President Obama and Democrats in Congress haven't moved to stop subprime lending -- they've just taken it over.

Building the next subprime crisis

By STEPHEN B. MEISTER

Last Updated: 12:11 PM, September 28, 2010

Posted: 10:28 PM, September 27, 2010
Comments: 8
More Print

President Obama and Democrats in Congress haven't moved to stop subprime lending -- they've just taken it over.

They've created a federal subprime-lending monopoly by seizing control of the financial apparatus -- Fannie Mae, Freddie Mac and the Federal Housing Administration -- and lending 100 percent of the home price to borrowers who can't afford it.

Private lenders can't make these loans -- they need to get paid back.

On Sept. 9, I reported that Fannie had forged a subprime partnership with state housing-finance agencies called "Affordable Advantage": Fannie agreed to buy loans from housing-finance agencies for which the buyer puts down $1,000 or less -- in at least one case, just 67 cents.

On Sept. 15, the House Government-Sponsored Enterprises Subcommittee held a hearing on Fannie and Freddie. Since these two GSEs have cost the taxpayers $148 billion (so far), Reps. Spencer Bachus (R-Ala.) and Judy Biggert (R-Ill.) took their regulator to task over Affordable Advantage.

Edward J. DeMarco, head of the Federal Housing Finance Agency, sheepishly replied, "This one got away from us" and then promised "you won't be hearing about additional programs such as this."

But DeMarco also testified that Fannie's contracts to buy these zero-down loans from HFAs don't expire until next March -- and he can't tell Fannie to stop.

Baloney. Obama controls the GSEs -- they were seized by Bush and placed in federal conservatorship; Obama OK'd $42 million in bonuses for their top brass last Christmas. They're making subprime loans because the boss wants them to.

DeMarco apparently changed his tune as soon as he left the committee room. He spoke later that day with Barbara Thompson, director of the National Council of State Housing Agencies -- and she then wrote on the group's Web site that he'd agreed that "HFAs have demonstrated their ability to administer low-down-payment programs successfully."

Democrats don't want Fannie and Freddie to clean up their acts -- that could mean less subprime lending.

(The Obama team isn't even willing to look into what went wrong. On July 27, I reported that Rep. Darrell Issa, top Republican on the House Committee on Oversight and Governmental Reform, had written to Alfred Pollard, DeMarco's general counsel, demanding a probe into 173 VIP loans made to Fannie and Freddie execs by Countrywide Financial's then-chairman, Angelo Mozilo -- who's going to trial on SEC fraud charges next month. But Pollard hasn't issued a single subpoena to any of the 173 VIP loan-taking execs.)

Obama and the Dems haven't limited their subprime takeover to the GSEs. The Federal Housing Administration insured 29.4 percent of all home purchases in 2009, up from just 4.5 percent in 2006.

To insure a loan, the FHA requires a downpayment of 3.5 percent -- but also it allows "seller concessions" of 6 percent. In other words, if the seller's willing to mark up the official price by 6 percent and then put that amount to the downpayment, the buyer doesn't have to come up with any cash. There's talk about reducing allowable seller concessions to 3 percent -- but that would still permit FHA-insured loans of 99.4 percent.

Because the FHA is insuring so many more mortgages than it used to, its capital reserve -- the cash it's supposed to have on-hand in case of a wave of defaults -- is at a quarter of the congressionally mandated minimum. But Democrats want the FHA to keep insuring subprime loans, so it's not enforcing the minimum.

Testifying before the Senate on Thursday about when the FHA would meet the reserve minimum, FHA Commissioner David Stevens said, "a timeline would be the wrong way of approaching FHA reform" and could have "unintended consequences."

Yeah, like the FHA being unable to underwrite bad mortgages.

And home prices are still falling. The FHFA home-price index shows that they've dropped 2.38, 2.41, 0.61, 1.46 and 0.55 percent in the five quarters through this June.

The Democrats' continued push for subprime lending will hurt a whole lot of people that they're claiming to help.

Remember, what the government's doing here is "helping" people buy homes they can't truly afford. Many of these borrowers will find soon enough that they can't keep up with the payments (or perhaps just need to to relocate) -- and, with prices still falling, they won't be able to flip the house to get out from under, either.

The taxpayers will be out for the balance of the mortgage -- but the borrower will lose the downpayment plus everything he or she's paid on the loan.

Having undercut private lenders with 100 percent loans at cheap rates in a falling market, federal subprime lending is booming.

The result: Another subprime crisis is coming, this time the taxpayers holding the bag for all subprime loans.

Still believe that Wall Street, not the Dems, caused the subprime crisis?

Stephen B. Meister is a partner of Meister, Seelig & Fein LLP.