The Next Bubble

When the last housing bubble burst, politicians blamed "greedy banks." They said mortgage companies lent money recklessly, making loans to people with dubious credit, for down payments as low as 3 percent.

"It will work out," said the optimistic bankers. Regulators didn't disagree. Everyone said, "Home prices will keep going up." And home prices did -- until they didn't.

The bubble popped in 2007. Lots of people were hurt, and politicians took more of your tax money to bail out Fannie Mae and Freddie Mac along with reckless banks. They also gave the Federal Housing Administration a $2 billion bailout.

Then the politicians said, "We'll fix this so it doesn't happen again." Congress passed Dodd-Frank and a thousand new regulations. The complex rules slowed lending, all right. It's one reason this post-recession recovery has been abnormally slow.

But -- April Fools'! -- the new rules didn't solve the problem of reckless lending, and it's happening again.

Because our government subsidizes home purchases, recklessness is invited. Somehow, Americans buy cars, clothing, computers, etc. without government guarantees, but politicians think housing is different.

The left wants government to help struggling families, and the right thinks home ownership sends a wholesome cultural message. Both parties have cozy connections to home-builders and lenders.

At the time of the housing crash, most high-risk loans were guaranteed by the government. Those banks wouldn't have been as reckless if they had their own money on the line.

But they knew they could grant a mortgage to most anyone and the FHA would back it or government-sponsored companies Fannie Mae and Freddie Mac would buy it. That fueled the frenzy of lending.

After the bubble popped, I assumed the political class would learn a lesson, but they haven't. Today, even more American mortgages are guaranteed by government. More than 90 percent of new loans are backed by taxpayers. After the crash, Fannie and Freddie did raise their minimum down payment -- to a measly 5 percent -- but a few months ago, they lowered it again to 3 percent!

Are they crazy? A sensible congressman, Rep. Jeb Hensarling (R-TX), tried to get an answer from the administration's new mortgage regulator, asking in a hearing, "All things being equal, is a 3 percent down riskier to the taxpayer than a 10 percent down loan?"

A pretty basic question -- but one that director Mel Watt still dodged, responding, "Mr. Chairman, that is generally true. But when you pair the down payment with compensating factors ... look at other considerations ... you can ensure that a 3 percent loan is just as safe."

What? That's nonsense. This is what happens when pandering politicians get to dispense your money. Watt is among the worst. When he was a congressman, he pushed for mortgage subsidies for welfare recipients who made down payments as low as $1,000.

Edward Pinto, who studies housing risk for the American Enterprise Institute, says policies like this put us on the way to another bubble: "The government is once again ... saying, let's loosen credit, give loans to people that potentially can't afford them, and everything will be fine because house prices will go up."

On my show, former FHA commissioner David Stevens, who did improve lending standards a bit after the crash (before Watt and his cronies weakened them), responded that this time the government has new regulations that will prevent things falling apart: "I think in the effort, post-recession, to make sure we never go down this path again, we have created more rules than ever existed in the history of this country."

But more rules aren't a solution. Government's regulators didn't foresee the problems last time. Fannie and Freddie got a clean bill of health right up until the collapse.

The solution is less government involvement. Canada doesn't have a Fannie, Freddie or FHA. Canada didn't have the trauma of a housing bubble. In Canada, lenders and homeowners risk their own money.

Does that mean Canadians cannot afford homes? No! Without all that government help, Canada's homeownership rate is higher than ours.

Almost everyone seems to have forgotten that the catalyst for the previous housing bubble and crash was the federal governments demands that lenders extend mortgage loans to people (primarily minorities) who did not qualify and had no reasonable prospects of being able to afford the payments.

Not letting the Banks off the hook, but didn’t the Community Reinvestment Act require Banks to give a high percentage of their home loans in the ‘sub-prime’ category so more minorities could own? Under penalty of prosecution? That aspect is missing from this story.

Yep. Actually, I think it wasn’t penalty of prosecution that was the big stick, but risks to renewal of the bank charter.

Also, the GSEs (Fannie/Freddie) lowered their mortgage standards so they bought the crap loans that were made.

Then, they tried to shift some of the blame to the ratings agencies (who did deserve heat).

In the end, this is all about the Left spreading the wealth. Housing and loose lending, couple with government subsidies and backing is a mere shell game that simply redistributes the wealth.

Why else would you ever want someone to buy a house with $1,000 down payment with a loan with artificially low interest rates courtesy of the Feds along with the backing and guarantee of Fannie or Freddie. The answer of course is that the government will step in on those many loans that will go bad and payoff the banks with money from responsible taxpayers. Poof, you’ve just redistributed the wealth courtesy of the Left who is NOT as much interested in “helping the poor” as they are interested in buying their votes to keep them in power.

Human nature plays a role. If a person has invested 20% of their own money for down payment, they have every reason to not go into foreclosure. That's only true if second mortgages haven't given them back their investment and created a situation where the house has no equity.

These know-it-alls who write policies should look in the back yards of us normal folk before coming up with their hypotheses which they treat as Gospel. The way things are now, let's say a person who doesn't handle responsibility or finances real well gets a house with next to no down payment. They are less likely to pay for major repairs and be good about upkeep, as that would be their money. When they no longer want the house and it isn't in good enough condition for a sale that covers their mortgage, they have an out. They can stop paying that mortgage and live rent-free until foreclosure happens. The money they've saved by not paying the mortgage can be used to start out somewhere else.

I wonder how long before we have a rental market collaspe. Where I live they are building a lot of apartments. The rents are several hundred dollars monthly more than home ownership of a existing home.

Seems to me that when people start buying used homes these buildings will sit empty. At some point the average guy is going to start buying homes again. From what I see the only ones who can afford homes now are the people on welfare or the high wage earners. Not the blue collar worker. They seem to be locked out of the market by the new rules.

“everything will be fine because house prices will go up.”

This is the worst canard. Housing prices should only go up if the market can support them, not just as a general principle. If they are being buoyed by easy flowing money from the government, then they are not rising because of true market forces, and will eventually have to crash, because the government cannot keep the money faucet turned on forever.

“I wonder how long before we have a rental market collaspe.”

The rental market and housing market are counterbalanced. When home purchases are soaring, fewer people are renting and the rents tend to go down. When home purchases bottom out, more people start renting and the prices go up.

“The rents are several hundred dollars monthly more than home ownership of a existing home.”

Are you including utilities, maintenance, and real estate taxes in the cost of home ownership?

“Seems to me that when people start buying used homes these buildings will sit empty. At some point the average guy is going to start buying homes again.”

Well, they will only sit empty if the owners either refuse to reprice the apartments, or if they are unable to reprice them because they wouldn’t be able to pay their bills at a lower rent (this is a problem mainly for new construction). Still, there will have to be another housing crash before that happens, because home prices will not go back down to a level affordable for the average worker until that happens.

If I had to rent my house it would cost nearly five hundred more per month over my house payment which includes taxes and insurance. This does not include upkeep on my house.

I do have about 30% equity. But still principal and equity payment is only about 60% of my monthly payment.

In San Francisco, an apartment building changed hands.

One lady was on TV saying that her rent had gone from about $2000 a month to almost $9000 a month.

So much for rent control..........

“If I had to rent my house it would cost nearly five hundred more per month over my house payment which includes taxes and insurance. This does not include upkeep on my house.”

Well of course renting the house costs more than the mortgage payments, because the person you are renting from is still making those same mortgage payments, plus they have to pay for maintenance, landscaping, etc, and they would surely like to make some profit on top of that too.

Renting can be cheaper than owning, but not so much with houses, only usually when you are renting in a multifamily property.

Yeah, the commercial rental market has rebounded a bit, but there is still a lot more space available than businesses who are looking to rent. To top that off, commercial owners often have clauses built in to the mortgages now that won’t allow them to rent the commercial space for less than a certain amount per square foot. Of course this is an extremely bad idea, because then the owner can’t respond to the market efficiently and losses are inevitable, but the banks are doing it anyway for some unfathomable reason.

I’m not an expert (but hubby is). Haven’t asked him, but will tonight.

Thinking it has something to do with:

a. the borrower having enough NOI to ensure service of the debt

b. LTV

Yes, it might be that taking a lower rent makes the borrower think the income will be too low to make the loan payments, but if rent isn’t lowered in a bad market, the space sits vacant and you are in even worse shape paying the loan. So it seems to me to be cutting off the nose to spite the face.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.