The Economy President Obama Is Leaving Behind Left The Middle Class Behind

I wrote the article below for a local newspaper. It was published a few weeks ago. I thought I would also share it here.

 

This is the picture of the Gross Domestic Product since 2006 (from tradingeconomics.com).

As you can see, it has taken almost eight years to get back to where we were in 2008. The other interesting number is the Workforce Participation Rate. Here is that chart:

The number of people participating in the workforce has dropped steadily since 2009.

We have not recovered from the recession that followed the collapse of the housing bubble. I would like to remind everyone what caused that collapse and who was actually responsible for it.

The root of the collapse of the housing market is the Community Reinvestment Act (CRA) passed by Jimmy Carter in 1977. The idea of the law was to make housing more affordable for low income families and to make sure minorities were not discriminated against. The intentions were good.

In 1995 President Clinton added some new provisions to the Community Reinvestment Act. Part of these revisions allowed CRA loans containing subprime mortgages to be traded with securities. Banks were forced to issue $1 trillion in subprime loans. There were sit-ins at annual meetings of major banks to pressure them to issue loans in risky neighborhoods. Banks were threatened with fines if they denied loans in risky neighborhoods. The normal rules for issuing mortgages were suspended because of government interference and pressure.

In 2000 Fannie Mae announced it would purchase $2 billion of “My Community Mortgage” loans. The idea was to customize affordable products for low and moderate income borrowers. Fannie Mae and Freddie Mac moved into the subprime mortgage market. Fannie Mae is a government-sponsored entity that guarantees mortgages and then sells them to banks and investors. Fannie Maw pursued subprime mortgages to increase their profit–the more mortgages Fannie Mae sells, the more money it makes. House prices began to rise as more loans became available and more people purchased houses.

Mortgage products were created to make home buying something people at all income levels could afford. Interest only loans, adjustable loans, and variable rate loans were created. Qualifications for borrowers were loosened–no income verification, no money down. Banks had to issue subprime mortgages or face penalties.

In 2004, 92% of Fannie Mae subprime loans were variable rate. In 2005, the number was 91%. Fannie Mae told banks that they would guarantee the subprime loans. House prices rose, interest rates rose, variable interest rates increased and payments got bigger. Gas prices went up, so low-income borrowers were squeezed. Some borrowers stopped paying, and bankers stopped lending. The subprime mortgage market collapsed. Foreclosures began, and home prices fell. Banks collapsed due to worthless government sponsored securities.

Before the revisions to the CRA, home prices rose at about the rate of inflation. After the CRA revisions, the rapid rise of home prices created a bubble. When prices rose quickly, speculation also rose. This further fueled the bubble.

In 2003 President Bush proposed an agency inside the Treasury Department to oversee Fannie Mae and Freddie Mac. The Democrats in Congress stopped the proposal. Barney Frank, a Democrat Representative from Massachusetts, said that the problem with Fannie Mae and Freddie Mac was exaggerated.

In 2005, Senator John McCain warned of a mortgage collapse. Senator McCain sponsored “The Housing Enterprise Regulator Act of 2005 (S.190 109th). The Democrats blocked the bill. He tried again in 2207, and the bill was again blocked.

Fannie Mae and Freddie Mac made large campaign donations to members of Congress. They also provided ‘special mortgage rates’ to certain Congressional leaders. Many of the executives at Fannie Mae and Freddie Mac were government officials after the housing crisis–they paid no price for their mismanagement of Fannie Mae and Freddie Mac–instead they profited greatly while the bubble was growing and after the collapse.

I tell this story for one reason. We have heard the media blame greedy bankers on the housing market collapse and the economic chaos that followed. Actually, greedy bankers were not the problem–government regulation and Congressmen who accepted contributions and sweetheart loan deals from mortgage companies were. Why were Fannie Mae and Freddie Mac, government-sponsored agencies, making campaign contributions?

This is one aspect of the swamp Donald Trump was elected to drain. People connected to the mortgage companies or the government walked away from the housing bubble with millions; many average Americans lost their homes and their jobs. It is ironic that President Obama, who should have been able to relate to the Middle Class, decimated the Middle Class during his eight years in office. I am thankful that we have elected someone as President who has business experience and a proven history of economic success.

Once Is A Mistake–Twice Is A Decision

Yesterday The New York Post reported that the Obama Administration is making the same mistakes that led to the housing market collapse of 2008. One of the major causes of the economic collapse of 2008 was the amount of money borrowed for housing loans that was not going to be paid back. There were a number of causes of the problem. The economy had been good for a while, interest rates were reasonably low, people had moved into bigger houses, and banks were pressured to give loans to people with questionable credit and unsubstantiated income. As gasoline prices doubled, many of the people who had taken out loans that were on the edge of their ability to repay found themselves unable to make the payments. The banks, in turn, sold those mortgages as if they were going to be paid back, and they were not paid back. The YouTube video Burning Down the House provides one of the best explanations of the cause of the 2008 collapse that I have seen. I am posting it here in case YouTube takes it down:

That was then, but where are we now?

The story in The New York Post reports:

As Paul Sperry recently noted in The Post, Team Obama has pushed mortgage lenders to offer home loans to folks with shaky credit, setting up conditions for another housing-market collapse.
Wasn’t the last one bad enough?

Credit scores of approved borrowers, for example, have been trending down, even as their debt levels have grown.

The Federal Housing Administration and government-sponsored “independent” lenders Fannie Mae and Freddie Mac have been demanding lower credit standards — just as the feds did starting under President Bill Clinton, in pursuit of the same “affordable housing” goal.

Some borrowers need only put 3 percent down to get a Fannie Mae loan — even if the downpayment is a gift. Fannie also has started up a new subprime-lending program.

The Office of the Comptroller of the Currency recently warned that mortgage underwriting standards have slipped and now reflect “broad trends similar to those experienced from 2005 through 2007, before the most recent financial crisis.”

When the economy and housing prices turn south again, a lot of these loans will go bad, just as they did last time.

The writer of the article states that he doesn’t believe the loans will cause a worldwide problem this time because the banks have learned their lesson. He does point out, however, that a large portion of housing loans made in America are government insured. That means taxpayers will be on the hook this time (I thought we were the last time). Hang on to your hats. Here we go again.

Recreating The Housing Bubble

On Friday, The Daily Caller posted an article about the government making changes in the mortgage industry that will put the taxpayers on the hook for unpaid loans (sound familiar?).

The article reports:

The administration’s policies and price cuts at the Federal Housing Administration – the latest coming on January 26 — are squeezing the private sector competitors. President Barack Obama and the FHA are engineering things so that just about anyone with a modest down payment who wants a mortgage needs Uncle Sam to get it.

FHA was originally conceived as a vehicle only for low- and moderate-income individuals seeking modest homes and mortgages who were not served by the conventional market. Today, FHA is insuring very large mortgages for people in all income brackets (including ones that absolutely can get mortgage financing in the conventional market). Thanks to prodding from the administration, the FHA mission’s has been transformed in a way that grows the government’s market share, puts private capital in the backseat, and exposes the taxpayers to even greater risks due to their 100 percent guarantee.

After the Dodd Frank law required that lenders to make sure borrowers have the ability to repay mortgage loans, the FHA loosened the standards for FHA loans. This is setting up the taxpayers to be the ones that will have to bail out those loans.

The article concludes:

Fool me once, shame on you. Fool me twice, shame on me. Together the Obama administration and the House and Senate committees looking at the whole business are setting the mortgage market on a path to where — as it now is with student loans — anyone who buys a house will have a government guaranteed loan. This is about as far from the founder’s vision of limited government as one can get. Instead, policymakers should be taking steps to strengthen the private mortgage insurance industry to minimize the exposure of us all to bad policy.

Deja Vu All Over Again

Yesterday’s Washington Post posted an article stating that the Obama Administration is working toward making home loans available to people with weak credit in order to boost the economy. Wow. Just as the housing market is recovering from the sub-prime mortgages of the 1990’s, we are going to add a bunch of risky mortgages to the mix.

The article reports:

In response, 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.

Part of the problem here is the government’s intervention into the housing market. Banks should be left alone to make their own decisions on issuing loans.

The article further reports:

Deciding which borrowers get loans might seem like something that should be left up to the private market. But since the financial crisis in 2008, the government has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans, according to the industry publication Inside Mortgage Finance. It has done so primarily through the Federal Housing Administration, which is part of the executive branch, and taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, run by an independent regulator.

It really is time to let the private sector be the private sector and shrink to government to a reasonable size.

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What Was In That Bill ?

Yesterday the Daily Caller posted a summary of the payroll tax cut bill that recently caused so much hand wringing in Congress. The bill that was passed was pretty much what was suggested at the beginning of the negotiations (except for the two-month limit).

The Daily Caller reports:

—Retains through Feb. 29 the current 4.2 percent rate for Social Security payroll taxes paid by 160 million workers, instead of letting the rate rise to 6.2 percent on Jan. 1.

—Renews federal benefits averaging $300 a week for the long-term unemployed through Feb. 29.

—Prevents 27 percent cut in Medicare payments to doctors; extends other health care fees through Feb. 29.

—Requires President Barack Obama to approve construction of the Keystone XL oil pipeline from Canada to Texas within 60 days unless he declares the project would not serve the national interest.

—Price tag of $33 billion. Paid for by increasing home loan guarantee fees charged to mortgage lenders by Fannie Mae, Freddie Mac and the Federal Housing Administration by one-tenth of 1 percentage point. The fee is passed on to home buyers and will apply to many new purchases and refinancings starting Jan. 1. For a $200,000 mortgage, the fee increases a borrower’s cost by about $17 a month.

—Requires House and Senate leaders in both parties to name negotiators to work on a bill extending the payroll tax cut for a year, extend federal jobless benefits for the long-term unemployed and keep Medicare payments to doctors at their current level.

I guess I am wondering why we need a committee to extend the bill for a year. The gang of twelve didn’t work out too well, so why are we doing this again?

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The Wall Street Journal Understands Financial Things

Logo of the Federal Housing Administration.

Image via Wikipedia

Today’s Wall Street Journal posted an editorial updating what is happening with Fannie Mae and Freddie Mac. It seems that we have not yet learned our lessons about these two organizations.

Florida Republican Bill Posey and New York Democrat Gary Ackerman are asking fellow members of the House of Representatives to sign a letter supporting an amendment to an appropriations bill recently passed in the Senate. The amendment will increase the mortgage limits that Fannie Mae, Freddie Mac, and the Federal Housing Administration can insure from $625,500 to $729,750.

The article concludes:

There’s talk now that the House and Senate will convene a conference later this week to negotiate the final details on the appropriations bill that includes the loan-limit hike, without the accountability of so much as a floor debate or a hearing. That would confirm that, for all its reform talk, the current House majority is little better than the one that disgraced Republican principles in 2005-2006.

Ed Morrissey at Hot Air posted an article yesterday reporting on Mayor Bloomberg’s addressing the Occupy Wall Street people and explaining how federal policies caused the housing bubble. Mr. Morrissey reports on Mayor Bloomberg’s statements:

By this time, everyone should be aware of the federal policies that precipitated the housing bubble and its collapse — the push by Congress and two administrations to push higher-risk lending in order to expand home ownership, as well as the effort by Congress to get Fannie Mae and Freddie Mac to spread that risk through mortgage-backed securities.  While Wall Street made the situation worse by developing risky derivatives on those securities and failed to recognize the risk inherent in the securities themselves, the collapse wouldn’t have occurred at all had the federal government not intervened to distort lending for their own social-engineering goals.

It is becoming very obvious that establishment Republicans are not really very different from the Democrats that got us into this mess. There is only one solution–elect tea party candidates who will not be swayed by the Republican establishment. As long as the current Republican leadership is in control, there will be no change in Washington.

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