Wednesday, October 15, 2008

Hole Rule

When we find ourselves in a hole, it is usually prudent to stop digging.

The shovel for many holes is the good intentions of the digger.

Way back in 1977, the United States Congress enacted a new law called the Community Reinvestment Act (CRA). The purpose for this new law was for the Federal Government to monitor and ensure that local banks were making loans to home buyers in low and moderate income areas. Then in 1992, congress passed the Federal Housing Enterprises Financial Safety and Soundness Act which allowed Freddie Mae and Freddie Mac to assume responsibility for home loans made to low income buyers.
FHEFSSA established risk-based and minimum capital standards for Fannie Mae and Freddie Mac. And, it established HUD-imposed housing goals for financing of affordable housing and housing in central cities and other rural and underserved areas.

Low income buyers are not at all responsible for the current financial mess, but as low income buyers were approved for home loans that did not meet traditional credit standards, the demand for houses and the asking price for houses increased [basic economics]. As prices increased, fewer buyers qualified for traditional home loans which meant that more and more home buyers needed sub-prime loans backed by the Government Sponsored Enterprises (GSE’s) Fannie Mae and Freddie Mac. As more and more low and middle income buyers took advantage of sub-prime loans, more and more middle and high income buyers took advantage of lax lending standards to purchase new homes. Many of these buyers were investors and speculators. This Ponzi scheme finally reached a point where many buyers, not even able to pay their interest only loans, walked away from their property and mortgage with nothing to lose but their credit rating. Prices plummeted, banks ended up with more debt than equity, and new lending stopped.

The solution to the problems caused by easy credit seems to be more easy, perhaps even easier, credit for banks and businesses.

At some point we will have to suffer the consequences of easy credit. Perhaps it is time to stop digging.


The Count said...

If the Government makes housing affordable through loans and programs that's good. A politician can take credit for it.

If the the market tanks and housing prices become more affordable, that's bad, because a politician must then take blame.

Perhaps another type of easy credit than needs to be revoked is the easy credit for politicians who think what they're doing helps.

David M. Smith said...

Hi Count,

I agree with you.

In general, politicians have much more ability to mess things up than to improve anything, but as long as there is an EASY media, there will be politicians taking easy credit.

Thanks for your comment.

Buz said...

The solution is to stop rewarding manipulative people.

(1) We reward manipulative borrowers who "have nothing to lose by overextending themselves".

(2) We reward manipulative politicians who have nothing to lose by stealing our money and buying our votes with it.

(3) We reward manipulative journalists who, rather than report the truth, twist the truth to fit their own agenda.

Maybe if we required people to bear the consequences of their decisions ... losing everything they have to pay their debts, going to jail for manipulating the political system, and putting them on the staff of the National Inquirer to cover UFOs instead of elections, it might have some small effect. (By the way, I see that Obama has the Jovian vote this time around.)


David M. Smith said...

Hi Buz,

A life without consequences is the only compassionate thing to do for the richest country on earth, isn’t it? : - (

The meaning of “fair” sure has changed since I was a kid.

Buz said...

There WILL be consequences ... either people bear the consequences of their own decisions, or others bear it for them.

People don't thing about what they are doing before getting married. We used to require them to live with the consequences of their stupidity and stay married ... unless there was a really good reason not to. No longer, now you can get a divorce easier than you can get a driver's license. So who bears the consequences now. Everyone but them. The children are shuffled back and forth, society has to pay to help them meet some minimal living standard, but they are free to go and get married again, and again, and again.


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Buz said...
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