Lessons of the “Great Recession” Not Learned
The Obama administration believes in its own propaganda. Believe it or not, the U.S. federal government is currently mandating the same kind of bad behavior that caused the 2007-2008 financial crisis. The administration would have you believe that greedy, rapacious bankers and investors were to blame because of the subprime mortgages they originated. Somehow they have conveniently forgotten bankers were pushed by the federal government into doing what the federal government now acknowledges as the cause of the “Great Recession”.
As you may recall, we demonstrated in the post “Causes of the 2007-2008 U.S. Financial Crisis” that the federal government in the early 1990s had initially required bankers to give at least 30% of all mortgages to people with incomes at or below their communities’ median income level. This requirement was later increased to 56% of mortgages by the Department of Housing and Urban Development. The only mortgage low income families can support is usually a subprime mortgage. They simply do not have the income to afford the traditional 20% down payment, and they often have poor credit ratings since they frequently are living from check-to-check. By requiring that 56% of all mortgages be given to low-income people in many communities, the federal government actually mandated subprime mortgages. The cause of the 2007-2008 recession was the mass of subprime mortgages on which people defaulted.
Last December the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac would begin buying 30-year mortgage loans with as little as 3% down. Yet another Obama administration program for making home-ownership accessible for those with low incomes is a Fannie Mae program called the HomePath Ready Buyer Program. In this program Fannie Mae would give up to 3% closing cost assistance to eligible participants. That is, Fannie Mae would rebate 3% of the home’s cost to the buyer. To be eligible, the buyer must satisfy these conditions:
- The buyer must complete a course to prepare him/her for the responsibilities of home ownership. The course costs $75, but if the buyer actually buys a home in the program, the course cost is refunded.
- The property must be offered for sale in Fannie Mae’s HomePath Ready Buyer Program and be listed on Homepath.com
- The buyer must be a “first-time homebuyer”, which Fannie Mae defines as a buyer who has not owned a home in the last three years.
- Within 60 days of purchase the buyer must reside on the property as his primary residence,
- If the buyer uses public funds to purchase the home or is a tenant in tenant-occupied properties, he is eligible for the program.
And that is pretty much it for program requirements. There is no mention of credit rating or income level. Such mortgages with only a 3% down payment can only be called subprime.
Just as the subprime real estate bubble that popped in 2007 was fueled with easy money from the Federal Reserve, the Fed is offering easy money to fuel a new bubble under these housing programs. The Fed may have stopped its QE (Quantitative Easing) program, but it is still using ZIRP (Zero Interest Rate Policy) to keep real interest rates close to zero.
With the ingredients of subprime mortgages together with easy money from the Fed, we have all the ingredients for a subprime bubble that appears essentially identical to the one that hurled us into the “Great Recession”. If there is any economic downturn at all, large numbers of the buyers of these new subprime loans may have no choice but to default. Already, Fannie Mae and Freddie Mac are reported to be in fragile financial health and may need additional federal bail-outs to stay afloat. When they were bailed-out by the government during the 2007-2008 crisis, they were again taken over by the Bush administration just before Obama took office. In the years since then, the government has swept any profits Fannie Mae and Freddie Mac made into general government funds. Needless to say, these two organizations have marginal financial reserves as a result. Any hiccups in the economy could leave them non-solvent and needing additional bail-out money.
If all this happens and the big banks or Fannie Mae and Freddie Mac are again threatened, will political progressives again put the primary blame on rapacious, greedy non-government financial institutions? Will they again say that it is all due to “free market failure”, and not at all due to government failure?
Will the progressive Left never learn?
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Since the federal government created the conditions for bankers profiting from subprime mortgages, and since the federal government carrys the big stick of coercive law, they might as well profit from what the government demanded that they do. Whether or not they wanted to do it, they had no choice but to comply. Recall that prior to the government mandates in the early 1990s for subprime mortgages, the banks offered none. The only way to get a loan prior to the 1990s was to have a job, have a good credit rating, and simultaneously pay 20% down. The villain of… Read more »
“bankers were pushed by the federal government”. Ha!, to which the bankers were all to eager to comply. They take their cut off the top, “because the govt made me do it (wahh)” , and the hell with what happens afterwards.