Just when we thought Obama was done messing with the economy and the banking industry, word comes that the Occupier of the Oval Office wants to make it easier for people to buy a house whether they can afford it or not. From The Washington Post:
President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.
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.
Oh, hey, yea, that’s the way to get people out of debt in a recession. Sign them up for a mortgage they may not be able to afford and then back it with a federal guarantee on the faith and credit of the people who are already strapped.
Banging one’s head against a flat surface will do nothing other than give you a headache when it comes to this.
Raise your hand if you’ve seen the trailer for this horror movie before. Like, eight years ago, when the big banks finally said that they couldn’t take on any more toxic debt after the community banking moves of 1994 by the federal government made a mess out of their balance sheets. Remember that, when then Treasury Secretary Hank Paulson got all the big banks together and no one would adopt Lehman Brothers, and eventually they all got a whole lot of U.S. taxpayer cash to straighten out the finances? That’s more or less what Obama wants to start all over again.
See, after the housing bubble crash of 2008, when it became known that banks were making risky loans for housing in order to be compliant with federal regulations, the rules for lending for housing within the banking system were tightened. At this time in history, in order to buy a house for the first time, one has to have a stellar credit paper trail of several years, and be able to put down a significant amount of cash as a down payment. Experienced Americans – that would be those of us with a paper trail in the credit realm – actually don’t see what the big deal is with this. It saves a lot of heartache if someone can actually afford what he or she buys.
However, for the community organizer who seems to think he is still running for office, the housing market is a place where government’s hands just need to go.
From 2007 through 2012, new-home purchases fell 30 percent for people with credit scores above 780 (out of 800), according to Federal Reserve Governor Elizabeth Duke. But they declined 90 percent for people with scores between 680 and 620 — historically a respectable range for a credit score.
“If the only people who can get a loan have near-perfect credit and are putting down 25 percent, you’re leaving out of the market an entire population of creditworthy folks, which constrains demand and slows the recovery,” said Jim Parrott, who until January was the senior adviser on housing for the White House’s National Economic Council.
Is it really? Given that the Washington Post article does cite that young people are renting when they first spread their wings rather than buying, maybe that where this reflexivity if “credit worthiness” is coming from. The banks want a paper trail of proven ability to pay. That doesn’t happen without a number of years under the belt.
As the whole situation is shaping up, though, it is the government, not the market that is shaping how the housing situation is playing out. 80-90% of first time mortgages are backed by government programs. In addition, with Obama pushing for banks to be more lenient on credit history when granting mortgage loans, the Justice Department is assuring the banks that it will also be lenient when it comes to enforcing regulations. (Payback for Operation Choke Point?)
And the Obama people all seem to think this is a great idea that will stimulate the economy just the same way it all happened before 2008, and even as far back as the 1920’s when government loans set up the margin bubble. All that’s going to happen is a whole lot of little people are going to go broke.