The housing bust, de ja vu
The housing market collapsed in 2008. Depending upon your political persuasion, we either got there because of greedy bankers, or because the federal government (i.e., Fannie Mae and Freddie Mac) lowered credit standards. Apparently, your government is urging a repeat performance.
In a 26-page paper sent to top lawmakers on congressional banking committees, the Fed warned that tight mortgage- lending standards threaten to hold back the economy. [emphasis supplied]
Yes, you read that correctly.
Of course, the Fed has nothing to do with the housing market. But every measure the Fed has used within its power has done little to boost the economy. So, apparently, this will be the new mantra. I could probably write a doctoral thesis on why the policies of neither the Fed, nor the administration have helped the economy, but, I will leave that for another day.
Here is what the Fed has to say about the current policies of Fannie and Freddie.
Some actions that cause greater losses to be sustained by the [companies] in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery. [emphasis supplied]
“Might” and “if”…don’t you just love it when the federal government makes policy decisions based upon those two proven theories.
You, the taxpayer, have already thrown $151 billion at Fannie and Freddie to bail them out of the results of loans that they assumed, but should never have assumed due to the poor credit ratings of the borrowers. So, Fannie and Freddie have tightened their credit standards, but the Fed wants them to now relax those standards again based solely upon “mights” and “ifs”.
The administration will claim that the Fed has lowered borrowing rates to near zero, but the banks are still not lending. You need to understand why.
Many lenders are worried about being forced to buy back loans they sell to Fannie and Freddie if those mortgages later default. [Fannie and Freddie]…have ramped up these so called put-backs to minimize the amount of taxpayer money the firms must borrow but it discourages new lending, the Fed paper said.
Distilled to its basics, here is what the Fed wants. Banks, Fannie and Freddie should once again lower their credit standards, but if any of those mortgages default, Fannie and Freddie can dump those bad loans back on the banks.
If you were a bank, would you take the risk of lowering your credit standards given the inevitable outcome?
Understand, though, this is an election year, and the President has little in the way of accomplishments to point to. Legal or not, he will do something in the housing market. The only question is what.
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