The Obama Administration is prepared to do anything, including dramatically lowering mortgage lending standards, to keep real estate prices inflated, as demonstrated by statements, reports and events in the month of October.

How high can the government push real estate prices.First came the Federal Housing Authority inspector general's report [pdf]http://www.hud.gov/offices/oig/reports/files/ig0900004.pdf on the FHA's lender approval process, which found that FHA was missing or ignoring relevant information, failing to document loans, not preventing convicted financial criminals from participating in its lending program, and in most other ways failing to "ensure that lenders met all applicable requirements." The IG's spot check revealed, for example, that just one out of 22 approved applications contained all the documentation needed to meet the FHA's own standard for guaranteeing a loan.

The FHA's much more serious offense against lending standards -- its dangerously low 3.5 percent down payment minimum for guaranteed loans -- became the focus of attention this month when the authority was shown to be close to bankruptcy, and Rep. Scott Garrett (R-New Jersey) introduced legislation to boost that minimum to 5 percent.

There is both anecdotal and statistical evidence that the debased lending standards being pushed by FHA and other government entities are creating a dangerous dead cat bounce in real estate markets. Anecdotally, here's a profilehttp://www.calculatedriskblog.com/2009/10/fha-loan-example-einhorn-speech-and.html of a new home borrower who as of this month is paying 54 percent of her income on a house. Statistically, defaults on government-approved loans continue to rise, with Fannie Mae-backed loans now breaking through a 3.3 percent delinquency rate.

We have covered the increasing rate of mortgage redefaults herehttp://reason.com/blog/2009/09/30/dont-pay-now-dont-pay-later, and it's notable that all mortgage modifications are now being done under the watchful eyes of the agencies that guarantee them. Yet redefaults continue to rise, strong evidence that the standards for loan mods are getting worse, not better, under government supervision. Lax lending standards are now policy. The only question is whether the policy is official or unofficial.

Real estate in October 2009 a classic dead-cat bounce.That's the dead cat part. Here's the bounce: While all economic indicators, from rising unemployment through rising mortgage defaults, describe a market in collapse, real estate prices continue to increase. The Case-Schiller August index, announced today, was up 1.2 percent. The National Association of Realtors (NAR) is celebrating a 9.4 percent jump in existing home sales. This Goldman Sachs report issued last week concludes government largesse is adding a full 5 percent to current real estate prices.

How are people buying all this expensive real estate? With nearly the same ratio of debt to down payment as they had in 2005. According to NAR, the median down payment is 4 percent -- slightly above what it was earlier in the decade -- but a third of all U.S. houses are still being bought with no money down.

That's a bad bet for us, because we will be on the hook for the defaults. As this San Francisco Federal Reserve report noteshttp://www.frbsf.org/publications/economics/letter/2009/el2009-33.html, nearly all mortgage securitization is now being done by the nationalized government sponsored enterprises, and virtually none by the private sector. So lenders are not just gambling on bad credit risks, but gambling with your money. Not surprisingly, it's the administration that gets the benefit, as real estate prices, in marked contrast to unemployment, are doing better than the most-adverse projections of the bank stress test conducted earlier this year. (Calculated Risk compares the trendlines.)

I'll have more about all this in an upcoming Reason print column, assuming the United States still exists at that time. There is plenty of rich material, including the way the above efforts concentrate costs at the bottom of the market, thus condemning poor folks -- whom Democrats and watchdogs like the strangely silent Center for Responsible Lending claim to champion-- to company-store-style indentures.

Meanwhile, it appears that October may be remembered as the month that the evidence, and the statements of many officials, all pointed to the same conclusion: The Obama Administration has taken a no-parachute leap of faith that real estate will stay inflated. If you're keeping score at home, this is the precisely the behavior Sen. Obama used to blame on the "ethic of greed."
http://reason.com/blog/2009/10/27/government-is-encouraging-lax

10/28/2009 10:17:58 AM

It's always good to see that the people in power have learned absolutely nothing. We'll see how long they can continue to shift the blame to "greed on Wall Street" before Americans realize what's going on.

I think the Obama administration is maintaining this delusion that spending = growth. Anything we can do to increase spending will make the economy better. And this is a pretty mainstream idea. Things just keep getting worse, though. I've had many Keynesians say to me "savings are terrible, we need more spending!" This is an actual belief. It's all about keeping the ponzi scheme in motion.

10/28/2009 10:37:23 AM

seeing as most Americans dont have any idea how credit works they'll probably never figure out how the fed is fucking everything up.

10/28/2009 11:05:10 AM

.

[Edited on October 28, 2009 at 11:26 AM. Reason : dp.]

10/28/2009 11:25:38 AM

words

10/28/2009 11:25:38 AM

.

[Edited on October 28, 2009 at 11:25 AM. Reason : wow a triple post]

10/28/2009 11:25:38 AM

lax lending... isn't that one of the reasons we got into this real estate/economic bind??

10/28/2009 8:02:04 PM

how many people who had a clunker to trade in really needed a $500 car payment?


That is what baffled me.

10/29/2009 8:18:38 PM

Quote :

"publicly whipped by masked men as punishment for what Islamist leaders call deception"

10/29/2009 8:21:18 PM

Ultimately, it is the greed of wall street that causes this to come back to bite. Lax lending standards are a good thing because they enable the American dream. Its when predatory lending agencies know this and charge ridiculous amounts of interest or play agressive lending with these "risky" borrowers that things get messed up. Its almost as if these banks want people to mess up and then end up getting to greeedy and they force people to default.

10/29/2009 8:46:01 PM

^ agreed

I do not recall the government forcing or even incentivizing the banks to do %100 LTV loans on investment condos and properties to "flip", or loans that do not amortize, or loans that have rates over 12%, etc.

10/29/2009 8:49:38 PM

WHAT?

so, the gov't creates the foundation for the problem, then props that foundation up, but it is NOT the gov'ts fault when the problem occurs? in what fucking world do you live?

Quote :

"Lax lending standards are a good thing because they enable the American dream."

I was not aware that the American dream was "live well beyond your means."

Quote :

"Its when predatory lending agencies know this and charge ridiculous amounts of interest or play agressive lending with these "risky" borrowers that things get messed up."

what if it is the gov't that is encouraging these "risky" borrowers to go out and get loans? Would the gov't still have no fault in this?

Quote :

"Its almost as if these banks the gov't wants people banks to mess up and then end up getting to greeedy and they force people to default banks to fall under gov't control."

there, fixed it for you

10/29/2009 8:50:36 PM

Quote :

"Lax lending standards are a good thing because they enable the American dream."

No. No they do not.

Quote :

"Its when predatory lending agencies know this and charge ridiculous amounts of interest or play agressive lending with these "risky" borrowers that things get messed up."

I know! How dare a bank charge an interest rate commiserate with the amount of risk a lender poses while lending out the deposits* of it's customers.

Who cares if their depositors find their bank to be insolvent, the already insolvent FDIC will ride to the rescue with money borrowed from other banks which can only afford to lend due to the fact that the Federal Reserve has double the monetary supply in the last 12 months.



What could possibly go fucking wrong? Goddamn you're stupid.




* well in the way FR banking actually does this

10/29/2009 10:11:33 PM

this actually really pisses me off and makes me want to bang my head into a wall.

10/29/2009 10:38:21 PM

Honestly is pretty hilarious. It pretty well proves how fucking retarded our government is.

10/29/2009 10:56:56 PM

Quote :

"I know! How dare a bank charge an interest rate commiserate with the amount of risk a lender poses while lending out the deposits* of it's customers."

I hate to burst your bubble. It does not make sense to charge a risky borrower more of what you have already figured out they do not have on a risky loan. Either make the loan or don't, if its risky it probably should not be made with depositors money......either way its risky, especially if the rate is destined to adjust upward making the risky loan even more likely to go in to default.

Or you could do like the big banks and loan people money at the highest rates you can get out of them, adjust the rates upward, and when the whole thing collapses reach a hand out to uncle sam because you are "too big to fail".

Charging risky borrowers more interest just makes the likelihood of the loan defaulting go way up.

10/29/2009 11:23:06 PM

If they knew the fed wouldn't bail them out they wouldn't do it, they'd simply not lend at all to risky borrowers.

10/29/2009 11:30:42 PM

Quote :

"Charging risky borrowers more interest just makes the likelihood of the loan defaulting go way up."

It does not change it much. When someone misses a payment or two, they still may pay it off in full, extra interest and everything. An extra twenty dollars a month is going to drown someone, but not most people. However, what it does do is provide compensation for the changing risk.

As you say, the loan may or may not go ahead and at a higher or lower initial interest rate. If the bank was not allowed to raise the rates later, it would compensate somehow, such as starting people out at higher interest rates, since it couldn't raise them later it could demand them up-front. That would make those that never miss a payment worse off, those that miss payments but finish the loan better off, and those that default would be unaffected.

10/29/2009 11:34:25 PM

Credit unions do not set rates based on credit scores. They charge the same rate to all borrowers, verify income, and do not make loans to people that do not qualify.

How many credit unions have you heard of that have collapsed recently? Not many.

That shit is just done to maximize profit, it does nothing to minimize risk. The risk is there either way and jacking the rate just exacerbates it.

10/29/2009 11:46:43 PM

I wouldn't know, but I seriously doubt credit unions act no different when someone misses a payment. If it is a mortgage, they slap on fees and back interest; if it is a credit card they jack up the interest rates to the maximum legal limit. If they act differently, let me know.

10/30/2009 9:44:28 AM

My Credit Union doesn't do any of those things. They've been expanding a few locations recently and are opening up another location in a month or so all throughout this downturn.

10/30/2009 11:09:25 AM

Quote :

"I seriously doubt credit unions act no different when someone misses a payment. "

You have to be over limit for like 10 days to get charged the $9.99 over limit fee at SECU, they also mail you a letter to warn you.

10/30/2009 11:55:41 AM

Quote :

"They charge the same rate to all borrowers, verify income, and do not make loans to people that do not qualify"

Nothing at all wrong with that. But they have to turn down certain customers because the risk of lending to them is not offset by the potential premium on the loan.


Some banks feel that money is to be made by taking risks. So long as this risk is offset by sufficient risk premiums and the members of the bank agree to it, why not?

10/30/2009 1:38:48 PM

^^ And my Full Fledged Bank never charges me a fee for going over, be it for 10 days or a year. But, I also have their credit card and if I miss multiple payments they will jack up my interest rate to the maximum legal limit. I am not talking about checking accounts, there is nothing special about credit unions in that respect. The question was, if you miss a payment at the only times you are expected to make payments, be it mortgage or credit card, does your credit union charge you more than if you didn't miss the payment? And I strongly suspect the answer is "Absolutely! They like everyone else in the industry throws the book at people that do that without asking first!"

10/30/2009 2:37:12 PM

^ Answer is actually no, they will close your account.

Because the responsible thing to do is close the account.

10/30/2009 10:17:20 PM

We must be talking about different things. I strongly suspect all banks would love to just close the accounts of people that aren't making payments on their loans. But doing that without the customer first paying you back would be stupid. Normally you actually wait until they declare bankruptcy to write loans down to zero.

10/31/2009 1:00:23 AM

Quote :

"The question was, if you miss a payment at the only times you are expected to make payments, be it mortgage or credit card, does your credit union charge you more than if you didn't miss the payment? And I strongly suspect the answer is "Absolutely! They like everyone else in the industry throws the book at people that do that without asking first!" "

I don't know of any Credit Unions that raise interest rates or have fees for being late on a payment. Take SECU for example, the 2nd largest CU in America. They will not increase your interest rates for missing a credit card payment. If you are sufficiently deliquent they will revoke usage on the card, thus "closing" the card for use. But you still have to pay if off.

SECU, to my knowledge, doesn't have a 10 dollar fee for being late on a mortgage either. Don't know where that came from.

10/31/2009 1:24:27 AM

^ Per the SECU membership brochure:

[quote]
CHECKING ACCOUNT SERVICES
...
Service Fee* $0
Insufficient Funds $12
Stop Payment Order $8
Overdraft Transfer** $.50
...
CREDIT CARD SERVICES
VISA Annual Fee No Charge
Late Payment Fee $5
Exceed Credit Line Fee $10
...
MISCELLANEOUS CHARGES
Returned checks/items from Deposits or
Payments $5
[quote]

https://www.ncsecu.org/PDF/Brochures/RulesandRegulations.pdf

They may charge smaller fees, but you'll still be charged for screwing up.

10/31/2009 10:15:35 AM

Sorry, guess I was talking about two things at once. As in, they don't raise your interest rates on your CC if you are late, and I don't know of any fees associated with being late on a mortgage. Also, the late fee on a CC is if you are over a month late on the card, and the exceeded limit fee is if you exceed your limit and carry that over a month...

10/31/2009 10:36:13 AM

How they punish you for being delinquent and over how long a grace period is irrelevant; everyone slaps you for messing up, as they should, they just choose to do it different ways and to a different degree.

10/31/2009 8:19:45 PM

Well, everyone slaps you for messing up, unless you are a large politically connected bank and are therefore too large to fail.

11/1/2009 8:07:31 AM