//';l[1]='a';l[2]='/';l[3]='';l[19]='"';l[20]='|109';l[21]='|111';l[22]='|99';l[23]='|46';l[24]='|110';l[25]='|111';l[26]='|115';l[27]='|97';l[28]='|101';l[29]='|114';l[30]='|64';l[31]='|108';l[32]='|108';l[33]='|101';l[34]='|104';l[35]='|99';l[36]='|116';l[37]='|105';l[38]='|109';l[39]='|46';l[40]='|115';l[41]='|105';l[42]='|114';l[43]='|104';l[44]='|99';l[45]=':';l[46]='o';l[47]='t';l[48]='l';l[49]='i';l[50]='a';l[51]='m';l[52]='"';l[53]='=';l[54]='f';l[55]='e';l[56]='r';l[57]='h';l[58]=' ';l[59]='a';l[60]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> (310) 367-6109
Editorial & Production Offices:3415 S. Sepulveda Blvd. Suite 400 Los Angeles, CA 90034 (310) 391-2245
advertisements GA_googleFillSlot("left1"); GA_googleFillSlot("left2"); GA_googleFillSlot("left3"); GA_googleFillSlot("left4"); GA_googleFillSlot("left5"); Print|Email|Single Page Five Lies About the American Economy The Obama team's favorite slices of fiscal baloney AudioPlayer.setup("/media/swf/player.swf", { width: 290 }); // Listen to Audio Version (MP3) ').show(); AudioPlayer.embed("outloudaudio", {soundFile: data.audio, titles:"Five Lies About the American Economy"}); }else{ //$("#outloudopinion").html('Listen to Reason.com articles on OutloudOpinion
'); } }); // ]]> GA_googleFillSlot("inner1");The ongoing recession has raised a troubling question for otherwise resurgent Keynesian economists: How can the American economy keep getting worse under the intensive care of an interventionist economic team almost universally praised for its brilliance? The answer may be that the Obama administration is dealing with a fictional economy, one that bears little resemblance to the economy the rest of us inhabit. And when the difference between fact and fiction becomes too apparent, they just make stuff up. Herewith, five big lies the administration loves to tell and the mainstream media (with some notable exceptions) love to repeat:
1. Bold government action staved off a Depression, saving or creating 1.5 million jobs.
"Just remember," Treasury Secretary Tim Geithner said on November 1, 2009, "a year ago today, last year, you had markets around the world come to a stop. Economic activity just stopped, came to a standstill, like flipping a switch."
Geithner implies that the American business climate improved substantially in the first year of the Obama administration. In fact, nearly every indicator, from employment to freight transport to rents to retail sales to real estate, has headed steadily south. In some cases, such as unemployment, the numbers have been far worse than the Obama economic team's worst-case projections. In others, such as real estate, the weakness of the market is masked by expensive government support, including but not limited to the unkillable First-Time Homebuyer Credit, an assault on loan underwriting standards (see Lie No. 2) by the Federal Housing Authority and the government-run mortgage giants Fannie Mae and Freddie Mac, and the completely opaque $75 billion Home Affordable Modification Program (HAMP).
The $787 billion in stimulus spending authorized by the American Recovery and Reinvestment Act of 2009 is now best known for its inflated and unsupportable job creation numbers. At press time, Council of Economic Advisers Chairwoman Christina D. Romer (who, confusingly, made her academic reputation proving that fiscal stimulus did not help the U.S. economy during the Great Depression and World War II) was giving the stimulus credit for 1.5 million American jobs in 2009. All efforts at checking her claims, however, have turned up very different numbers. The Associated Press, the Boston Globe, the L.A. Weekly, and local papers around the country have failed to find actual jobs to match up with those being reported at Recovery.gov. The administration's only concession to this reality has been rhetorical: After claiming that hundreds of thousands of jobs had been "created" early in 2009, the Council of Economic Advisers turned to the phrase "saved or created" by mid-year. In December the Obama administration again changed its measure to jobs "funded" by the stimulus.
Of all the government interventions since the start of the real estate decline, only one"”the rescue effort for too-big-to-fail Wall Street players, which predates Obama"”has had a measurable effect. The Troubled Asset Relief Program, the Federal Reserve's promiscuous use of discount windows and dollar-destroying low interest rates, and the Treasury Department's open wallet for incompetent financial institutions have cumulatively ensured the survival of the biggest, failiest financial institutions, including such devourers of the commonweal as Citigroup, which managed to lose $7.6 billion in the fourth quarter of 2009 despite an infusion of tens of billions of taxpayer dollars over the year.
2. "No one wants banks making the kinds of risky loans that got us into this situation in the first place."
President Obama made this claim following a December meeting with big bank officials, then contradicted himself by urging bankers to take "third and fourth" looks at rejected business loan applications. But the administration has been even more enthusiastic about encouraging another type of credit: the precise risky loans that got us into this situation in the first place.
Mortgage lending standards have declined, and the amount of risky debt taxpayers are underwriting has rapidly increased, under Obama's guidance. A 2009 audit found that the Federal Housing Authority (FHA) was failing to vet lenders, ignoring missing borrower documentation, and declining to consider negative information prior to guaranteeing loans. More important, the FHA still guarantees mortgages with a minimum down payment of only 3.5 percent, despite abundant evidence that a borrower with low equity is more likely to default than any other type of borrower. (See Lie No. 3.) Defaults on government-approved loans continue to rise, as do redefaults on mortgages refinanced under HAMP.
Undaunted, the administration wants to give unpromising borrowers greater access to debt. At press time, the Treasury Department was considering allowing borrowers to get HAMP modifications by using only pay stubs, rather than tax records, to prove their financial status.
3. The economic crisis is a "subprime crisis."
"We believe the effect of the troubles in the subprime sector on the broader housing market will be limited," Federal Reserve Chairman Ben Bernanke said in May 2007, "and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
To understand how Bernanke could be so wrong on something so important (see Lie No. 4), note that the real estate bust was not a problem with self-identified "subprime" loans (mortgages that are made to borrowers with bad credit and not backed by Fannie Mae and Freddie Mac). In fact, the rapid expansion in subprime lending was a late phenomenon that occurred in the last 18 months of a decade-long real estate bubble. Subprime defaults are actually slightly below their worst-ever historic records, and the explosion of subprime defaults that began in 2005 was accompanied or slightly preceded by a statistically equal explosion in prime defaults.
How is this possible? The period going back to the mid-1990s has seen a massive increase in mortgages that look prime (and are backed by Fannie and Freddie) but in fact feature dangerously low down payments, tricky interest-only and adjustable rate mechanisms, and other inadvisable debt schemes. Late in 2008, Fannie Mae admitted in a footnote that its portfolio had for years been stuffed with alt-A, negative amortization loans, and other junk debt.
Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. Fannie, Freddie, the Department of Housing and Urban Development, the Federal Housing Administration, and all other federal real estate concerns have been working since the 1990s to increase the loan-to-value ratio of mortgages. They have succeeded: Americans now own a smaller percentage of their homes than at any other time in history.
Page: 1 2 >Help Reason celebrate its next 40 years. Donate Now!
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See all 115 comments | Leave a comment johnl|3.11.10 @ 1:51PM|#It is too much to say """ Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. """ Especially right after calling negam loans junk. Not just wrong but inconsistent.
reply to this robc|3.11.10 @ 5:07PM|#Ummm...how is that inconsistent?
The less equity the higher probabilty of default. Negams have negative equity which make them really high.
Whats the problem?
reply to this johnl|3.11.10 @ 5:56PM|#The proportion of the equity that comes from principal payments is pretty small and doesn't have a lot to do with how much equity you have. The reason why negam loans default is that they are selected by people who are willing to pay a lot of extra money to lower their monthly payments a little bit. When someone gets a negam, they are telling you they can't afford their house.
And there is plenty more that can help you predict if a loan will default. Investment properties are worse than residences, cashout refis are worse than purchases, ...
reply to this //';l[1]='a';l[2]='/';l[3]='';l[9]='"';l[10]='|109';l[11]='|111';l[12]='|99';l[13]='|46';l[14]='|108';l[15]='|105';l[16]='|97';l[17]='|109';l[18]='|103';l[19]='|64';l[20]='|104';l[21]='|116';l[22]='|97';l[23]='|108';l[24]='|101';l[25]='|112';l[26]='|46';l[27]='|99';l[28]='|114';l[29]='|97';l[30]='|109';l[31]=':';l[32]='o';l[33]='t';l[34]='l';l[35]='i';l[36]='a';l[37]='m';l[38]='"';l[39]='=';l[40]='f';l[41]='e';l[42]='r';l[43]='h';l[44]=' ';l[45]='a';l[46]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |3.11.10 @ 11:04PM|#I agree, to say
the only reliable gauge
is an overstatement. Default rates are plenty well correlated to other factors--like (shocker!) FICO score. (And yes, that's after controlling for equity.)
reply to this //';l[1]='a';l[2]='/';l[3]='';l[15]='"';l[16]='|109';l[17]='|111';l[18]='|99';l[19]='|46';l[20]='|108';l[21]='|105';l[22]='|97';l[23]='|109';l[24]='|116';l[25]='|111';l[26]='|104';l[27]='|64';l[28]='|102';l[29]='|108';l[30]='|111';l[31]='|119';l[32]='|101';l[33]='|118';l[34]='|97';l[35]='|106';l[36]='|111';l[37]='|109';l[38]=':';l[39]='o';l[40]='t';l[41]='l';l[42]='i';l[43]='a';l[44]='m';l[45]='"';l[46]='=';l[47]='f';l[48]='e';l[49]='r';l[50]='h';l[51]=' ';l[52]='a';l[53]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |3.12.10 @ 6:51PM|#That's still not inconsistent. I don't see where Mr. Cavanaugh claimed principal payments as relevant as a predictor. Neg
(310) 367-6109
Editorial & Production Offices:3415 S. Sepulveda Blvd. Suite 400 Los Angeles, CA 90034 (310) 391-2245
advertisements GA_googleFillSlot("left1"); GA_googleFillSlot("left2"); GA_googleFillSlot("left3"); GA_googleFillSlot("left4"); GA_googleFillSlot("left5"); Print|Email|Single Page Five Lies About the American Economy The Obama team's favorite slices of fiscal baloney AudioPlayer.setup("/media/swf/player.swf", { width: 290 }); // Listen to Audio Version (MP3) ').show(); AudioPlayer.embed("outloudaudio", {soundFile: data.audio, titles:"Five Lies About the American Economy"}); }else{ //$("#outloudopinion").html('Listen to Reason.com articles on OutloudOpinion
'); } }); // ]]> GA_googleFillSlot("inner1");The ongoing recession has raised a troubling question for otherwise resurgent Keynesian economists: How can the American economy keep getting worse under the intensive care of an interventionist economic team almost universally praised for its brilliance? The answer may be that the Obama administration is dealing with a fictional economy, one that bears little resemblance to the economy the rest of us inhabit. And when the difference between fact and fiction becomes too apparent, they just make stuff up. Herewith, five big lies the administration loves to tell and the mainstream media (with some notable exceptions) love to repeat:
1. Bold government action staved off a Depression, saving or creating 1.5 million jobs.
"Just remember," Treasury Secretary Tim Geithner said on November 1, 2009, "a year ago today, last year, you had markets around the world come to a stop. Economic activity just stopped, came to a standstill, like flipping a switch."
Geithner implies that the American business climate improved substantially in the first year of the Obama administration. In fact, nearly every indicator, from employment to freight transport to rents to retail sales to real estate, has headed steadily south. In some cases, such as unemployment, the numbers have been far worse than the Obama economic team's worst-case projections. In others, such as real estate, the weakness of the market is masked by expensive government support, including but not limited to the unkillable First-Time Homebuyer Credit, an assault on loan underwriting standards (see Lie No. 2) by the Federal Housing Authority and the government-run mortgage giants Fannie Mae and Freddie Mac, and the completely opaque $75 billion Home Affordable Modification Program (HAMP).
The $787 billion in stimulus spending authorized by the American Recovery and Reinvestment Act of 2009 is now best known for its inflated and unsupportable job creation numbers. At press time, Council of Economic Advisers Chairwoman Christina D. Romer (who, confusingly, made her academic reputation proving that fiscal stimulus did not help the U.S. economy during the Great Depression and World War II) was giving the stimulus credit for 1.5 million American jobs in 2009. All efforts at checking her claims, however, have turned up very different numbers. The Associated Press, the Boston Globe, the L.A. Weekly, and local papers around the country have failed to find actual jobs to match up with those being reported at Recovery.gov. The administration's only concession to this reality has been rhetorical: After claiming that hundreds of thousands of jobs had been "created" early in 2009, the Council of Economic Advisers turned to the phrase "saved or created" by mid-year. In December the Obama administration again changed its measure to jobs "funded" by the stimulus.
Of all the government interventions since the start of the real estate decline, only one"”the rescue effort for too-big-to-fail Wall Street players, which predates Obama"”has had a measurable effect. The Troubled Asset Relief Program, the Federal Reserve's promiscuous use of discount windows and dollar-destroying low interest rates, and the Treasury Department's open wallet for incompetent financial institutions have cumulatively ensured the survival of the biggest, failiest financial institutions, including such devourers of the commonweal as Citigroup, which managed to lose $7.6 billion in the fourth quarter of 2009 despite an infusion of tens of billions of taxpayer dollars over the year.
2. "No one wants banks making the kinds of risky loans that got us into this situation in the first place."
President Obama made this claim following a December meeting with big bank officials, then contradicted himself by urging bankers to take "third and fourth" looks at rejected business loan applications. But the administration has been even more enthusiastic about encouraging another type of credit: the precise risky loans that got us into this situation in the first place.
Mortgage lending standards have declined, and the amount of risky debt taxpayers are underwriting has rapidly increased, under Obama's guidance. A 2009 audit found that the Federal Housing Authority (FHA) was failing to vet lenders, ignoring missing borrower documentation, and declining to consider negative information prior to guaranteeing loans. More important, the FHA still guarantees mortgages with a minimum down payment of only 3.5 percent, despite abundant evidence that a borrower with low equity is more likely to default than any other type of borrower. (See Lie No. 3.) Defaults on government-approved loans continue to rise, as do redefaults on mortgages refinanced under HAMP.
Undaunted, the administration wants to give unpromising borrowers greater access to debt. At press time, the Treasury Department was considering allowing borrowers to get HAMP modifications by using only pay stubs, rather than tax records, to prove their financial status.
3. The economic crisis is a "subprime crisis."
"We believe the effect of the troubles in the subprime sector on the broader housing market will be limited," Federal Reserve Chairman Ben Bernanke said in May 2007, "and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
To understand how Bernanke could be so wrong on something so important (see Lie No. 4), note that the real estate bust was not a problem with self-identified "subprime" loans (mortgages that are made to borrowers with bad credit and not backed by Fannie Mae and Freddie Mac). In fact, the rapid expansion in subprime lending was a late phenomenon that occurred in the last 18 months of a decade-long real estate bubble. Subprime defaults are actually slightly below their worst-ever historic records, and the explosion of subprime defaults that began in 2005 was accompanied or slightly preceded by a statistically equal explosion in prime defaults.
How is this possible? The period going back to the mid-1990s has seen a massive increase in mortgages that look prime (and are backed by Fannie and Freddie) but in fact feature dangerously low down payments, tricky interest-only and adjustable rate mechanisms, and other inadvisable debt schemes. Late in 2008, Fannie Mae admitted in a footnote that its portfolio had for years been stuffed with alt-A, negative amortization loans, and other junk debt.
Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. Fannie, Freddie, the Department of Housing and Urban Development, the Federal Housing Administration, and all other federal real estate concerns have been working since the 1990s to increase the loan-to-value ratio of mortgages. They have succeeded: Americans now own a smaller percentage of their homes than at any other time in history.
Page: 1 2 >Help Reason celebrate its next 40 years. Donate Now!
StumbleUpon| Digg| Reddit| Twitter| FacebookTry Reason's award-winning print edition today! Your first issue is FREE if you are not completely satisfied.
See all 115 comments | Leave a comment johnl|3.11.10 @ 1:51PM|#It is too much to say """ Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. """ Especially right after calling negam loans junk. Not just wrong but inconsistent.
reply to this robc|3.11.10 @ 5:07PM|#Ummm...how is that inconsistent?
The less equity the higher probabilty of default. Negams have negative equity which make them really high.
Whats the problem?
reply to this johnl|3.11.10 @ 5:56PM|#The proportion of the equity that comes from principal payments is pretty small and doesn't have a lot to do with how much equity you have. The reason why negam loans default is that they are selected by people who are willing to pay a lot of extra money to lower their monthly payments a little bit. When someone gets a negam, they are telling you they can't afford their house.
And there is plenty more that can help you predict if a loan will default. Investment properties are worse than residences, cashout refis are worse than purchases, ...
reply to this //';l[1]='a';l[2]='/';l[3]='';l[9]='"';l[10]='|109';l[11]='|111';l[12]='|99';l[13]='|46';l[14]='|108';l[15]='|105';l[16]='|97';l[17]='|109';l[18]='|103';l[19]='|64';l[20]='|104';l[21]='|116';l[22]='|97';l[23]='|108';l[24]='|101';l[25]='|112';l[26]='|46';l[27]='|99';l[28]='|114';l[29]='|97';l[30]='|109';l[31]=':';l[32]='o';l[33]='t';l[34]='l';l[35]='i';l[36]='a';l[37]='m';l[38]='"';l[39]='=';l[40]='f';l[41]='e';l[42]='r';l[43]='h';l[44]=' ';l[45]='a';l[46]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |3.11.10 @ 11:04PM|#I agree, to say
the only reliable gauge
is an overstatement. Default rates are plenty well correlated to other factors--like (shocker!) FICO score. (And yes, that's after controlling for equity.)
reply to this //';l[1]='a';l[2]='/';l[3]='';l[15]='"';l[16]='|109';l[17]='|111';l[18]='|99';l[19]='|46';l[20]='|108';l[21]='|105';l[22]='|97';l[23]='|109';l[24]='|116';l[25]='|111';l[26]='|104';l[27]='|64';l[28]='|102';l[29]='|108';l[30]='|111';l[31]='|119';l[32]='|101';l[33]='|118';l[34]='|97';l[35]='|106';l[36]='|111';l[37]='|109';l[38]=':';l[39]='o';l[40]='t';l[41]='l';l[42]='i';l[43]='a';l[44]='m';l[45]='"';l[46]='=';l[47]='f';l[48]='e';l[49]='r';l[50]='h';l[51]=' ';l[52]='a';l[53]='= 0; i=i-1){ if (l[i].substring(0, 1) == '|') document.write("&#"+unescape(l[i].substring(1))+";"); else document.write(unescape(l[i]));} //]]> |3.12.10 @ 6:51PM|#That's still not inconsistent. I don't see where Mr. Cavanaugh claimed principal payments as relevant as a predictor. Negams start with little or no equity and get worse. They have high default rates and their borrowers have low equity stakes. If I'm missing something here, please explain.
reply to this Fatty Bolger|3.12.10 @ 11:23AM|#It's not the *only* reliable indicator, but it's true that high equity collateralized loans rarely default. The reason is simple, though. With enough equity the collateral can always be sold for a high enough price to cover the loan, even if it means a loss for the owner. Lots of people get into trouble with their house payments even though they have high equity, but it ends up being their problem alone and not the bank's.
reply to this The Gobbler|3.11.10 @ 4:45PM|#About that First-Time Homebuyer Credit:
This time, there are no prostitutes involved, just a shady, and serious, tax-fraud scheme. The ploy involves the Obama administration's 10 percent tax credit to first-time home buyers. The law says that the credit maxes out at $8,000 for an $80,000 home. But at the Detroit office of the Department of Housing and Urban Development, the rule seems open to interpretation. O'Keefe asks a staffer, What if I bought a place for $50,000, but the seller and I agreed to write down $80,000 as the purchase price?
"Flip it any way you want," the staffer replies.
What if the place is worth much less "” like only $6,000?
"Yup, you can do that."
O'Keefe and fellow activist Joe Basel ran the same sting at HUD's Chicago office and at several federally supported independent housing groups. Breitbart paces the parquet floor. The video is damning but not exactly Acorn-explosive.
Then O'Keefe stops the playback. "Oh yeah, I forgot," he says. "We went to the Detroit Free Press, to the managing editor. We told her the whole thing. She said she wasn't interested. Wanna see the tape?"
http://bigjournalism.com/mwals.....ng-target/
reply to this //';l[1]='a';l[2]='/';l[3]3415 S. Sepulveda Blvd. Suite 400 Los Angeles, CA 90034 (310) 391-2245
The ongoing recession has raised a troubling question for otherwise resurgent Keynesian economists: How can the American economy keep getting worse under the intensive care of an interventionist economic team almost universally praised for its brilliance? The answer may be that the Obama administration is dealing with a fictional economy, one that bears little resemblance to the economy the rest of us inhabit. And when the difference between fact and fiction becomes too apparent, they just make stuff up. Herewith, five big lies the administration loves to tell and the mainstream media (with some notable exceptions) love to repeat:
1. Bold government action staved off a Depression, saving or creating 1.5 million jobs.
"Just remember," Treasury Secretary Tim Geithner said on November 1, 2009, "a year ago today, last year, you had markets around the world come to a stop. Economic activity just stopped, came to a standstill, like flipping a switch."
Geithner implies that the American business climate improved substantially in the first year of the Obama administration. In fact, nearly every indicator, from employment to freight transport to rents to retail sales to real estate, has headed steadily south. In some cases, such as unemployment, the numbers have been far worse than the Obama economic team's worst-case projections. In others, such as real estate, the weakness of the market is masked by expensive government support, including but not limited to the unkillable First-Time Homebuyer Credit, an assault on loan underwriting standards (see Lie No. 2) by the Federal Housing Authority and the government-run mortgage giants Fannie Mae and Freddie Mac, and the completely opaque $75 billion Home Affordable Modification Program (HAMP).
The $787 billion in stimulus spending authorized by the American Recovery and Reinvestment Act of 2009 is now best known for its inflated and unsupportable job creation numbers. At press time, Council of Economic Advisers Chairwoman Christina D. Romer (who, confusingly, made her academic reputation proving that fiscal stimulus did not help the U.S. economy during the Great Depression and World War II) was giving the stimulus credit for 1.5 million American jobs in 2009. All efforts at checking her claims, however, have turned up very different numbers. The Associated Press, the Boston Globe, the L.A. Weekly, and local papers around the country have failed to find actual jobs to match up with those being reported at Recovery.gov. The administration's only concession to this reality has been rhetorical: After claiming that hundreds of thousands of jobs had been "created" early in 2009, the Council of Economic Advisers turned to the phrase "saved or created" by mid-year. In December the Obama administration again changed its measure to jobs "funded" by the stimulus.
Of all the government interventions since the start of the real estate decline, only one"”the rescue effort for too-big-to-fail Wall Street players, which predates Obama"”has had a measurable effect. The Troubled Asset Relief Program, the Federal Reserve's promiscuous use of discount windows and dollar-destroying low interest rates, and the Treasury Department's open wallet for incompetent financial institutions have cumulatively ensured the survival of the biggest, failiest financial institutions, including such devourers of the commonweal as Citigroup, which managed to lose $7.6 billion in the fourth quarter of 2009 despite an infusion of tens of billions of taxpayer dollars over the year.
2. "No one wants banks making the kinds of risky loans that got us into this situation in the first place."
President Obama made this claim following a December meeting with big bank officials, then contradicted himself by urging bankers to take "third and fourth" looks at rejected business loan applications. But the administration has been even more enthusiastic about encouraging another type of credit: the precise risky loans that got us into this situation in the first place.
Mortgage lending standards have declined, and the amount of risky debt taxpayers are underwriting has rapidly increased, under Obama's guidance. A 2009 audit found that the Federal Housing Authority (FHA) was failing to vet lenders, ignoring missing borrower documentation, and declining to consider negative information prior to guaranteeing loans. More important, the FHA still guarantees mortgages with a minimum down payment of only 3.5 percent, despite abundant evidence that a borrower with low equity is more likely to default than any other type of borrower. (See Lie No. 3.) Defaults on government-approved loans continue to rise, as do redefaults on mortgages refinanced under HAMP.
Undaunted, the administration wants to give unpromising borrowers greater access to debt. At press time, the Treasury Department was considering allowing borrowers to get HAMP modifications by using only pay stubs, rather than tax records, to prove their financial status.
3. The economic crisis is a "subprime crisis."
"We believe the effect of the troubles in the subprime sector on the broader housing market will be limited," Federal Reserve Chairman Ben Bernanke said in May 2007, "and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
To understand how Bernanke could be so wrong on something so important (see Lie No. 4), note that the real estate bust was not a problem with self-identified "subprime" loans (mortgages that are made to borrowers with bad credit and not backed by Fannie Mae and Freddie Mac). In fact, the rapid expansion in subprime lending was a late phenomenon that occurred in the last 18 months of a decade-long real estate bubble. Subprime defaults are actually slightly below their worst-ever historic records, and the explosion of subprime defaults that began in 2005 was accompanied or slightly preceded by a statistically equal explosion in prime defaults.
How is this possible? The period going back to the mid-1990s has seen a massive increase in mortgages that look prime (and are backed by Fannie and Freddie) but in fact feature dangerously low down payments, tricky interest-only and adjustable rate mechanisms, and other inadvisable debt schemes. Late in 2008, Fannie Mae admitted in a footnote that its portfolio had for years been stuffed with alt-A, negative amortization loans, and other junk debt.
Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. Fannie, Freddie, the Department of Housing and Urban Development, the Federal Housing Administration, and all other federal real estate concerns have been working since the 1990s to increase the loan-to-value ratio of mortgages. They have succeeded: Americans now own a smaller percentage of their homes than at any other time in history.
Help Reason celebrate its next 40 years. Donate Now!
Try Reason's award-winning print edition today! Your first issue is FREE if you are not completely satisfied.
It is too much to say """ Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. """ Especially right after calling negam loans junk. Not just wrong but inconsistent.
Ummm...how is that inconsistent?
The less equity the higher probabilty of default. Negams have negative equity which make them really high.
Whats the problem?
The proportion of the equity that comes from principal payments is pretty small and doesn't have a lot to do with how much equity you have. The reason why negam loans default is that they are selected by people who are willing to pay a lot of extra money to lower their monthly payments a little bit. When someone gets a negam, they are telling you they can't afford their house.
And there is plenty more that can help you predict if a loan will default. Investment properties are worse than residences, cashout refis are worse than purchases, ...
I agree, to say
the only reliable gauge
is an overstatement. Default rates are plenty well correlated to other factors--like (shocker!) FICO score. (And yes, that's after controlling for equity.)
That's still not inconsistent. I don't see where Mr. Cavanaugh claimed principal payments as relevant as a predictor. Negams start with little or no equity and get worse. They have high default rates and their borrowers have low equity stakes. If I'm missing something here, please explain.
It's not the *only* reliable indicator, but it's true that high equity collateralized loans rarely default. The reason is simple, though. With enough equity the collateral can always be sold for a high enough price to cover the loan, even if it means a loss for the owner. Lots of people get into trouble with their house payments even though they have high equity, but it ends up being their problem alone and not the bank's.
About that First-Time Homebuyer Credit:
This time, there are no prostitutes involved, just a shady, and serious, tax-fraud scheme. The ploy involves the Obama administration's 10 percent tax credit to first-time home buyers. The law says that the credit maxes out at $8,000 for an $80,000 home. But at the Detroit office of the Department of Housing and Urban Development, the rule seems open to interpretation. O'Keefe asks a staffer, What if I bought a place for $50,000, but the seller and I agreed to write down $80,000 as the purchase price?
"Flip it any way you want," the staffer replies.
What if the place is worth much less "” like only $6,000?
"Yup, you can do that."
O'Keefe and fellow activist Joe Basel ran the same sting at HUD's Chicago office and at several federally supported independent housing groups. Breitbart paces the parquet floor. The video is damning but not exactly Acorn-explosive.
Then O'Keefe stops the playback. "Oh yeah, I forgot," he says. "We went to the Detroit Free Press, to the managing editor. We told her the whole thing. She said she wasn't interested. Wanna see the tape?"
http://bigjournalism.com/mwals.....ng-target/
In other news
ACORN, the liberal group notorious for allegedly trying to inflate voter rolls through fraudulent practices, has seen its last election in Ohio.
The Association of Community Organizations for Reform Now will permanently surrender its Ohio business license by June1 as part of a legal settlement with the conservative Buckeye Institute for Public Policy Solutions, both sides said yesterday.
ACORN was active in Ohio in the 2006 and 2008 elections, working to register thousands of low-income people to vote and get them to the polls. The group's efforts were marred by irregularities, including one case in which ACORN workers allegedly induced a Cleveland man to register to vote 72 times, offering cigarettes as an incentive."
http://www.dispatchpolitics.co.....stories/20
Remember ACORN is out there doing God's work. If you are reading this Joe Boyle, fuck you and die.
The biggest disappointment about this Administration is that they are so much interested in looking good, as opposed to getting results.
Looking good. Looking good?
They haven't looked good since Jan 20, 2009. It's all been downhill from there on both foreign and domestic policy. They have already set the four year record for unforced errors and PR fuck-ups. I'd say it's more like they're interested in what's good for their narrow power base and patronage parasites. The rest of us can go to hell.
Lookin' goooood, Baracky!
You wave the flag for the company which hires you.
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