What was the President talking about in his housing speech in Phoenix the other day? This is an area I have followed rather closely for a long time and I would like to try to clear up some of the fog, if I may.
First, here is a transcript of his speech:
Remarks By the President on Responsible Home Ownership
In case you not not aware of it, there is a move afoot to entirely transform the way that housing finance is handled in our country.
A road map was published in 2011 with the White Paper that was done jointly by Treasury and HUD for Congress which will give you an idea of the overview and see where President Obama's 2 major Departments that concern both Housing and Finance think we should be going.
Reforming America's Housing Finance Market
This White Paper and the President's speech yesterday concur with the goal of dismantling the GSEs Fannie and Freddie and making private capital the overwhelming source of funding for home ownership in this country.
President Obama's own distillation of the policy he is promoting comes down to this:
First, private capital should take a bigger role in the mortgage market. I know that sounds confusing to folks who call me a socialist -- I think I saw some posters there on the way in. (Laughter.) But I actually believe in the free market. And just like the health care law that we put in place, Obamacare -- (applause) -- which, by the way, if you don't have health insurance or you're buying it at exorbitant rates on the individual market, starting on October 1st, you can join a marketplace and be part of a pool that gives you much lower premiums, saves you a lot of money. (Applause.)
But in the same way that what we did with health care was to set up clear rules for insurance companies to protect consumers, make it more affordable, but still built on the private marketplace, 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. So that's one principle.
A second principle is we can't leave taxpayers on the hook for irresponsibility or bad decisions by some of these lenders or Fannie Mae or Freddie Mac. (Applause.) We've got to encourage the pursuit of profit, but the era of expecting a bailout after you pursue your profit and you don't manage your risk well -- well, that puts the whole country at risk. And we're ending those days. We're not going to do that
anymore. (Applause.)
The third principle is we should preserve access to safe and simple mortgage products like the 30-year, fixed-rate mortgage. That’s something families should be able to rely on when they're making the most important purchase of their lives. (Applause.)
Number four, we've got to keep housing affordable for first-time homebuyers -- like all these young people. When they're ready to buy a house, we've got to make sure it's affordable. Families who are working to climb their way into the middle class, we've got to do what we can to make housing affordable. And that means we've got to strengthen the FHA so it gives today’s families the same kind of chance it gave my grandparents to buy a home, and it preserves those rungs on the ladder of opportunity.
Question - Is getting rid of Fannie and Freddie (the GSEs) good or bad?
Answer - Trick question. It doesn't matter what you think, they are going away. Our bi-partisany Senate, specifically Mark Warner (oh oh) and Bob Corker (oh oh) are working on it, and the crazy Republican Congress says so, so it's pretty much a done deal. Plus, with his approval , Obama gets to demonstrate that, as with the healthcare reform which relied on the private sector, he is no Socialist.
Fannie and Freddie Shutdown May Raise Mortgage Rates
The GSEs were created in the first place during the Depression to loosen up the available funds for mortgages by creating a secondary market so that the original funds could go back to the bank to be loaned out again. They also made the resulting securities attractive as low risk for investors.
They worked relatively well, until they too ran after the tail end of the Bush and Greenspan fueled fake housing boom at the insistence of their investors who were mad about them losing market share and then they blowed themselves right up, along with the banks. Sad. But they did fulfill an excellent and necessary role for just about everyone as Official Scapegoat of the Housing Meltdown. For that, they must be punished and killed for everyone else's sins
Question - Who will take over the securitization and insurance roles that the GSEs currently provide? At what cost and to whom?
Answer - They, (you know, THEM) are going to set up some organization similar to the FDIC for mortgages and mortgage securities which will be funded by fees paid by the mortgage companies (only the most cynical among you will think these fees will be passed along to the consumer in some fashion).
The BIGGEST still unanswered questions revolve around what exactly will the requirements be for a loan to be labelled a Qualified Residential Loan? That pretty much will be the whole ball of wax right there. For down payment requirements I have heard everything from 5 to 30 percent down. Also to be determined is maximum allowable debt to income ratio and credit scores.
This is the biggest part of the deal because only Qualified Residential Loans will qualify for the FDIC clone insurance and will not be counted towards Risk Retention requirements in Dodd Frank.(Risk retention is if the bank makes a risky loan, they have to retain a percentage of that loan on their own books. In other words, if they are cooking up hemlock for investors, they have to drink a little too)
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Now I'm just a simple little person who reads a lot and has purchased and sold property in the past and this is what I can tell you I think about all of this.
1. I think it's crappy that the President continues to push the canard that somehow irresponsible home buyers were responsible for the housing meltdown. Did you see how the White House labelled his speech - "Responsible Home OWNERSHIP" when it should be "Responsible Home MORTGAGE LENDING." That just really burns me. The great financial swindles perpetrated on the home-buying public and on innocent investors of the mortgage securities frauds have gone largely unpunished except for some civil slaps on the wrist and some negligible fines.
2, Home ownership will become harder if down payment requirements go up, debt ratios go down and minimum credit scores go up. That's just a fact. The pool of available buyers will shrink greatly.
3. If the pool of available buyers shrinks, home prices will drop, even further then where they are at now. Simple supply and demand.
I personally believe that it is very possible that home-owners themselves will step into the gap and we will see a resurgence of owner financing. This option would only be available to those who own their property outright
4. No one's talking about the other thing on the drawing board which is eliminating the home mortgage interest deduction.
5. If house are harder to buy, and equity slower to build and if tax incentives disappear, the goal of home-ownership itself will begin to lose value to many.
Regarding #5 - is that a good thing or a bad thing?
Why might TPTB want to kill off the American Dream of home ownership?
I hope you will advance your theories in the comments. I will lay back and then confiscate the the best of them as my own original thoughts in a later diary. Just kidding. I do have some theories, some actually benign (mostly involving climate change) and then I have some darker thoughts concerning global corporatists requiring a flexible work force constrained to only the modest goals achievable on serf wages.
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UPDATE
Here is some amazing stuff from a guy who has written more about the housing crisis than just about anyone, David Dayan in Salon and JUST published.
20 Urgent Questions We Should Ask Obama Today
OMG! These questions are incredible. Read the link and the questions posed and educate yourself about the questions we should be asking and aren't.
5. Why do you continually distinguish between what you call “responsible” and “irresponsible” homeowners (your fact sheet on the second-term housing agenda references “responsible” borrowers 10 times)? Do you use the same language to single out “irresponsible” welfare or food stamp recipients or natural disaster victims? Isn’t it the job of the lender to check a borrower’s credit-worthiness, and subsequently how “responsible” their decision is to take out the loan? Haven’t banks admitted to preying on communities with low incomes and poor financial literacy, steering them into risky, higher-cost loans? Why aren’t you talking about “irresponsible” banks?
7. Speaking of things still going on, banks continue to foreclose on homeowners using fabricated, back-dated or forged documents, making a mockery of the property records system in America. In addition, banks failed multiple metrics of the servicing standards they agreed to in the National Mortgage Settlement, which was supposed to stop abusive conduct. Given that these sanctions did not stop much of anything, should new criminal investigations be initiated?