Josh Earnest, The White House Press Secretary, was recently quoted saying:
“One of the fundamental legacy achievements of the Obama Administration is the Wall Street reforms. Those reforms have led to a more stable financial system that ensures taxpayers will not be expected to bail out big financial institutions that make unsound bets.”
Just like everything else Obama does, his statements don’t match his actions. The administration has, for some time now, been engaged in a broad effort to push for more home loans to people with weak credit.
This effort, if successful- officials say- will help to advance the progress toward a full recovery. But history and critics of this policy say it could drive the economy to the brink of another collapse.
Administration officials claim the drive toward lowered lending standards is intended to encourage banks to offer loans to a wider swath of borrowers. They say these loans will be supported by tax breaks that will help to shore up the ability of these borrowers to pay the loans back.
The administration is also making demands that minorities should receive preferential qualification standards- a key feature of policies that contributed to the ‘08 collapse.
The Mechanics of a Recovery
The Dodd-Frank Consumer Protection & Wall Street Reform Act of 2010, cut the amount of Americans who qualify for home loans from 52 to 26 percent. This was a necessary damage control measure to shore up the economy after the recession and restore enough stability for Americans to recover.
Five years after that law was passed the National Association of Realtors said that the numbers of first-time home buyers had dropped precipitously to what they called the lowest point in thirty years.
Obama praised the policy at the time saying, “Using this law, we will crack down on harmful practices in mortgage lending. We will ensure that the contracts are simpler- which will end the confusion caused by hidden fees- so that people will know what they are agreeing to.”
The real effect of the law was to punish vast amounts of Americans looking to buy a home by ratcheting up the requisite FICO credit score needed to qualify for a mortgage from roughly 710 to 770, a prohibitively high number according to Bloomberg.
Last November, Mel Watt, the Federal Housing and Finance Agency Director, urged Congress to waste no more time in adopting a new way to improve the current system of mortgage qualification.
Community organizers, at the same time, have been pushing demands that Fannie Mae and Freddy Mac should drop these standards so that Blacks and Hispanics could more easily obtain loans.
Lessons not Learned from ‘08
The adoption of preferential treatment for minorities, allowing them to more easily access mortgages was a key ingredient to the pre-recession Community Redevelopment Act.
This well-intentioned policy was a direct antecedent to the explosion in sub-prime loans that all but kicked the feet out from under the economy the year Obama was elected.
It’s common knowledge that the result was taxpayers then being made to pay everything back to the banks who knew very well that their participation in that downward spiral was poison to the economy.
The current standard FICO 4 credit scoring system was first introduced in 2004 but has undergone many changes since its inception. Lawmakers have urged Freddie and Fannie to switch to an updated model known as FICO 9.
Mel Watt told the House Financial Services Committee that he has asked Fannie Mae and Freddy Mac to take a second look at the strengths and weaknesses of the FICO 9 model as well as those of alternative schemes like VantageScore.
But Obama and his allies complain that FICO 9 still depends on data from the credit bureaus. They insist credit scores should include utility and rental payment histories- personal financial history metrics which VantageScore is sensitive to, and credit bureaus do not record.
What the administration doesn’t seem to recognize is that easing qualifications from the paranoid FICO 770 all the way down to the lax 710 will only offer temporary relief to individuals and families who are now struggling. This is the classic neoliberal tactic of shoring up their own voter support with the ranks of people they portend to care about.
Democrats are eager to gain support at the polls by importing immigrants who cannot pay for even sub-prime loans and by irresponsibly boosting the confidence of poor citizens by offering the same honey trap to them.
But when the bottom falls out, first they will blame Wall Street and Republicans. Then they will rob the taxpayer to pay back the banks, while still blaming everything on republicans.
Regards,
Ethan Warrick
Editor
Wealth Authority
