David Stockman on Bill Gross, Pimco, crony capitalism, and gaming the drive to homeownership

Some raids on the US Treasury by America's crony capitalists are so egregious as to provoke a rant -- even if you aren't Rick Santelli. One such rant-worthy provocation is Pimco latest scheme to loot Uncle Sam's depleted exchequer.

According to Bill Gross, who heads what appears to be the firm's squad of public policy front runners, the American economy can be saved only through "full nationalization" of the mortgage finance system and a massive "jubilee" of debt forgiveness for millions of underwater homeowners. If nothing else, these blatantly self-serving recommendations demonstrate that Matt Taibbi was slightly off the mark in his famed Rolling Stone diatribe. It turns out that the real vampire squid wrapped around the face of the American taxpayer isn't Goldman Sachs (GS) after all. Instead, it's surely the Pacific Investment Management Co.

As overlord of the fixed-income finance market, the latter generates billions annually in effort-free profits from its trove of essentially riskless US Treasury securities and federally guaranteed housing paper. Now Pimco wants to swell Uncle Sam's supply of this no-brainer paper even further -- adding upward of $2 trillion per year of what would be "government-issue" mortgages on top of the existing $1.5 trillion in general fund deficits.

This final transformation of American taxpayers into indentured servants of HIDC (the Housing Investment & Debt Complex) has been underway for a long time, and is now unstoppable because all principled political opposition to Pimco-style crony capitalism has been extinguished. Indeed, the magnitude of the burden already created is staggering. Before Richard Nixon initiated the era of Republican "me-too" Big Government in the early 1970s -- including his massive expansion of subsidized housing programs -- there was about $475 billion of real estate mortgage debt outstanding, representing a little more than 47% of GDP.

Had sound risk management and financial rectitude, as it had come to be defined under the relatively relaxed standards of post-war America, remained in tact, mortgage debt today would be about $7 trillion at the pre-Nixon GDP ratio. In fact, at $14 trillion or 100% of GDP the current figure is double that, implying that American real estate owners have been induced to shoulder an incremental mortgage burden that amounts to nearly half the nation's current economic output.

There's no mystery as to how America got hooked on this 40-year mortgage debt binge. At the heart of the matter is the statist Big Lie trumpeting the alleged public welfare benefits of the home-ownership society and subsidized real estate finance. Once the conservative party embraced this alluring but dangerously destructive idea, the cronies of capitalism have had a field day conducting a Washington bidding war between the two parties which is now in its fifth decade

During this time span all of the congregates of the HIDC lobby -- homebuilders, mortgage bankers, real estate brokers, Wall Street securitizers, property appraisers and lawyers, landscapers and land speculators, home improvement retailers and the rest -- have gotten their fill at the Federal trough. But the most senseless gift -- the extra-fat risk-free spread on Freddie and Fannie paper -- went to the great enablers of the mortgage debt boom, that is, the mega-funds like Pimco, which did little more than hang out an "open to buy" shingle as billions poured in year after year. Sadly, there isn't a shred of evidence that all of this largese serves any legitimate public purpose whatsoever, and plenty of evidence that the HIDC boom has been deeply destructive. But the intellectual cobwebs spun by the housing cronies so obfuscate these truths that the only way to grasp them is through an examination of the contra-factual -- a postulated world without Freddie/Fannie/FHA and the $100 billion annual tax subsidy on mortgage interest.

In that world, households would be tax-indifferent as to whether they acquired shelter services through renting or owning, and appropriately so. There's simply no evidence that home ownership produces any externality or "public good," such as making people better citizens, causing them to work harder or aspire higher, turning them into better neighbors, or even growing hair on their chests. Housing is a commodity like furniture and automobiles, and inducing citizens to buy more of it is no business of the state.

~ David Stockman, "How Pimco Is Holding American Homeowners Hostage," Minyanville.com, August 27, 2010

Barney Frank on the GSEs: "We see entities that are fundamentally sound financially" (2003)

The more people, in my judgment, exaggerate an issue of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury - which I do not see - I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. And even if there were a problem the federal government doesn't bail them out, but the more pressure there is there, then the less I think we see in terms of affordable housing.

~ Representative Barney Frank (D-MA), September 10, 2003

Charles Schumer on Fannie Mae and Freddie Mac (2005)

... I think Fannie and Freddie over the years have done an incredibly good job and are an intrinsic part of making America the best-housed people in the world... if you look at the last 20 or whatever years, they've done a very, very good job.

~ Senator Charles Schumer (D-NY), Senate Banking Committe Hearing, April 6, 2005

Tom DiLorenzo on the drive to expand homeownership that helped foment the housing bubble

Let us briefly review some of the more notorious behavior of the federal government in recent years that has spawned the current economic crisis. First, every law and government agency having anything to do with housing policy, from HUD to the Fed, FDIC, Comptroller of the Currrency, Office of Thrift Supervision, enforcers of equal-lending laws, Fannie Mae and Freddie Mac, the Community Reinvestment Act, Congress, and more, did everything possible to force or bribe mortgage lenders into making trillions of dollars of bad loans to unqualified "subprime" borrowers. Among the various rationales that were given for this monumentally stupid policy were "discrimination," which the Fed admitted there was no evidence of when confronted by Forbes journalists Peter Brimelow and Leslie Spencer in the 1990s. Banks and mortgage lenders made trillions of dollars of bad loans as the Fed assured them that the risk could be swept away when Fannie and Freddie "securitized" the loans and sold them. And there was always an implicit (wink, wink) promise of a bailout if worse came to worse (as it did).

HUD announced in the early 1990s that its top policy priority was to sharply increase the percentage of Americans who owned their own homes, whether they could afford to own a home or not. The home building and mortgage finance industries applauded and supported this brand of egalitarianism run amok. The real culprit, however, was the Greenspan Fed, which flooded the markets with cheap credit, creating the housing market bubble which of course has now burst. Has anyone seen or heard from Alan Greenspan in the past eighteen months, by the way?

~ Thomas J. DiLorenzo, "Why Did This Happen?," LewRockwell.com, February 5, 2009

Kevin Duffy on the lesson of the collapses of Fannie Mae and Freddie Mac

Isn't it that business and politics don't mix? You'll always have the schemers and dreamers. The dreamers promoted "home ownership" for the less fortunate and built political careers in the process, while the schemers - political capitalists like Angelo Mozilo - figured out how to game the system... until it fell in on them. And the media dreamers looked the other way.

~ Kevin Duffy, Bearing Asset Management, November 20, 2008

Karen De Coster and Eric Englund on Fannie Mae, New Deal monstrosity

Fannie Mae is not a free-market entity, nor is it a private body that must compete on the same playing field as its competitors. Fannie Mae is representative of all that's wrong with central planning institutions: it is a government-created conduit for carefully crafted financial and market socialism that the bureaucrats uphold for the purpose of propping up their fantasies for pandemic social engineering.

There's nothing "American" about this dream. In the eyes of the Republic's visionaries, this particular dream has turned into a nightmare.

~ Karen De Coster and Eric Englund, "Fannie Mae: Another New Deal Monstrosity," Mises.org, July 2, 2007

HUD's role in the drive to homeownership

Federal policies designed to ensure mortgage loans were affordable for risky borrowers helped push the U.S. mortgage industry toward crisis, analysts said.

Since 1992, when the Department of Housing and Urban Development became the regulator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., the federally chartered companies have been obligated to help expand the availability of mortgages, The Washington Post reported Tuesday.

But, as consumer groups warned banks were offering mortgages with low initial payments -- called "teaser" rates -- to unqualified buyers, HUD neglected to assess the risks, The Post reported.

"For HUD to be indifferent as to whether these loans were hurting people or helping them is really an abject failure to regulate," Michael Barr, a University of Michigan law professor, told the newspaper.

Between 2004 and 2006, Freddie Mac and Fannie Mae helped set lending trends by purchasing $434 billion in securities backed by risky, subprime loans. Now, with 3 million to 4 million mortgage foreclosures expected, Congress is considering a move to find a stronger regulator to oversee the Freddie Mac and Fannie Mae, and may do so before the July 4 recess, the report said.

~ "HUD fails to assess risks", UPI, June 10, 2008

Angelo Mozilo on the drive to homeownership and Countrywide's exposure to subprime

Bartiromo: How exposed is Countrywide to the subprime mess?

Mozilo: In 2006 subprime loans were about 9% of our total business, now down to 7%. We're a prime lender...but we also have been on a mission...to try to increase home ownership opportunities for minorities and low-income borrowers. So it's distressful to me personally to see the piling on that's taking place by the media and regulators. This was a system that was working very well, providing an opportunity for people to get over that barrier of entry to owning a home. Now what you've had is panic setting in, and [the subprime story] is leading every newspaper. It's like there's no war going on in Iraq.

Bartiromo: Do you worry that the subprime fallout will bleed into the prime mortgage market?

Mozilo: I don't think it's going to bleed substantially into prime.

~ Angelo Mozilo, interview with Maria Bartiromo, "Inside the Mortgage Crisis," BW, March 26, 2007

Lew Rockwell on the housing bust

The ideological basis of the meltdown began during the New Deal, when the government decided that the American Dream could only be achieved through housing ownership – not renting but owning. As time went on, every conceivable mechanism was pulled into order to realize this dream.

What if borrowing rates are too high for people to afford? We'll beat them down with the sledgehammer of government policy. What if the financial risk is still too high? Who cares, we'll subsidize it. What if there is no credit history or savings on which to justify taking the risk? We'll guarantee it. With what? With newly created money. What if mortgage lenders still aren't convinced that they will get paid? We'll make them lend money no matter what, and even threaten them with lawsuits if they don't.

So on it went for seventy years, until one day the entire hoax was exposed by the ultimate reality test: the market economy. Bad credit risks didn't pan out. Those who lent without regard for underlying fundamentals are suddenly seeing red all over the place. Bankruptcy ensues. Those who purchased repackaged mortgages on the open market find themselves with a hot potato and no one to toss it to.

So what does the government do then? It runs to the basement and turns on the printing presses. It creates $37 billion on the spot and buys up the bad loans and calls them assets. The government says that this is to create confidence. But confidence can't be created by making up reality. That path only leads to more illusion and error.

~ Lew Rockwell, "Reality vs. the State," LewRockwell.com, August 14, 2007

Lew Rockwell on government delivering the American dream

Since the period after World War II, the American dream has been identified with owning one's own home. And when the government makes a dream come true, it is going to do it good and hard. So there were no limits. The housing market has boomed and ballooned beyond belief.

~ Lew Rockwell, "The Mirage of the Mortgage Fix," LewRockwell.com, December 12, 2007

Franklin D. Raines on expanding homeownership as local and national policy

Homeownership is a local and national policy priority. The U.S. Conference of Mayors has placed expansion of affordable housing at the top of its agenda for 2002. And in his 2002 State of the Union address, President George W. Bush called for "broader homeownership, especially among minorities."

~ Franklin D. Raines, chairman and CEO, Fannie Mae, Fannie Mae 2001 Annual Report

Holman W. Jenkins, Jr. on the Carolina Katz Reid study of low-income homeowership from 1977-1993

A home financed by a mortgage is not just an asset. It's also a liability. We owe thanks to Carolina Katz Reid, then a graduate student at University of Washington, for a 2004 study of what she dubbed the "low income homeownership boom." She considered a simple question -- "whether or not low-income households benefit from owning a home." Her discoveries are bracing:

Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36% returned to renting in two years, and 53% in five years. Suggesting their sojourn among the homeowning was not a happy one, few returned to homeownership in later years.

Bottom line: Homeownership likely has had an exceedingly poor payoff for millions of low-income purchasers, perhaps even blighting the prospects of what might otherwise be upwardly mobile families.

~ Holman W. Jenkins, Jr., "Payback," The Wall Street Journal, August 22, 2007

Holman W. Jenkins, Jr. on the drive towards homeownership

Everybody talks about moral hazard. A wisp of memory came to mind last week. Then-Fannie Mae chief Franklin Raines visited The Journal years ago and entertained himself by mocking editorial writers who assume that establishing that a policy is economically inefficient is enough to establish that it's unwise.

He yukked it up quite a bit, in fact, noting that voters are perfectly entitled to assert values other than those of the market, namely that homeownership is a social blessing and should be encouraged with subsidies. And so we've done with tax subsidies, lending subsidies and a concerted set of policies by Bill Clinton's HUD to move low-income people out of rental units and into homes they own. His goal, which was achieved, was to lift the homeownership rate from 64.2% to 67.5% of households.

~ Holman W. Jenkins, Jr., "Payback," The Wall Street Journal, August 22, 2007

Timothy Egan on Angelo Mozilo "touting the great American housing miracle"

You may have seen Mozilo with Jim Cramer or Maria Bartiromo on television, touting the great American housing miracle. It was all good, all up, up, up. Flip and roll. No man with without a mortgage. Mozilo said every American who wanted to buy a home should be able to do so, and Countrywide made it nearly as easy to get a mortgage as ordering fries at the takeout window.

~ Timothy Egan, "The Pools of Riverside County," The New York Times, February 1, 2008

NAR: "Homeownership is a safe, secure way to build long-term wealth" (2006)

It's a great time to buy or sell a home.

Contracts for home sales in August are up 4.3% and the outlook is for home prices to increase next year.

Former Federal Reserve Chair Alan Greenspan recently said the housing prospects are looking up...

Homeownership is a safe, secure way to build long-term wealth.

~ National Association of Realtors, full-page advertisement placed in WSJ, USA Today, and The New York Times, November 3, 2006

Thomas DiLorenzo on Paul Krugman blaming the mortgage mess on the free market

In [Paul] Krugman's article blaming the "subprime" mortgage mess on the free market, he claims that the Comptroller of the Currency should have been regulating the lending business more stringently. If so, this all might have been avoided, he says. As usual, he hasn't the foggiest idea of what he's talking about.

The fact is, the Comptroller of the Currency and the Fed itself have been busy enforcing the "Community Reinvestment Act" of 1977 for the past 30 years, which pressures banks to make uneconomical loans to uncreditworthy borrowers, euphemistically called "sub-prime" borrowers. They're not financial deadbeats, or people who never pay their bills on time. They're just a tiny, tiny bit below "prime" borrowers, in Governmentspeak.

Once again, Krugman gets everything ass backwards: Government regulation of the credit markets is a major CAUSE of the "subprime" mortgage debacle, not the solution. (Of course, the Greenspan Fed itself is the cause of the now-burst housing bubble).

~ Thomas DiLorenzo, "Crazed Keynesianism (and stupid, too)," LewRockwell.com blog post, December 21, 2007

Franklin Raines: "Housing is a safe, leveraged investment"

In 2001, your company helped a record 5.2 million Americans purchase or refinance homes or obtain affordable rental housing. Fannie Mae helped to expand mortgage consumer rights, broaden homeownership among Americans of color and modest means, and spruce up old neighborhoods all over the country.

Fannie Mae is one of only three companies in the Standard & Poor's 500 index to achieve double-digit growth in operating earnings per share for each of the past 15 years.

At a time when the market, shareholders, policy makers, and the public are seeking - and deserve - additional assurance and confidence in their public companies, Fannie Mae is a model for openness, transparency, regulatory oversight, capital protections, and market discipline.

Housing is a safe, leveraged investment - the only leveraged investment available to most families - and it is one of the best returning investments to make.

Home values are expected to rise even faster in this decade than in the 1990s as homes continue to get bigger and better, the growth in households and homeownership rates boost the demand for homes, and the supply of homes will be squeezed by land use and growth restrictions.

Fannie Mae's key role in housing America is to help supply the mortgage capital. The demand for the housing capital Fannie Mae provides is - and will be - especially great because we supply the lowest-cost capital on the most consumer friendly, flexible terms in the market.

Your company has a lot of work to do, and many great years ahead.

~ Franklin D. Raines, chairman and CEO, Fannie Mae, Fannie Mae 2001 Annual Report

Justin Fox on study that spurred minority lending under Clinton

As director of research at the Federal Reserve Bank of Boston, [Boston College management professor Alicia] Munnell co-authored a bombshell 1992 study that concluded that mortgage lenders systematically discriminated against blacks and Hispanics--even when one adjusted for income and creditworthiness.

Munnell's work propelled her into a big job in the Clinton Administration and led to new legislation and regulations aimed at pressuring banks to increase their presence in poor and minority neighborhoods. These new laws had the desired effect: home ownership among minorities, and Americans in general, began to rise steadily--the first such sustained increase since the 1950s. In 1998, 57% of black mortgage applicants were turned down; by 2004 the figure had dropped to 26.8%. For low-income applicants, mortgage denials went from 44.3% in 1998 to a low of 19.8% in 2003.

That was one remarkable result of the surge in subprime mortgage loans to borrowers with iffy credit records. The other remarkable result is that it is ending really badly--in a wave of foreclosures that could, at worst, cost billions, throw millions of people out of their homes and cause a recession.

Federal regulators stood by while this went on, but don't blame Munnell's study or the desire to encourage lending to minorities. "The point of that study was never to say, 'Let's go out and lend to people who aren't going to be able to carry the debt,'" Munnell argues. Sure enough, federally supervised banks and S&Ls and mortgage buyers Fannie Mae and Freddie Mac seem to have avoided big hits.

~ Justin Fox, "Subprime's Silver Lining," Time, April 2, 2007

Atlanta Fed study: Why the rise in homeownership?

After three decades of stability, the national rate of homeownership suddenly began rising around 1995. The rush to buy homes fueled an enormous surge in housing construction and home prices. Experts differed on the cause of the increase in homeownership, from 64.2% of households in early 1995 to 69.1% in early 2005. Was it the aging of the population? Or was it an expression of what President George W. Bush calls the "ownership society"?

Neither. Surprising new research published by the Federal Reserve Bank of Atlanta concludes that the bulk of the increase was caused by innovations in the mortgage market, in particular the explosion of "piggyback" or "combo" loans that made it possible for people to make small or zero down payments. Young families with little savings flocked to those loans to buy first homes.
Trouble is, lenders aren't making many of those loans anymore because default rates on the smaller, second loans have been extremely high. That means that one of the main props of the housing market has been kicked away. If the homeownership rate drifts back to where it was in 1995, the outlook for housing construction and home prices could turn out even worse than the pessimistic projections.

The Atlanta Fed paper, "Accounting for Changes in the Homeownership Rate," was published in September. Its authors are Matthew Chambers, an economist at Towson University in Maryland; Carlos Garriga, an economist at the Federal Reserve Bank of St. Louis; and Don Schlagenhauf, an economist at Florida State University and a visiting scholar at the Atlanta Fed.

Many analysts have fingered easy lending as a contributor to the housing boom, but the Atlanta Fed paper may be the first to quantify its effect in a rigorous way. Using math-heavy econometric analysis, the authors conclude that the availability of new kinds of mortgages, mainly ones with low down payments, accounted for 56% to 70% of the decade-long increase in the U.S. homeownership rate, while demographic changes accounted for only 16% to 31% of the effect.

~ BusinessWeek, "A Troubled 'Ownership Society'," October 22, 2007, by Peter Coy