Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Stalling Loans in Our Banking Economy is a Good Thing

Economics / Credit Crisis 2014 Sep 23, 2014 - 10:19 PM GMT

By: Harry_Dent

Economics

Rodney Johnson writes: Part of the story about subprime mortgages during the U.S. banking economy of the 1990s and 2000s centers on the Community Reinvestment Act — through which Congress required lending institutions lend more in poor neighborhoods.

There is a question as to how much this drove lenders to extend credit to people who couldn’t afford it.


Late in the subprime game, FNMA and FHLMC (Fannie Mae and Freddie Mac), the two government-sponsored mortgage giants, began buying up subprime mortgages from banks, further encouraging this type of lending. How much or how little these two programs mattered can be endlessly debated. What we know for a fact is that both things existed, so when the housing market blew up there was some rationale for laying part of the blame at the feet of government.

Those days are long gone… or at least, they were.

While FNMA and FHLMC are now under the conservatorship of the U.S. government, the programs aren’t dead. In fact, these two entities still purchase mortgages made in the U.S. but with a new overseer and under new regulations.

The watchdog that keeps the two entities in line is the Federal Housing Finance Agency (FHFA), which was created for this purpose. Since the financial crisis, the head of the FHFA was Edward DeMarco. He believed it was his job to preserve as much value as possible for the American taxpayers who had bailed out these two giants.

Part of his approach was to keep as much interest from mortgages flowing into the two companies while staying away from risky lending. For a banker, these sound like good ideas.

But then Mr. DeMarco was replaced. Apparently his conservative approach to the business didn’t fit with the plans of the administration, which wanted Fannie Mae and Freddie Mac to offer a slew of mortgage changes to underwater homeowners, many of which would’ve cost taxpayers money.

As is the prerogative of the administration, Mr. Mel Watt was installed as the head of the FHFA in January of this year, and he has declared that the mortgage giants under his control should do more to help struggling homeowners. Part of this help is encouraging banks to assist more low-income borrowers to not only refinance their homes, but also purchase homes, just like during the housing boom.

FHFA encourages such behavior by changing the mix of loans the two entities will buy from banks. When Fannie and Freddie offer to buy more low-income loans, if banks don’t have the right mix, then the banks are missing out on some almost free money.

I say “almost free” because the new regulations for mortgages in general are now making themselves known. Part of the fallout from the new Consumer Finance Protection Bureau (CFPB) is that banks can be held liable if they make a loan to a person whom later defaults, but it’s determined that the bank should have known the borrower was most likely not able to pay in the first place.

Take a minute to digest that.

Banks are at fault if they make a conforming loan (one that meets all the guidelines of Fannie Mae or Freddie Mac), but the loan defaults at some point and the borrower can show the bank “should have known” that the borrower wasn’t good for it.

Is it any wonder that banks are choosing to make only the most cautious lending decisions with that kind of liability hanging over their mortgages? Who in their right mind would make subprime loans that had even the most remote chance of defaulting?

There is no question that CFPB regulations are stemming the flow of loans, which is one of the many things that are holding back the economy. But in this particular instance, it’s better for the nation that the loans never get made.

While we won’t sell as many homes, at least fewer people will be taking on mortgages they potentially can’t pay, and taxpayers won’t have to eat the cost of default.

Rodney

http://economyandmarkets.com

Follow me on Twitter @RJHSDent

Rodney Johnson

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in