM Mortgage in Alamo, California.
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