Sunday, May 23, 2010

NITA LOWEY DESTROYS HOUSING MARKETS

Voted YES on regulating the sub-prime mortgage industry.
(Nov 2007)


"H.R. 3915 is a bill that, in an attempt to improve conditions in the housing market, will end up making it more difficult and more expensive for hard-working Americans to obtain a mortgage."
-Ron Paul


When Rep. Lowey looks at the disaster that is the housing market, she quickly blames its failures on the free market and private banks. But what Nita fails to understand is that the entire housing bubble and its collapse is the cause of government manipulation of the housing market. It is not the free market that needs to be regulated but the actions of the government and the Federal Reserve.

THE HOUSING CRISES:
After the tech bubble burst and the attack on September 11th, the Fed Chairman Allan Greenspan set interest rates at an all time low of 1% to artificially stimulate a weakened economy. In order to do this the Federal Reserve printed money out of thin air so that banks could have a large reserve of cash to lend out at a low interest rate.

SIDE NOTE:
When banks loan money out at an extremely low interest rate, this encourages people to take out loans for a longer period of time and invest in things that are extremely expensive and/or take time to build...like houses. On the other hand, if interest rates were high it would encourage the borrower to pay back the loan quickly and not invest in long term projects.


As a result of the interest rates being artificially lowered and all of this new money in the economy, the demand for housing increased which in turn caused housing prices to increase. Between 1998 and 2006 home prices appreciated dramatically. But the amount of new money was so great that banks, who were in charge of it, started to look for new and innovative ways to lend that money out. As a result they came up with sub-prime mortgages, which is pretty much just a fancy term for a loan to a borrower with a bad credit score. Before interest rates were set to an historical low, it was actual extremely difficult to obtain a sub-prime mortgage.

The banks started cautiously by charging a higher interest rate to sub-prime borrowers, but as the economy continued to artificially expand these sub-prime loans were defaulting at an extremely low rate. With the extra profits, as a result of these higher interest rate mortgages, reckless investors were encouraged to enter the market to offer more of these sub-prime loans. Lenders began to make even riskier loans, now offering adjustable rate mortgages and no money down loans, which the government and now Fed Chairman Ben Bernanke fully endorsed as a safe investment. In fact, the government passed legislation that made it possible for people who could not afford down payments on houses to receive assistance from the federal government, or even to pay no down payment at all, courtesy of the taxpayers. People began buying homes that they could not afford and also began to use their house as if it were a credit card confident that the price of houses would continue to rise and that they could easily refinance their home if they faced economic trouble down the road. This reckless attitude eventually caught up with us, because the money was created out of thin air and was not a result of actual personal savings, people began to default on payments, sending the housing market into a tailspin.

But the question you should ask is: If the risk was on private banks, how did the housing collapse infect the world economy?

The true "risk" was not on the banks but on the Government Sponsored Enterprises (GSEs), like Fannie Mae and Freddie Mac who bought these loans from the banks. When a homeowner takes out a loan from a bank, that bank turns around and sells that mortgage on a secondary mortgage market to companies like Fannie and Freddie. By 2008 they had a hand in about half of the country's mortgages and nearly 3/4 of all new mortgages. Fannie and Freddie, in turn, would bundle these mortgages together and sell them as mortgage securities to investors. As a result, banks had money to make new loans and Fannie and Freddie became responsible for bearing the risk and reward of the current loans.

Some people will argue that Fannie and Freddie are private companies because their stock is traded publicly but they actually enjoy tax and regulatory privileges that their competitors do not. They have billions of dollars worth of credit with the US Treasury which guaranteed them a bailout in 2008 when the housing market collapsed. Since the US Treasury gets its money from the taxpayer, it is the taxpayer who actually bore the risk of these sub-prime mortgages, and Fannie and Freddie who reaped the rewards. Why be cautious when there is a guaranteed government bailout right around the corner?

But government manipulation does not stop there. When Freddie and Fannie sold these mortgage securities to investors, the investors looked to rating agencies who gave most of these toxic assets a triple A score. Moody's, Fitch, and Standard and Poor are examples of bond rating agencies, who are suppose to tell us when something is a bad investment and there is a smell of fraud in the air...but they didn't. The free market was unable to weed out these bad rating agencies because they are wholly owned subsidiaries of the US government. If you try to start a ratings agency you can't because there are government imposed restrictions on entry, thus making these rating agencies part of the government apparatus and not part of the free market. Not only does the government limit entry, but when people see that the agency is backed by government approval, they are manipulated into thinking that the corporation is safe, which leads the investor to let their guard down and unknowingly partake in bad investments.

The root of the crisis, as with other financial and economic crises, is a direct result from government intervention into the monetary policy and housing market. HR 3915 will only lead our country into further economic turmoil.

H.R. 3915
This bill restricts entrance into the mortgage market through a licensing system, and makes it mandatory for loan originators to be fingerprinted and have a background check. Not only is this an affront to a free and open labor market, but just by introducing a mortgage licensing system, like they did with the rating agencies, mortgage fraud can not and will not be eliminated. All it will do is restrict the number of people able to work in the mortgage industry. And according to the laws of economics, when the supply of mortgage providers decreases, the cost of retaining those services increases. This will be detrimental to the poor community.

H.R. 3915 also makes restrictions on the types of mortgages which can be offered, utilizing language which is vague enough that its definition will likely be finally determined in time-consuming expensive federal court cases. By restricting the number of people licensed to work in the mortgage industry and the types of mortgages that can be offered, the availability of mortgages would decrease and the cost would increase. H.R. 3915, which has as its purported aim the protection of American home-buyers, would have the perverse effect of keeping more Americans from being able to purchase homes.

If we really want to improve the conditions of the American economy, we should only promote investment when there is actually money to be lent out. This comes only from the savings of the American people and not by money created by the Federal Reserve. New money only destroys the value of the dollar and manipulates the free market. No matter how many laws and regulations the government will pass, there will always be people getting around those laws. The best possible way we can protect people from fraud is with harsh penalties and jail time for anyone that commits it, not constant government bailouts to those who are guilty of it. We need to get the government and the Federal Reserve out of the business of manipulating the market, and that has to start with getting Nita Lowey out of Congress.

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