President Barack Obama is bringing the subprime-mortgage crisis back, fueled by the progressives’ political urge to treat borrowed money loans as a “right” that everyone is “entitled” to get, and by the willingness to dismiss mathematical probability as a racist conspiracy.
The last time liberals ran this mortgage ponzi-scheme, from 1995 to 2007, they almost crashed the financial system of the entire planet. They managed to largely evade responsibility by pinning the blame on their junior partners — the banks, the stock-market and the GOP — and even found political profit in the ensuing panic, so why shouldn’t President Obama not try again?
From Investors Business Daily comes word of what the editors christen “Subprime 2.0”:
The White House is rolling out a new low-income mortgage program that for the first time lets lenders qualify borrowers by counting income from nonborrowers living in the household. What could go wrong?
The HomeReady program is offered through Fannie Mae, which is now controlled by Obama’s old Congressional Black Caucus pal Mel Watt. It replaces the bankrupted mortgage giant’s notorious old subprime program, MyCommunityMortgage.
No worries, though, because Democrats realized the phrase “subprime loan” makes people nervous, so they worked a little Orwellian magic and renamed them “alternative loans.” That’ll fix everything!
As IBD explains, the new scheme might even be riskier than the financial H-bomb which Congress could not defuse once the countdown began in 1995, because applicants can use some remarkably fanciful accounting to tally up their “income”:
At least before the crisis, your income had to be your own. But now, as a renter, you can get a conventional home loan backed by Fannie by claiming other people’s income. That’s right: You can use your apartment roommate’s paycheck to augment your qualifying income. Or your abuela.
You can even claim the earnings of people who are not occupants, such as your parents, under this program.
You don’t have to bring much financial wherewithal to the table. You can even live in government-subsidized housing.
Just as long as you round up enough income-earners and pool finances to help meet the debt-to-income ratio of 43%.
You don’t need good credit either. You can qualify with a FICO credit score as low as 620, which is subprime. And you can put as little as 3% down.
It’s available for first-time homebuyers and repeat deadbeats. It will also expand to include refinancings.
This plan is so nuts that it feels like deliberate sabotage – like the architects want to create another rolling avalanche of loan defaults and excess-housing inventory.
Supporters quoted in the IBD article come pretty close to accusing banks of racist lending practices, by citing the number of Hispanic who share houses as clear evidence of an “underserved market.” That’s not normal poverty, say progressives, is it is racism because banks are not treating the multiple low-income, high-risk people in each house as a collective individual deserving a large and low-interest loan.
Weirdly enough, that means Obama is embracing and extending the disastrous mortgage-bundling economic trick — the taxpayer-backed Collateralized Debt Obligation — that Wall Street used as the shaky foundation for the 2000’s bull-market and 2008 crash. Those CDOs are the central villain of the new movie — ‘The Big Short” — even though it was the federal government’s mortgage-guarantee — and threatening merger policies — policies that allowed and forced Wall Street traders and banks to ignore the risks in buying and selling the high-risk mortgages held by millions of poor people.
Back then, the taxpayer-backed CDOs hid many high-risk mortgages in a complicated pile of many medium-risk and low-risk mortgages. So when the bad mortgages went belly-up, so did the many trustworthy CDOs that many Wall Street investors had recklessly used as the foundation for other high-risk gambles. The end result was a Wall Street avalanche, and financial calamity for most Americans, but especially for Africa-Americans. The crash was so bad that the median wealth held by African-American families fell from $23,000 in 2004 to $11,000 in 2013, according to a December 2014 report by Pew.
But the bubble and crash were good for many Democratic operatives, including Obama. He got paid to add his name to a 1995 mortgage and race lawsuit in Chicago, even though a huge percentage of his clients subsequently lost their homes and wealth. Moreover, he got elected in 2008 because voters wanted a new president to fix the disaster.
When Obama’s Bubble II implodes — 2026? 2030? — the same progressives will lecture us on the racial insensitivity of evicting families from houses they can’t pay for, hold all of America guilty for leaving so many poor families in such dire straits, demand more government power and reassure us that it will turn out great if we just try again.
We should have learned from the 2008 meltdown that saddling poor people with loans they can’t repay does them no favors, and the ripple effect will crash through the entire economy, damaging people who had no idea these “alternative loan” programs even existed.
It plays out like a stealthy back-door tax increase on everyone, with eager politicians and bureaucrats leaping in to claim more power and money, in the name of battling a crisis they created.
Big Government will never stop using its power to create crises it can exploit to grow larger, and secure its grip on dependent constituencies. You can rest assured Hispanic voters trapped beneath the burden of loans they can’t repay, and losing their equity to foreclosure, will not be told to vent their displeasure on the people who came up with this crackpot scheme.
As for the bankers, they’re willing to be used as props for left-wing class-warfare theatrics, as long as they get some bailout money. The individual people who sign off on these politicized financial arrangements generally don’t suffer the way their institutions and shareholders do, when it all falls apart.
Subprime lending isn’t just for houses any more. In November, the Wall Street Journal noted that “subprime auto lending is shifting into higher gear,” with over $110 billion of car loans extended to borrowers with credit scores under 660 over the previous six months. $70 billion of it went to borrowers with credit scores below 620, which is outright “bad” credit.
The Journal quoted Comptroller of the Currency Thomas Curry remarking this subprime auto-loan activity reminded him “of what happened in mortgage-backed securities in the run-up to the crisis.”
The article also quoted Consumer Financial Protection Bureau director Richard Cordray warning about “predatory practices” against subprime auto-buyers, and declaring that “direct oversight of their lending practices is essential.” In other words, a Big Government bureaucrat – heading up one of the newest bureaucracies inflicted upon us during the Obama presidency – is using an incipient crisis to demand more regulatory power. What a surprise.
The enthusiasm for subprime lending is an aspect of Cargo Cult economics, which holds that people can be made “middle class” by giving them the accouterments of middle-class life, much as the original Pacific Island tribesmen thought they could summon U.S. Air Force cargo-planes by crudely mimicking U.S. military airports and radio towers originally built during the World War II island-hopping campaign.
Central planners are obsessed with the notion that “access” to the cargo cult symbols of middle-class life can be improved by artificially reducing their cost through government regulations – or socializing those costs by forcing taxpayers to subsidize them.
In reality, the vital elements of middle-class identity are its productive assets – including the ability to find, develop, and retain good jobs, political independence, and the sort of financial discipline reflected in a good credit score. Some of the essential middle class assets are directly attacked by left-wing policies, notably intact families maintained by marriage, and the aforementioned sense of independence.
It is often said that home ownership is the primary means for low- and middle-income to accumulate wealth – an asset that holds, and usually increases, its value on a very long timeline. Such wealth cannot be given to people because politicians think they deserve it. It must be built, sometimes across the span of generations, and the task is not easy.
Earning is hard but necessary work, because people have trouble appreciating and maintaining the value of what they are given. The socialist solution to that dilemma involves destroying everyone else’s ability to calculate the true value of anything.