Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19
The Exponential Stocks Bull Market Explained - Video - 13th Mar 19
TSP Recession Indicator - Criss-Cross, Flip-Flop and Remembering 1966 - 13th Mar 19
Stock Investors Beware The Signs Of Recession / Deflation - 13th Mar 19
Is the Stock Market Still in a Bear Market? - 13th Mar 19
Stock Market Trend Analysis 2019 - 13th Mar 19
Gold Up-to-Date' COT Report: A Maddening Déjà Vu - 12th Mar 19
Save Fintech? Ban Short Selling. It's Not That Simple - 12th Mar 19
Palladium Blowup Could Expose Scam of Gold & Silver Futures - 12th Mar 19
Next Recession: Concentrating Future Losses & Bringing Them Forward In Time As Profits - 12th Mar 19
The Shift of the Philippine Peso Regime - 12th Mar 19
Theresa May BrExit Back Stab Deal Counting Down to Resignation, Tory Leadership Election - 12th Mar 19

Market Oracle FREE Newsletter

Stock and Finanacial Markets Trading Analysis Worth

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