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America's housing policy: The definition of insanity

Aaron Task
Editor in Chief

If the definition of insanity is "doing the same thing over and over again and expecting a different result," then clearly Albert Einstein is not responsible for America's housing policies.

Federal Housing Finance Agency director Mel Watt on Tuesday unveiled new regulations that would make it easier for Americans to buy a house with little or no money down. The rules are aimed at private lenders who opposed a proposal that borrowers make a 20% down payment.

“Finalizing this rule represents a major step forward to providing greater certainty to the housing finance market and paves the way for increased participation by the private sector,” Watt said Tuesday at the Mortgage Bankers Association's annual conference held at the Mandalay Bay in Las Vegas (A casino? Really? The optics couldn't be worse.)

In 2013, less than 2% of the $1.6 trillion of MBS issued were so-called private-label securities, meaning they did not have government backing.

In separate but related news, Watt earlier this week announced that Fannie and Freddie are planning to guarantee loans with down payments as little as 3%, down from 5% previously and back to pre-crisis levels.

Insanity number one is the government bending to industry lobbying against proposed rules designed to tighten lending standards and force borrowers to have more "skin in the game" vs. less. The FHFA also loosened proposals to ensure banks have some "skin in the game" by forcing them to hold a small portion of the loans rather than bundling them together and selling them as mortgage-backed securities (MBS). The 5% "risk-retention rule" requires banks to hold onto 5% of loans they sell but exemptions "may enable the banks to hold less or nothing," The NYT reports.

Insanity number two is the federal government saying they want to encourage private lending but at the same time "shifting course on Fannie Mae and Freddie Mac, announcing plans to use the mortgage giants to expand credit rather than reducing their outsize role in the housing market," as The WSJ put it.

Fannie and Freddie already back 60% of all mortgages originated in the private market and guarantee 90% of all new mortgages underwritten, according to Investors Business Daily.

The root of all this insanity is a housing market that not only needs the Fed to keep rates at zero "for a considerable time" but also massive government-sponsored subsidies to maintain altitude. After two years of strength, the housing market has clearly cooled in recent months. From August 2013 to February 2014, the year-over-year increase in the Case Shiller national home price index exceeded 10%. The pace of increase has declined every month so far in 2014 and was at 5.6% in July, the most recent available, the slowest pace since November 2012.

The Obama administration, the Fed and the private lenders all share the same concern: That the housing market rebound is running out of steam and will start to rollover without additional incentives for banks to lend -- and Americans to borrow. The MBA expects total lending for home purchases to fall 13.5% in 2014, The WSJ reports.

In sum, we're going back to relying on banks to verify borrowers' ability to repay loans with little or no money down while Fannie and Freddie are lowering limits on what loans they'll guarantee. What could possibly go wrong?

Somewhere a young Angelo Mozilo -- maybe even the former Countrywide CEO himself -- is preparing to launch a new venture aimed at lending to Americans with poor credit and/or little savings for a downpayment. After all, it's a very lucrative business...and if things go awry, the taxpayer bails you out.



















Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.