Obama on the Housing Crisis (3 of 7)

Uploaded on Jun 11, 2008

Why can’t we learn from our past mistakes? Here is what you said in 2008 Mr. President about the housing crisis:

Sen. OBAMA: Well, I think that there were a combination of forces. Obviously, we’ve had very low interest rates for a long time, and rising, as a consequence, rising housing prices for a long time, which made people feel that housing prices can only go up and only–and never go down. And then that made everybody, consumers, lenders, all feel a little bit too complacent. We had a fundamental failure, though, in government regulation, and I think that was a real problem. We had a government that was not paying attention to loans that were being made on assets that were shaky. You know, you had mortgage lenders engaging in practices that were not sound but because they could immediately sell off those loans and bundle them, and you know, nobody was minding the store. The government should have, at a certain point, stepped in and said, `We’ve got to tighten up these lending standards or we’re going to be building a house of cards.‘ And that sort of transparency and accountability in the marketplace, that’s not anti-market, that’s pro-market. One of the things that’s always worked for us, it’s been one of our competitive advantages, is people can trust that if they invest in our markets, that they know what they’re getting. And in the housing market in this situation, that–our government didn’t do its job.

Newscom

The Obama Administration is reportedly pushing banks to increase mortgage lending to people with relatively weak credit in hopes of boosting home sales. But the very same policy under Presidents Clinton and Bush contributed mightily to the housing bubble that ultimately devastated millions of families in mortgage default.

Credit is indeed tight—a predicament that’s exacerbated by the President’s tax and regulatory policies. Reforms to those policies are needed to prompt housing-sector growth.

Home sales have improved in the past year—but there was no place to go except up. The rebound is largely confined to rental-property investments and established homeowners with exemplary credit. Home sales to younger, first-time buyers—those necessary to a healthy market—remain scant.

Bankers’ current caution is understandable. High unemployment, tepid economic growth, and punishing tax and regulatory burdens have made lending particularly risky and costly.

Nor are borrowers banging on bankers’ doors. Currently, only 58.6 percent of U.S. adults are working, a number that has barely changed since 2009. Young adults have been disproportionately affected. Indeed, the number of individuals age 18 to 30 living with parents or relatives has increased by more than one million above typical levels in recent years, according to research by the Federal Reserve.

At the same time, the regulatory jihad of Dodd–Frank has radically expanded creditors’ liability for mortgage defaults—among countless other new requirements that have made lending too costly for all but the most secure mortgages.

Hundreds of pages of new servicing standards, for example, entangle in red tape the collection of mortgage payments as well as maintenance of escrow accounts, loan modifications, and foreclosures. Other Dodd–Frank provisions dictate virtually every element of the loan process.

Of particular consequence is the Qualified Mortgage rule, which dictates the criteria that determine whether a borrower can repay the loan. Under Dodd–Frank, borrowers have the right to sue lenders for improperly assessing their “ability to repay” a mortgage. Lenders who write loans that do not meet the “qualified mortgage” criteria face a much greater risk of default litigation.

In the past, creditors would balance greater risk by charging a higher interest rate. But Dodd–Frank also punishes lenders who would do so.

The President’s call for (essentially) more subprime lending appears to conflict with these and other regulatory restraints he aggressively advocated. Perhaps the Administration now understands why Dodd–Frank opponents repeatedly warned that such policies would restrict credit.

Taxpayers should worry a great deal if the White House, as reported, is promising to cover the inevitable defaults of subprime borrowers. They have already forked over more than $100 billion to bail out the politically driven subprime lending of Fannie Mae and Freddie Mac.

The last thing the President should be doing is pushing banks to extend mortgages to people who cannot afford them. Been there, done that—with disastrous consequences. Credit will flow again on its own if crippling tax and regulatory constraints are lifted.

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I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism,  Greece,  welfare state or on gun control.

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