Trump Goes Ape-Sheet Crazy With Government Sponsored Housing Memorandum

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Instead of deregulation, Trump unveils his latest big-government housing program.

If you thought Trump would deregulate Fannie Mae and Freddie Mac you thought wrong. Instead of deregulating, he replicates the old rules and prepares another bust.

Please consider The Coming Trump Housing Crisis.

The Trump administration has finally turned its attention to housing policy. Unfortunately, the president’s Memorandum on Housing Finance Reform, issued last week, is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.

The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending.

An administration that believes in deregulation should do better. The Trump administration could have used its control over the Federal Housing Finance Agency—the regulator and conservator of Fannie Mae and Freddie Mac—to shrink their footprint dramatically over five to 10 years. This would be done through administrative action, reducing the size and types of the mortgages that GSEs could buy and opening larger portions of the housing-finance market to the private sector, which offers 30-year fixed-rate loans at rates competitive with the GSEs’.

Since 1992, this government intervention has been guided by the misconception that low down payments and high debt-to-income ratios will help low- and middle-income families buy homes. The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Another Vote-Buying Monstrosity

These kinds of programs are popular with builders, political hacks, and economic illiterates who believe such programs help create affordable home.

The builders and hacks benefit but the public gets screwed.

Mike "Mish" Shedlock

Comments (62)
No. 1-23
themonosynaptic
themonosynaptic

On target. Thanks Mish. Our financial markets are able to deliver money on demand. They need to be watched over to make sure they don't tilt the playing field or extract rents, but apart from that, they can handle mortgages easily and effectively. The government should only be involved during a liquidity crisis to restart the engine (not cover stupid people's losses), and that should happen very infrequently, and should be painful to all asset holders to avoid moral hazard.

Carl_R
Carl_R

Housing lending has always been a problem, and it will continue to be a problem in the future because no one has ever come up with something that works, and I don't think anyone ever will. When a bank issues the loan, they loan long (30 years) and borrow short (demand deposit). That crashed in the 1930s (remember "It's a wonderful life"?) when bank runs couldn't be covered since the money had been lent long term.

After that, the banks willingly ceded the bulk of the home lending business to Savings and Loans, who thrived until they, too, learned about the disadvantages of lending long and borrowing short. In 1980, they had many assumable loans still outstanding at 5-6% that were issued in the 1960s, but found themselves having to pay up to 15% to attract deposits, and they were quickly heading for bankruptcy. A few S&Ls manage to grow fast enough to survive, but most that tried rapid growth as a solution found it made things worse, not better, because in growing fast, they issued more bad loans.

For the next cycle, we tried the separating the originator from the lender, and packaging loans up for sale. That system crashed, too, in 2008, because the originators didn't really care about the quality of the loans, only whether they could be sold, and buyers who were chasing yield foolishly bought poor quality loans, and even if they bought insurance against it, the insurer had no clue, and went broke, too, so the whole system imploded.

Is there a system that won't inevitably crash? I doubt it. Maybe Austrians are right, and that the way to prevent the boom-bust cycle is to prevent credit expansion (i.e., prevent home lending).

Zardoz
Zardoz

...And trump gets paid.

Remember folks, the lesser of two evils is still evil.

lol
lol

Yall ain't seen nothin yet,come election time get ready for Stimulus checks 2.0 i,then massive stimulus package, free trump phones then some form of student loan forgivenessand wait for it...………across the board amnesty for illegals....no question asked.Don pullin out all the stops cause losing is not an option.

AWC
AWC

This guy's Dick Nixon on steroids. Like Tricky D, I keep waiting for the "We're all Keynesians Now" slogan, to confirm my "Buy all the Things" meme. Not that I need much persuasion. Last thing I want to do, is get left out of the action, holding a wad of depreciating green paper, paying .0001 % of the CPI.