Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Here’s Why You Must Protect Yourself Outside the Financial System… - 22nd Nov 19
The Promise of AI - 22nd Nov 19
The Financial Implications of Bitcoin Casinos in Japan - 22nd Nov 19
FOMC Minutes Reveal an Important Shift That’s Key for Gold, Too - 22nd Nov 19
Adaptive Predictive Modeling Suggests Stock Market Weakness Into 2020 - 22nd Nov 19
Why You Should “Follow the Money” on The Yellow (and Silver) Brick Road - 22nd Nov 19
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

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.


© 2005-2019 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

6 Critical Money Making Rules