Should the Government Sell Bread, Orange Juice, or Mortgages?
What would you think if the government decided that that the price of bread was way too high and decided to open up a chain of bakeries to sell bread at the "correct" price? Here is another one: what if the government decided that Florida orange juice was priced too high and started selling orange juice by the barrel at the "correct" price? If either of those happened would you be standing on top of a mountain and screaming with all your might about the insanity of it all? I think you would and so would I. Well how come there is no screaming about this?
The Washington post reports that Housing and Urban Development Secretary Alphonso Jackson has a message to sub-prime lenders: "We need to reach out" to African-American, Hispanic and other first-time buyers with better loan concepts, more flexible guidelines and quicker service, said Jackson in an interview. "I am absolutely emphatic about winning back our share of the market" that has slipped away to subprime lenders."
Excuse me! Since when is it the business of the federal government to "win back" market share on housing loans? How is this any different that the federal government opening up bakeries to compete against the outlandish price of bread by private bakeries?
Jackson has a special reason for wanting first-time buyers to check out FHA loans. The FHA has lost significant ground during the past several years to competitors in the booming, private subprime sector. FHA-insured mortgages had an 11 percent share of the American home market as recently as 1995, but plunged to 4.3 percent in 2003 and 3.3 percent in 2004.
Gee that's nice but as for me I do not want the Government assuming market risk especially after this run-up in housing. All of a sudden, after this enormous run-up in housing, with some areas appreciating 100% in as little as 5 years, the FHA thinks that the subprime sector is gouging. Well one way to take care of that problem would be to cap interest rates but no!
Instead we see congress pass the Deflation Guarantee Act of 2005 otherwise know as the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005". This supposedly "Consumer Protection Act" does not cap interest rates, it does not cap fees, and it does not make allowances for loss of jobs, medical expenses or anything else. It is in fact the most anti-consumer act in the entire history of Congress. Rest assured whenever this Congress passes a law stipulating "protection" of anything, if you assume the opposite you are 98% likely to be correct. If ever there was a case for needed reform it would be in usury laws that might restrain the insane growth in credit. Instead, we see the FHA deciding to compete against private industry in an over-bloated housing market.
If that was not enough, President Bush is now urging tax credits for homebuilders! "To boost housing sales even more, Congress needs to pass my single-family homeownership tax credit," Bush told a meeting of the National Association of Realtors on Friday. Bush said the credit would increase the supply of affordable single-family homes by as many as 50,000 each, with the aim of increasing the supply of affordable homes by 7 million over the next 10 years.
President Bush said a surging real estate market could be enhanced even further if Congress passes a tax credit aimed at encouraging homebuilders to target middle class families. The proposal would grant a tax credit to firms that build affordable housing and sell it to middle-class buyers. The credit would cost around $2.5 billion over five years. In the speech, Bush said that homeownership set a record in 2004, with 69% of American families owning a home. "There are 74 million homeowners in America today. And that's the most ever in our nation's history," he said.
Just when you thought things could not get any sillier, they get sillier, much sillier. According to the commerce department's most recent data, US new-home sales jumped 12% in March to a record 1.431 million seasonally adjusted annual rate. That figure smashed the previous record of 1.304 million homes set in October. It was the largest percentage gain in nearly 12 years. Is that an industry that needs tax credits?
Let's see. New home sales are at an all time high, 69% of American families own a home, prices have gone parabolic, but... the FHA wants to compete against subprime lenders and the president wants to give tax breaks to an industry that has been setting record profits for the last four years. Is this blatantly stupid or what?
Rest assured that housing would be more affordable if it were not for our "ownership society" policies that encourage Fannie Mae and Freddie Mac to grant 125% mortgages to anyone who could breathe. Combine that with loose lending practices based on pure faith that Fannie and Freddie are too big to fail and it is no wonder that home prices are going thru the roof. Credit lending standards are in the gutter but "the society" says no matter how little economic sense it makes, we will try to give you the credit to make your purchase. Subprime lenders seem a bit worried (not worried enough IMO) so they have raised their fees. Now the government comes along and wants to compete with private industry. Is this a bad dream or do we really have a Republican president with a Republican Congress doing these things?
For what it's worth, I think the government has zero clues about how to get corporations to hire US workers, so it is attempting to goose the one an only thing (housing) that is holding this whole ball of wax together. In the meantime it is getting more and more costly to "own" anything.
In 2001 only 2% of new mortgages in California were Interest-Only. In 2004 this rose to 49%. Obviously the only way people newcomers can "afford" housing is with the age old trick of "how much monthly payment can you afford". Were it not for the GSE's willingness to lend money to anyone who could breathe, the government promoting "ownership", and absurdly low interest rates that intensified the housing bubble, we would not be in this mess in the first place. Now the FHA and Bush want to keep the insanity rolling by selling bread (home loans) at the "correct price".
Since there is no conceivable way this can possibly end well, I have a fail safe prediction: It won't.