Journalism in the Public Interest

The Latest Myth About the Government’s Mishandling of the Housing Market

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No matter how many times people debunk the notion that government policy created the housing bubble, it doesn't die. It's part of what the blogger Barry Ritholtz has called the "big lie" of the financial crisis. Now, we are having another argument about whether the government is creating a new housing disaster for taxpayers.

The target this time: the Federal Housing Administration, the government's mortgage insurer mostly for low-to-moderate income and minority borrowers. Late last year, the F.H.A. issued its annual report to Congress. According to estimates, over its lifetime, the agency would have to pay more out on the mortgages it has insured than it has taken in. The report estimated the potential shortfall at $16 billion, which is a lot in absolute terms, but minuscule in relation to the federal budget and the $1.1 trillion F.H.A. portfolio.

Despite these modest numbers (more on that below), the same crew that assailed the government's role in the housing bubble is now rending its garments about the F.H.A. Critics, like Edward J. Pinto of the American Enterprise Institute, argue that the agency has not only failed to help low-income communities, but is actually destroying them with reckless loans.

Next month, we may end up doing it all again, when the Office of Management and Budget issues its analysis of the agency's finances, using a different methodology.

So is the F.H.A. in trouble and in need of an imminent bailout?

Not really. According to the actuarial analysis, if the agency stopped backing mortgages right now, it would have a deficit after 30 years. But even by that analysis, it has enough cash for many years. And it will not stop insuring mortgages. In fact, it's backing what are probably going to be very safe and profitable home loans right now, so even if it drew money from the United States Treasury, it would almost certainly be able to pay it back eventually.

And if there is a Treasury infusion, taxpayers should consider it a bargain. The agency has been a rare bright spot in the Obama administration's otherwise dismal record on housing.

In both the boom and bust, the F.H.A. functioned as one would hope a government lending operation would. As the bubble grew and private lenders went nuts, its market share dwindled. (Maybe this wasn't on purpose, but it's better to be lucky than smart.) When the market crashed, the F.H.A. stepped in.

Without the agency's lending, mortgage rates would have doubled and home prices would have dropped another 25 percent, estimates Mark Zandi, chief economist of Moody's Analytics.

John Griffith, a housing policy analyst for the liberal Center for American Progress, has produced several useful rejoinders to the F.H.A.'s critics. He points out that compared with the private sector, the agency is doing quite well. Yes, the agency faces a high rate of delinquencies, but they pale when compared with private sector subprime loans.

At their peak in the fourth quarter of 2009, 9.4 percent of the F.H.A. loans were seriously delinquent, compared with 30.6 percent of subprime loans, according to the Mortgage Bankers Association.

"To go this far without significant problems after the worst housing crisis since the Great Depression is remarkable," Mr. Griffith said.

The F.H.A. hasn't been perfect. Far from it. The agency was too aggressive with its lending. When it stepped in as the market was collapsing, it should have had more careful lending standards. Now, it has tightened them up and raised its fees, which will put the agency in much better shape.

And its history isn't pure. One of its more disastrous policies was to allow something called seller-financed loans, where a nonprofit organization would broker a deal for a low-income borrower. In truth, someone else, like a developer, would front the costs and this would inflate the cost of house itself. Low-income borrowers could find themselves underwater almost immediately.

"A phenomenal mistake," Mr. Griffith said. The F.H.A. considered banning such loans. But the private sector lobbied for them, and with a push from Congress, the loans continued until 2009.

Yet, the criticism of F.H.A. from Mr. Pinto of the American Enterprise Institute, who in the late 1980s was the chief credit officer of Fannie Mae, goes far beyond that. Mr. Pinto says the F.H.A. has a record of 60 years of "mission failure" and that it's getting worse. Its lending standards have been eroding for years, and now it has an unacceptably high failure rate, he says. His work, including a study late last year, aims to show the F.H.A. has actually hurt the low-income and minority communities it purports to serve.

Mr. Pinto's study cites high rates of delinquencies in many neighborhoods, but that's no surprise. The housing market crashed in many cities. To have high default rates in those areas is hardly a sign of out-of-control government lending.

"I respect Ed, but he's dead wrong," Mr. Zandi of Moody's said. "He's got it absolutely backward." The private sector, not government, led us into the bubble.

Mr. Pinto has been repeatedly criticized for exaggerating the role of Fannie Mae and Freddie Mac in the mortgage crisis. The Financial Crisis Inquiry Commission took a long hard look at them, because Peter J. Wallison, a major proponent of the theory that the government created the housing bubble, sat on the commission. The commission found that the Pinto analysis was flawed.

Mr. Pinto is undaunted. He told me he believes that "federal housing policy was the cause of the housing boom and bust. That was what got us into this mess. People want to deny it."

That is what is known, as the Freudians tell us, as projection.

The debate has important consequences. If the F.H.A. does turn out to be a disaster, it undermines the idea that the government can serve a valuable role in financing loans to deserving and responsible people who can't afford traditional mortgages.

kent mollohan

Jan. 9, 2013, 5:20 p.m.

So Mr. Pinto was intimately involved in the “run-up” to FHA failures and the privatization of housing finance around the time of Reaganomics, is almost self explanatory of his idiocies in his analyses.  Of course I tend to think of his current institution as but a rabid dog wanting to eat his own.  Good luck with that bunch.

Goodness - quoting Zandi is like having Obama’s PR people help you write a story.  You can do better. Who else thinks Pinto is wrong?

Fanmae and Freddie Mac set the standards.  That’s what the private sector used since they sold to Fanny and Freddie.  The gov controls 99per cent of the mortgage market, Duh….Banks don’t warehouse!

My natural inclination is to always blame the government, but sometimes that way of thinking leads to incorrect conclusions.  One example was the Enron scandal. I had just assumed that it had been caused by the bungling of the State of California. Was I surprised! Anyway, although I still think that most of our ills are caused by the government, particularly of the leftwing kind, I do realize that such an assumption is sometimes misguided. So, when I saw this article, I was prepared to accept the possibility that my preconceptions might be in error. I was prepared to listen to the writer’s facts and arguments and to reevaluate my opinions. That didn’t become necessary. It wasn’t necessary because the author supplied no facts or arguments that supported his opinion. He just gave his opinion, so I won’t be printing this article, after all. Too bad, because I really like my beliefs to be challenged from time to time.

Thanks to Warren and Terri.  I too found the article vacant of facts.  How about those hard hitting journalistic terms like “almost certainly”, “eventually” and “probably”.  How about “a Treasury infusion should be considered a bargain”. Nothing subjective there.  Little research and a lot of opinion.  Pro Publica, I am surprised you would print this.

Michael E McCarthy

Jan. 9, 2013, 6:23 p.m.

Please read All the Devils are Here by McClean and Nocera as well as Reckless Endangerment by Morgenson.  Pay special attention to the beginning of chp 15 of RE.  Not that these books are the last word on the subject but they’ll give you a good idea on whom to blame for the meltdown in 2008.  The investment banks weren’t buying securities from F&F -  unfortunately it was the other way around. Hank Paulson wanted them to buy even more Wall St garbage to inject liquidity into the lending markets but F&F smartly refused - too little too late.

Thanks for the reading tips. Like Fox News, I try to be fair and balanced, and when I say “balanced,” I don’t mean Obama’s corruption of the term. Here’s a list of my own (I already had All the Devils are Here and Reckless Endangerment): The new Empire of Debt by Bonner and Wiggin, On the Brink by Paulson, Jr., The Housing Boom and bust by Thomas Sowell, Financial Shock by Zandi, Wall Street and the Financial Crisis by the U.S Senate Permanent Subcommittee on Investigatiions, and The Financial Crisis Inquiry Report by the National Commission on the Causes of the Financial and Economic Crisis in the United States.

There’s a sizeable crowd that unwaveringly “knows” that the GSE’s are the root cause.  Then there’s another sizeable crowd that unwaveringly “knows” the rating agencies are the root cause ..  and some other betting their firstborn that wall street banksters were the cause.  The same effect/result is being explained (housing crisis)  but root causes so different that somebody’s got it wrong (many)  scores of vocal, self-sure, well-informed purists might be in for a bad day eventually that way..
But any verdict still requires some unambiguous truth showing full attribution, and why wait around for that unlikelihood?  So many factors, correlated factors, plus pure massive size of market near-guarantee the competition of conjecture ends up in a draw anyway.  .  Also cant attach some human like thought/intent to these very not-human institutions—no sinister legion of doom crafted the devilish oitcome.  we all lost.

The fact that the commentors all lead with ad hominem tells me the article is right in essentialsl.

It started when Greenspan and Clinton decided to “deregulate” the telecom industry but., left it regulated while forcing it to sell its private property at below market value. When the resulting bubble popped, Greenspan lowered the interest rate to keep the economy from collapsing and Congress, pushed by Obama, mandated that loans be made in “underserved” areas. The FED’s money found its way into the housing industry and caused the Housing Bubble. Yes. The government caused this ongoing disaster.

Even if you were partially right, which you’re not, it wouldn’t justify your conclusion. That’s not logic, that’s just trying to impress by using a latin phrase. I’ll be generous and give you credit for knowing what it means, although I have my doubts, but the fact that someone uses ad hominem attacks does not prove that the person he is attacking is proven to be correct by those attacks.  It just means that he is not being logical in his attacks. If the position being attacked is wrong, it doesn’t become right because it is clumsily and ineptly attacked.

@Smith…....I was part of the OCC when the de-reg of energy, telecon came through…...We did not force telecoms to see property as you mean it.  We DID force AT&T to rent/lease its lines at a rate we deemed appropriate….....Competition was to be allowed, the different activities were broken up.  But the ‘fone company’ owned all the infrastructure at that time.

Allan Flippin

Jan. 10, 2013, 2:01 a.m.

You can argue about policy for a very long time.  But the major cause of speculative bubbles is a critical mass of people who all believe the price of something can never go down.
    For people in my generation, that belief was in housing prices.  Who could stop us all from believing what we were raised to believe?  But we were wrong.  Over time, private organizations and the government both adapted to this “reality” in ways that fed the bubble while it made us believe we were still right.
    The same as when tulip prices went out the roof, the way to not have a bubble is to have a public that’s smart enough to realize that any fad or trend will eventually play itself out.

Carlos Gonzalez

Jan. 10, 2013, 9:43 a.m.

The author assumes that the Federal government has to be a part of the process at all.  The participation of the Federal government in home lending turned what should have been a local driven market phenomenon into a nationwide systemic bubble driven by the value of the financing, not the value of the home.  Without the Federal intervention, the real estate bubbles would have been limited to markets in like CA, FL, AZ, and NY, been far smaller in scope, easier to recover from, and would have not been a burden on the Federal tax payer.

No matter how many times people debunk the notion that government policy created the housing bubble...

Note that I don’t want to (as some might) absolve the banks of wrongdoing at all.  However, the government not “creating” the bubble seems like a semantic dodge.  It’s hard to deny that the door was cracked open with Greenspan’s low fund rates, which is the only way the NINA loans could ever have arisen.  The OCC explicitly blocked the state Attorneys General from investigating the subprime mortgage industry.  I’m sure it wouldn’t take much more digging to find more problems that aren’t the domain of the tinfoil haberdashers.

They may not have created it, but the government definitely brought on the conditions and prevented anybody from stopping it.  It’s very hard for me to blame people for confusing the two.

Huh? This is not Jesse E.‘s best work.
Partisan hack Mark Zandi, a relentless Obama booster, is hardly the only source that could be found for various points of view.
Sorry, Jesse. Back to the drawing board.
There are many bad actors in the housing meltdown, and the feds’ key role in hampering recovery makes it a likely suspect.
Finger-pointing does no good: many loopholes and errors made up this mix. A perfect storm, but in a bad way.
Picking fights with the AEI is dull and rote. Add Zandi to the mix and you come across as unappealingly partisan.
Try again, dude. You have better efforts ahead of you…we await them.

Anyone who believes that the Housing Crisis wasn’t exacerbated by failed Democrat ideology and out right corruption is mentally impotent!

clarence swinney

Jan. 10, 2013, 12:48 p.m.

Washington Post reported a study on 2000 PNTR or Permanent Normal Trade Relations
passed by President Clinton. The study concludes that “freer trade with China cut manufacturing jobs by one third”.  Eliminated tariffs on Chinese goods will not return anytime soon.
We have closed 58,000 plants. Millions of jobs in small communities lost have hurt local economies.
My home town lost textiles and apparel to China. The mill hill villages look like poor poor.
Shame on Clinton. It hurts.  Add Nafta. 800,000 jobs to Mexico. President Clinton, greatest job creator in America. China, Mexico. Thanks.

Neil Cunningham

Jan. 10, 2013, 8:33 p.m.

Excellent article.

Where I differ is that the author like most Americans: if a bad outcome occurs, we must blame it on “one” party or individual.  Specifically to imply that it was entirely the private-sector caused the problem would be more accurate it they forced people to sign mortgage obligations, which I hardly believe was the case.

Concurrent responsibility included the 1) government regulators who had little if any oversight over the quality of the loans and an individual’s ability to repay, 2) the rating agencies who allowed tranches to carry AAA ratings as long as sub-prime loans in their tranches did not exceed 50%, 3) Insuring loans in which the ‘originatos’ (a.k.a. the mortgage broker whores) never had any skin in the game, 4) the realtors who used crooked appraisers to overstate a home’s realistic value, 5) and obviously the appraisers who gained materially from phoney appraisals.

In any event, Propublica is a great site as it provides valuable information and more objectivity than most so-called ‘news’ organizations.

If I remember correctly, Wall Street financiers took over at Fannie Mae and Freddie Mac and stole as much from government coffers as they did from homeowners when their housing value crashed.  They must think we’re stupid.  Now, the housing recovery is due to overseas investors buying up OUR land as tax havens.  It must stop.  America has been raped enough.

Holdem Accountable

Jan. 11, 2013, 1:09 p.m.

It was all Krugman’s fault:

Aug 2, 2002
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Next Article:
Why the crooks that stole trillions still walk free: Government Complicity
How to arrest the criminals and take back the $21 trillion stashed in the Caymans
OMG- Our Politicians are Crooks too!

It’s like that LAPD Ramparts scandal where the gangs had their youth sign up at the police academy…. the banks did the same thing to infiltrate the Gov. (see Government Sachs), Obama shamelessly picked JP Morgan Chase VP William Daley (of the Chicago Daleys) to be his Chief of Staff before Lew.

“Without the agency’s lending, mortgage rates would have doubled and home prices would have dropped another 25 percent, estimates Mark Zandi, chief economist of Moody’s Analytics.”

Isn’t that the definition of a gov’t inflated bubble?

It is the most successful economic system ever created.

We have all sorts of animals competing and seeking to dominate. As a society, though we are willing to accept some of the greedy completion, government was organized to bring some order and limits.

The government not only did not limit the destructive mortgage market, but it actually was a booster encouraging continuous expansion.

Please do not blame the fox for doing what is natural. Blame the farmer who did not maintain his fence that was to protect the chickens.

Catherine Tripp

Jan. 14, 2013, 10:04 p.m.

Good job, Jesse.  Because I read and kept your Portfolio magazine piece on the Credit Ratings Racket (2007), I don’t just believe the crisis was mainly caused by S&P and Moody’s blatant conflict of interest in issuing MBS ratings to the same companies they were advising - I know it.  Also, there is the Permanent Subcommittee on Investigations report published April 3rd, 2011 titled Wall Street and the Financial Crisis which backed up Jesse’s 2007 expose on the Ratings Agencies.  Higher down payments are just NOT going to prevent another financial collapse.  Eliminating conflicts of interest that mislead the global investment community just might.

I’m with Ms Tripp and a big fan of this author.  But wont blame rating agencies (RA’s) that way.  they’re pvt companies who compete to sell a product to buying customers—the ‘product is expert opinion, and clients are creators of new investments.  The purchase/sale is a success.  Their clients arent complaining about what they were sold
.but this huge universe of onlookers is looking to hear about, know, and rely on new ratings. RA’s have no idea who they are… or how they will use them.  No contractual agreement or accountabilities btw.

But this huge crowd is what nearly dsstroyed them.  in any contract RA’s wil sign they’ll insist on disclosures re “opinion”, inability to predict future, etc.  To show how serious they mean it they include loads of data/infoe to explain exactly why they came up with their view.

AEI is the same bucket shop that sold us a bill of goods on Iraq.  Iraq has WMD. Iraq has ties to al Qaeda. Saddam Hussein was bin Laden’s gay lover.  All lies.  All told with a straight face that would make a used car salesman blush.

I’d sooner trust Bernie Madoff than anyone from AEI, including Pinto.

Jesse Eisinger

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