Wednesday, August 7, 2013

Obama's Nonsensical Housing Reform Plan

After reading Obama's remarks, I honestly had to wonder whether people actually thought about the plan he was going to propose or they just had him say things that sound good in front of a friendly audience?  Seriously.  And of course he couldn't resist a remark about " an endless parade of distractions and political posturing and phony scandals".  Why scandals are phony?  Did the NSA not collect data on innocent Americans?  Did the IRS not target groups that were seen as opposed to the administration?  Did an Ambassador not die?  I'd really like to know.  Anyway, on to his plan:

1.  "Congress should pass a good, bipartisan idea to allow every homeowner the chance to save thousands of dollars a year by refinancing their mortgage at today's rates."  This definitely sounds good but why exactly does it need Congressional action?  The reasons people typically can't refinance are because they are underwater in their home and no bank will give them a new loan at the home valuation that they need to get rid of the first mortgage and because they don't meet current credit/lending standards.  Congress "fixing" this only creates more problems.  First, the current owner of the mortgage is going to take a loss.  So banks are going to lose capital and investors in mortgage backed securities will see the valuations of those securities go down.  Considering the Federal Reserve is having to prop up that market right now, I don't think it could use any more bad news like having the government cram losses into them.  Also, if the reason for the lack of ability to refinance is bad credit, is a new loan going to fix anything?  Plus, if you force banks to give new loans to people with bad credit aren't you just creating another class of subprime loans that will one day blow up in our faces?

2.  "We're cutting red tape for responsible families who want to get a mortgage but keep getting rejected by the banks.  We need to give well-qualified Americans who lost their jobs during the crisis a fair chance to get a loan if they've worked hard to repair their credit."  How do you judge if someone has "worked hard to repair their credit"?  If it's improved from 400 to 500?  Even irresponsible people have periods where they haven't done anything completely idiotic or simply have periods of good luck.  But we're talking about 30 year mortgages here.  If people have had financial disasters in the past they probably are more likely to have more in the future (works the same as heart attacks) and any bank giving them additional funds are liable to take a loss.  So once again, this would create another subprime lending mess.

3.  "And step three is something that you don't always hear about when it comes to the housing market, and that is fixing our broken immigration system.  It would actually help our housing market. "  So printing dollars isn't working well enough now we need to get more people too?  Anyway, he might have a point if he was talking about fixing the immigration system so educated, skilled people could come here easier.  But he's not.  The vast majority of people who are going to be assisted by the current immigration proposals probably don't have good enough credit to buy a home.

4.   "Let's put construction back -- construction workers back to work repairing rundown homes, tearing down vacant properties so that the value of homes in those surrounding areas start picking up."  Just what we need, more government funded construction jobs.  Because that worked oh so well with his $900 billion stimulus (remember that?).   Anyway, what we need are industrial jobs in sustainable industries, not jobs that go away once the project is done.

5.  "Instead, let's invest in affordable rental housing.  Let's bring together cities and states to address local barriers that drive up rents for working families. "  Does that mean he wants rent control which might keep rents low but also leads to a restriction of supply?  Or does he want to overrule local zoning boards and force them to put up low-income housing whether they want to or not?

6.  "Right now there's a bipartisan group of senators working to end Fannie and Freddie as we know them.  And I support these kinds of reform efforts...   I believe that our housing system should operate where there's a limited government role and private lending should be the backbone of the housing market.  And that includes, by the way, community-based lenders who view their borrowers not as a number, but as a neighbor."  I actually like this section a lot.  Honestly.  I'm wondering if he put it in there so he can take credit for it or something when it happens because it actually flies in the face of other sections of his plan.  First, because Fannie and Freddie were able to borrow money with the full backing of the US government, they helped reduce mortgage rates.  Hence, getting rid of them will most likely increase mortgage rates somewhat making housing less affordable.  Also, community based lenders are not the folks who will be too willing to give loans to people "working really hard to improve their credit".  Community banks tend to hold on to the mortgages they lend and not sell them off for someone else to worry about hence they are much more conservative than the fly-by-night brokers that originated 2/3 of the subprime loans in 2006.  Taken together, this part of the plan will likely reduce affordability and access, which seems to be the exact opposite of the spirit of the speech.  I guess I'm happier though with Obama being right for the wrong reasons than being just plain wrong like he is usually.

And honestly I simply question the need to do much, if anything, to encourage greater home ownership.  The home ownership rate is 65.4% today while pre-bubble it was closer to 64%.  There is simply no evidence that Congress needs to enact any major legislation other than to get rid of Fannie and Freddie.

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