Government Again Pushing Mortgages to Those Who Cannot Afford Them

In 2008 the world economies encountered the worst financial crisis since the Great Depression. In a supposedly effort to repair the economies, governments transformed them through huge stimulus spending, low interest rate policies and bailouts. These interventions have contributed to the ongoing weakness in economic recovery since.

The main cause of the 2008 meltdown was the subprime mortgage lending practices that led to loans being hustled to millions who could not afford to pay them back. When the housing market slowed leading to depreciated housing values, homeowners could no longer refinance, further eroding housing demand that led to many homeowners owing more on the homes than they were worth. Many walked away from the loans leading to the meltdown, putting at risk nearly most of the world’s largest financial institutions.

Given 2008 is only eight years ago, logic would dictate that we learned a lesson about imprudent financial behavior, at least for a generation. However, once governments intervene, logic and economic reality take a backseat. In fact, we are currently traveling down the same road, again fermented by governmental policies.

News.investors.com reported that the US government is again cajoling financial institutions to give mortgages to those that cannot afford them. Specifically, the Consumer Financial Protection Bureau warned (threatened) lenders that they would be investigated for discriminatory practices if they do not count government assistance payments to lower income individuals as real income. In announcing this policy, Bureau Director Richard Cordray used the following incredible logic:

“The bureau has become aware of one or more institutions excluding or refusing to consider income derived from the Section 8 HCV Homeownership Program during mortgage loan application and underwriting processes.” …. “Consumers should not be put at a disadvantage just because they receive public assistance.”

So, using the government’s logic, individuals who need governmental payment assistance are worthy of obtaining mortgages. Continue reading

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Subprime Loans are Back Again

It was just six years ago that the world was at the brink of economic Armageddon.  The crisis was brought on by the cheap loans made available to borrowers including those rated as subprime with credit scores below 640.  The cheap mortgages to those with limited assets helped create a huge bubble in the housing market.  When the economy slowed down and home values began to depreciate, many borrowers began to default on the mortgages, which placed at risk major financial institutions worldwide that invested in these bundled mortgages.

Banks and others that owned the collateralized mortgages then required bailouts from the government to stave off failure.  This did not eliminate the debt, but merely moved it from the private sector to governments; i.e. taxpayers.  In addition, the bailouts inordinately benefited companies and their shareholders who made the imprudent loans.  Without the bailouts they would have encountered substantial financial losses.

There is also been a more incipient result of the bailouts of investors who made imprudent loans in the subprime market.  Without suffering losses investors have had short memories and in fact they are back at it again in the subprime financing business, once again supported by low interest rate central-bank policies with interest rates worldwide remaining at artificially and historic lows.

Last month, the Wall Street Journal highlighted the growth of subprime loans in an article titled Borrowers Flock to Subprime Loans.  Today, subprime loans are not in the housing market, but in consumer goods.  The Journal published the following:

  • Subprime loans are at the highest level since before the 2008 financial meltdown.
  • Approximately 4 out of every 10 loans for autos, credit cards and other personal borrowing in 2014 were in the subprime category.
  • During the fourth quarter of 2014, total US household debt increased by over $300 billion.

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