Fwd: Again

'Wallison traces the policy mistake back to 1992, when Congress passed a law requiring the GSE's to purchase a certain percentage of its mortgages granted to low- and moderate-income homebuyers--30 percent originally, later adjusted up to 56 percent by the Department of Housing and Urban Development.

Previously the GSE's bought only mortgages in which the buyer made 10 to 20 percent down payments. That was revised downward to 3 percent and even zero. Such subprime mortgages proliferated until in 2008 when they accounted for more than half of U.S. mortgages, 76 percent of which were on the books of the GSE's or government agencies such as the FHA.

This was in line with the policy priorities of the Clinton and Bush administrations. They hailed the increase of homeownership from the 64 percent that prevailed from the mid-1960s up eventually, and temporarily, to 69 percent.

They emphasized the importance of increasing homeownership by blacks and Hispanics who did not qualify as creditworthy under traditional credit standards, which were treated as superstitions.

The result was a house price bubble of unprecedented magnitude. Low-down payment mortgages inflated housing prices because buyers could afford a larger house with the same down payment. Above-average households, though not the intended beneficiaries of lowered mortgage standards, took advantage of them by converting inflated housing values into cash by refinancing their mortgages.

The problem metastasized into large financial institutions because of imperfect information and perverse government regulations. Fannie and Freddie classified as subprime only those mortgages they bought through traditional subprime lenders -- an action for which their officers were later sued by the Securities and Exchange Commission…

 

Could it happen again? Wallison points out that government regulators are once again reducing the credit standards for mortgage seekers. The argument, as in the 1990s and 2000s, is that traditional standards are misleading and unduly prevent low-income and minority households from buying homes.

Fannie and Freddie are now purchasing the large majority of mortgages and announced last month they would buy mortgages with only 3 percent down payments. The qualified mortgage standards laid down by HUD and other regulators in October allowed for mortgages with zero down payments.

That sounds like a recipe for another housing bubble -- and for mass foreclosures, which hurt the policies' intended beneficiaries -- and perhaps for another financial crisis as well. '

http://www.realclearpolitics.com/articles/2015/01/20/government_created_the_housing_bubble_and_financial_crisis_--_and_could_be_doing_so_again_125310.html