Two weeks ago I published an article at TownHall.com stating that housing was ignored by both presidential candidates in the debates and on their campaigns. The economy cannot recover until housing recovers and neither has a chance to recover until the labor market recovers. They are inextricably intertwined.
My thoughts were, good, leave the market alone and allow it to recover without government interference. It was government social engineering, mandating lower lending guidelines that regulators enforced to make sure lenders were meeting quotas for loans to low income people instead of regulators enforcing prudent lending practices, combined with the Fed keeping interest rates too low for too long that led to the housing collapse and financial meltdown.
It was 100% government manipulation of the housing industry that caused the meltdown. Proving economist Milton Friedman correct again who said: “The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.”
I was vehemently opposed to the Stimulus in general and more specifically the tax credits to buyers in 2009 and 2010 that I knew would not pull the economy or the housing market out of recession. All the Stimulus resulted in was a temporary boost in employment that added nearly a trillion dollars to our debt, and all the tax credit did was change the timing of buyers in the market. Housing crashed after the credits expired just like car sales when cash for clunkers expired.
Now this week comes disturbing news once again caused by mismanagement of the private economy by government. As described by the President of the National Association of Realtors Moe Veissi a perfect storm of regulation is about to hit housing just when momentum is building. If allowed to proceed housing sales will decline.
Included in the leviathan financial reform law Dodd-Frank came the Consumer Financial Protection Bureau (CFPB) that purportedly will prevent another housing bubble. What this board is proposing will certainly prevent a housing bubble because it is promoting the unintended consequence of another housing collapse.
The board is writing a new rule called the quality mortgage rule which will tighten lending guidelines further. Dodd Frank has caused lenders to deny many credit worthy buyers loans already. This new rule will exacerbate the situation.
In an open letter to President Obama and Governor Romney CEO and Founder of RE/MAX David Liniger shared this:
Even with improving home sales, nearly 15% of sales contracts are falling through. This is largely the result of strict lending requirements. Obviously, we’re obsessed with fighting the last war. Today’s lending requirements may have prevented the housing crisis five years ago, but the pendulum has swung too far in the opposite direction. Otherwise creditworthy individuals are being denied or too intimidated to apply for a home loan.
Financing appears to be getting more difficult, not less. In August, the average FICO score of a rejected mortgage application at Fannie and Freddie was 734, two points higher than one year ago. And the average down payment of a rejected applicant was 19%. Historically, these are numbers that would seem like a solid lending risk, but for some reason that’s not the case today.
Additionally, requirements in the Dodd-Frank Consumer Protection Act that would unreasonably define Qualified Mortgages will certainly have the unintended consequences of making mortgages more difficult to obtain and perhaps add to the cost of financing a home. Even the authors of this legislation have said this was not their intent. [end quote]
The Mortgage Bankers Association together with the National Association of Realtors is attempting to have the CFPB to write reasonable Qualified Mortgage Rules, however James Parrot of Barack Obama’s National Economic Council who advises on housing issues told them the administration is still concerned.
In addition once the CFPB establishes the QM (qualified mortgage rule) regulators from the FED, FDIC, and SEC will write a second rule called the Qualified Residential Mortgage Rule (QRM). The QRM will require lenders to retain stakes in risky mortgages when they package them into securities.
The Mortgage Bankers Association said these two new rules would cause lenders to loan to only the most qualified of buyers. Parrot the president’s representative responded the rules could be changed if they don’t work.
This is a typical government response. Dictating to the private economy and when it causes another housing collapse they can change the rules. A reason I fervently oppose government intervention into the private sector excepting for the protection against unethical or illegal practices.
It gets better. RE/MAX Founder Lininger shared that included in the fiscal cliff, where all tax rates would revert to pre-Bush tax policy levels, was included the Mortgage Forgiveness Debt Relief Act of 2007 set to expire on December 31.
When the housing market collapsed taking home prices down 30% to 40% millions of families, including over ten million today, found themselves living in homes they owed more than the home was worth. Millions lost their jobs and their houses. A vehicle that was created to help these families avoid foreclosure was the ’short’ sale where the bank accepted less than what was owed. The average loss for the lender was $65,000.
What the relief act allowed was the family already in dire financial straights to do was to waive IRS rules in order to complete the ’short’ sale. The IRS viewed the $65,000 as taxable income otherwise. There was no way these families could pay that tax so that would have caused the home to go into foreclosure. This is exactly what will happen next year if this law is not extended.
It gets even better. The Obama administration is proposing the mortgage interest deduction be eliminated or reduced. 70% of homeowners would be impacted. The upper bracket home market would not be the only homeowners affected, millions of middle class families would as well. Lininger asks that not go forward.
Lininger concluded with: The Debt Relief Act must be extended, reasonable lending standards established, housing-specific provisions of Dodd-Frank re-examined, and the mortgage interest deduction untouched. These steps will build a solid foundation, restore confidence, and provide clarity to lenders and relief to troubled homeowners. Take these simple steps and watch housing lead the country to real recovery, as it has many times in the past. [end quote]
What will happen if the QM and QRM rules go forward making loans more difficult to qualify for, and raising the risk for lenders to make loans? Only the most qualified home buyers will be approved and millions of families previously considered good risks will be denied. The perfect regulatory storm to crash the housing market. Another assault upon the middle class.
The government created this mess and further mismanagement will as Friedman said be the cause for additional extended periods of unemployment not any inherent instability in the private economy.
Barack Obama supports these new rules. Governor Romney has pledged to repeal Dodd Frank and replace with reasonable regulations that won’t harm the economy while protecting consumers.
This literally means if you vote for Barack Obama you are voting to make your home less valuable and less salable. There is no doubt about it.
This also means voting for Obama that housing won’t recover, meaning the economy can’t recover, and we will be guaranteed more and longer periods of high unemployment.
You must take this into consideration when you vote on November 6.