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.

hmk
hmk

This has to be incorrect news it is that stupid. The govt should not be involved in housing at all. I am not sure what they do in other countries but I don' t think they have 30 year fixed rate mortgages. I think in other countries Canada for one, the rate gets reset every five years. I don't know if they have a Fannie Mae equivalent but I am thinking not. Still they have a housing bubble over there to.

Tengen
Tengen

They can't possibly believe this is sustainable in the long term, especially given the similarity between this and what led to 2008. This means that Trump aims to intentionally blow a bubble that would ideally last just long enough to outlive his administration.

And to think people wonder why so many are bearish on the long-term outlook of the US!

mrutkaus
mrutkaus

This is part of a long term "milking" plan of the treasury, leaving gigantic debt when he leaves office

Blurtman
Blurtman

Bubbles of increasing frequency approximate a straight line.

Alexkennedy
Alexkennedy

This story is complete BULL$HIT! Government should not be in control of these companies. They should be regulated at best. The government doesn't own GM and all the other car companies that needed a bailout?

DFWRealEstate
DFWRealEstate

They desperately need more credit growth, because without it the economy implodes. The problem is that they are encouraging the growth of mortgage ownership, not home ownership. As this cycle gets closer to the tail end, we're already seeing more people at the margins overleveraging to keep up with rampant home price inflation. Easy to become an underwater homeowner in this environment, particularly if you don't understand the game that is being played...

Blacklisted
Blacklisted

Trump's BELIEF that this move is actually good for the economy is consistent with his BELIEF that more QE is needed. What he, and quite frankly, the majority of so-called economist, pundits, and CB's fail to understand is it's all about confidence. CB's can hand over all the fabricated money they want to banks, but if banks can't find enough qualified borrowers and borrowers are not confident to borrow, well, you get exactly what Japan, Europe, and the US have gotten - anemic to declining growth. And since govt largess (fraud, corruption, career politicians, taxes, fees, civil asset forfeitures, etc.) will only get worse as pension and interest expenses grow, confidence will continue to decline until the "reset" occurs.

Maybe, the Fed should go back to it's original intent - provide capital to the real economy, by buying corporate debt during recessions, instead of funding the federal govt by buying treasury bonds. Maybe, the judiciary should equally enforce the rule of law, and CONgress install term limits. Who doesn't think these actions will improve confidence and trust?

Carlos_
Carlos_

I really enjoy all the comments. All wandering why would he do that and what other country does that. I tell you the why: It is to get votes next election by giving a house to anyone with a pulse. The who: Socialist and populist countries. Now, I do not care about "Well Hillary would had been so much worst answers". You all elected a Chavez deal with it

Ted R
Ted R

The answer is very simple. He is running for reelection. He need s votes.

Blacklisted
Blacklisted

I should mentioned that as bad as Trump's actions/beliefs are, they pales in comparison to what ANY establishment politician would do. It's analogous to why foreign capital continues to flow into the US, no matter how anemic the economy and fraudulent the establishment, it's still the healthiest horse in the blue factory. There is no perfect person or policy. Everything is relative, and this fact is understood by capital and the invisible hand.

ReadyKilowatt
ReadyKilowatt

I'm fine with it, as long as we get access to his bankruptcy lawyers.

APRnow
APRnow

the Trumpster is the only 'real' Democrat in the whole bunch. I've been fruitlessly telling that to all from day one. Has any of you viewed his mom in interviews? Ans: nope. He's also a true mountain man from N Scotland. Very tough.

Snow_Dog
Snow_Dog

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

Strictly small time amateurs. Let’s check in with someone who really knows how this stuff works :

Webej
Webej

When the "cost" of housing becomes unaffordable, it's great when market-oriented governments come out to "help" prospective home-owners by giving them money, guaranteeing their loans, tax deductions for mortgage interest ... anything other than the thought that house prices might drop if people can't afford them and that financing is actually driving the price.

wootendw
wootendw

Trump is now concerned with his re-election. Nothing else matters. The voters want peace but hate Russia. Since Trump turned warmonger without really starting new a war, his poll numbers have shot up. He can get away with violating international law in Palestine. Don't know what will happen with Venezuela. Trump may save Korea for his re-election campaign.

But Trump has claimed the stock market so it's his to lose.

RonJ
RonJ

"Another Vote-Buying Monstrosity"

There is the Big Money in politics. The democrats are always clamoring to get the money out of politics, but using the tax payers as a cash cow vote buying mechanism, won't go away by curtailing campaign contributions by corporations and the wealthy.

Sechel
Sechel

Trump has zero policy guys on his staff, departments are in disarray. He's not brainstorming bold policy initiatives