The chief executives of three giant banks – Citigroup, Merrill Lynch and UBS – were forced to resign in recent days. They were held accountable for billions of dollars of losses in their firms’ so-called investments in “subprime” mortgage-backed securities. The Financial Times reports that big U.S. and European banks are braced for many months and perhaps years of further disclosures of massive losses and housing sector depression.
Frederic Mishkin, a Federal Reserve Board member, said in a recent speech of intended reassurances to investors: “Conditions for subprime borrowers have the potential to get worse before they get better.” He urged mortgage lenders and loan-servicing companies to go beyond case-by-case bailouts of individual debtors and consider modifying all subprime loans under a sweeping program “to help large groups of borrowers.”
Treasury Secretary Hank Paulson, a former Goldman Sachs honcho, has opened the government’s predictably lengthy negotiations with the exposed banks to see how much of their subprime losses they will write off against their capital and how much of the losses the public will have to absorb.
Two Percent Down
The banks lent to deadbeats because the federal government ordered them to do so. The housing credit crisis originated in Washington almost three decades ago with idealistic, big-hearted liberals in Congress and housing agency bureaucrats who wanted to bring home ownership to “under-served” Americans who they said were shut out of the housing market. To stimulate home ownership, they enacted the Community Reinvestment Act (CRA) and imposed comprehensive banking regulations thereby opening up the easy housing credit spigot.
Now the Administration is betting the Democratic controlled Congress won’t cut off the banks or the borrowers. Chairman Barney Frank (D-MA) of the House Financial Services Committee is pushing reform legislation that would force banks to ease the terms of subprime mortgages and enable hard-pressed homeowners to avoid default and foreclosure and keep their homes.
The housing credit debacle was not caused by flinty-eyed, grasping bankers preying on helpless consumers and mortgage borrowers. It was caused by liberals like Frank who made buying a house easier than renting a bicycle.
As a young Congressional staffer, economist Lawrence B. Lindsey, who would later become a Federal Reserve Board member, recalls (The International Economy, spring 2007) reviewing the regulations imposing the government’s “soft quota” on the banks requiring them to adopt radically easier lending standards. Lindsey writes: “…By 2006, the median down payment for first time home buyers was only 2 percent, down from a 20 percent standard down payment fifteen years before. Forty percent of all first time home buyers in 2005 put zero down or actually took out mortgages that were more than the cost of their homes….”
Home ownership has swelled to an estimated 70 percent. In coming years, it will decline 6-8 percent. Former Federal Reserve Chairman Alan Greenspan, whose extremely loose monetary policy created the liquidity for the housing credit bubble, estimates that only about 200,000-300,000 finished housing units will have to be sold or bulldozed to ease the credit crisis. A half million or more is closer to reality, according to home builders now slashing asking prices. The overhang of new homes for sale, plus the rising inventory of unsold existing houses for sale, will take years to work off in glutted housing local markets.
Did you buy a house during the boom years? Don’t shed any tears for the three CEOs who got sacked. Cry for me, Argentina – my home has been on the market for two years.
Now the Administration is betting the Democratic controlled Congress won’t cut off the banks or the borrowers. Chairman Barney Frank (D-MA) of the House Financial Services Committee is pushing reform legislation that would force banks to ease the terms of subprime mortgages and enable hard-pressed homeowners to avoid default and foreclosure and keep their homes.
The housing credit debacle was not caused by flinty-eyed, grasping bankers preying on helpless consumers and mortgage borrowers. It was caused by liberals like Frank who made buying a house easier than renting a bicycle.
As a young Congressional staffer, economist Lawrence B. Lindsey, who would later become a Federal Reserve Board member, recalls (The International Economy, spring 2007) reviewing the regulations imposing the government’s “soft quota” on the banks requiring them to adopt radically easier lending standards. Lindsey writes: “…By 2006, the median down payment for first time home buyers was only 2 percent, down from a 20 percent standard down payment fifteen years before. Forty percent of all first time home buyers in 2005 put zero down or actually took out mortgages that were more than the cost of their homes….”
Home ownership has swelled to an estimated 70 percent. In coming years, it will decline 6-8 percent. Former Federal Reserve Chairman Alan Greenspan, whose extremely loose monetary policy created the liquidity for the housing credit bubble, estimates that only about 200,000-300,000 finished housing units will have to be sold or bulldozed to ease the credit crisis. A half million or more is closer to reality, according to home builders now slashing asking prices. The overhang of new homes for sale, plus the rising inventory of unsold existing houses for sale, will take years to work off in glutted housing local markets.
Did you buy a house during the boom years? Don’t shed any tears for the three CEOs who got sacked. Cry for me, Argentina – my home has been on the market for two years.
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