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Home Publications Blogs Beat the Press How Does WSJ Know That Obama Administration Wants Eased Mortgage Standards In Order to Help Buyers As Opposed to Increase Industry Profits?

How Does WSJ Know That Obama Administration Wants Eased Mortgage Standards In Order to Help Buyers As Opposed to Increase Industry Profits?

Friday, 13 June 2014 04:25

That's the question millions are asking after reading this article on the decision of the Securities  and Exchange Commission to go along with more lax standards. Under these standards issuers of mortgage backed securities (MBS) would not be required to keep any stake in a mortgage even if it has less than a 5 percent down-payment. This reversed efforts to ensure that issuers did not deliberately put questionable mortgages into MBS, which was a major problem in the run-up of the bubble. (The original standard required a 20 percent down-payment in order avoid keeping a stake.)

The piece told readers:

"The Obama administration has begun trying to relax some of the postcrisis efforts to tighten mortgage-lending standards over concerns that the housing sector, traditionally an engine of economic recovery, is struggling to shift into higher gear."

While the Obama administration may be concerned about the housing sector and the economic recovery it is also plausible that it is at least as concerned about the profits of the financial industry. Securitizing bad mortgages has been very profitable in the past and many investment banks would like to be able to do so again in the future. The Obama administration has close ties to investment banks with many top officials coming from the sector. It also was an important source of campaign contribution.

At one point the piece notes the opposition to the down-payment requirement:

"The original proposal three years ago sparked a backlash among housing-industry, affordable-housing and civil-rights groups, who banded together over shared concerns that a 20% down-payment requirement would end the dream of homeownership for many Americans."

It would have been worth pointing out that the 20 percent down-payment requirement was not a condition of getting a mortgage. People who put down less than 20 percent would have been required to have mortgage insurance to have their loan placed in a pool. This would raise the cost of the mortgage somewhat. The higher mortgage cost would reflect the much greater risk of default. (Mortgages with just 5 percent down default at roughly four times the rate as mortgages with at least 20 percent down.)

In the current interest rate environment, homebuyers paying this risk premium would still be able to get mortgages at far lower interest rates than they would have paid without a risk premium in prior decades. Given this fact, it is absurd to say that the stricter rule rejected by the SEC, with the support of the Obama administration, "would end the dream of homeownership for many Americans."

Comments (6)Add Comment
The WSJ is just another node in the Murderdoch propaganda network
written by John Puma, June 13, 2014 6:47
It cannot and should not be considered a legitimate source of journalism of any sort.
What a Sacrifice: Sellers Agree to Collude and Shift Risks to Buyers to Restore Demand
written by Last Mover, June 13, 2014 6:51

Exactly. As Alan Greenspan said when explaining the critical flaw he discovered that brought the economy down, bankers did not have enough skin in the game.

America has come a long way since then hasn't it. In one big circle. And Obama was the last to take the baton from his team mate of masters of the universe and continue to run the good race to get the economy back on track.

Bring back housing. On behalf of buyers. So demand can be restored to its heyday of full employment. When everyone had wealth, not just the 1%. When housing wealth was a substitute for low wages.

Thank you WSJ and the sock puppets for the financial sector who created the demand then and will create it again. Not for the benefit of sellers and lenders who are mere enablers of housing transactions from the shadow supply side, willing to sacrifice all but the minimum normal competitive profit necessary to incentivize said transactions.

No, it's for the benefit of buyers isn't it. Achieved by sellers having less skin in the game like before. So they can shift risks to their customers and taxpayers. So they can privatize gains and socialize losses like they always do. As buyers get more houses which will restore aggregate demand as well for all won't it.

Thank you Obama. Thank you Greenspan. America has come a long way baby, from "who could have known" about the bubble that destroyed it to everyone knows now don't they. Because the sock puppets have spoken. Like they did before.
written by djb, June 13, 2014 7:00
Purposefully misleading
written by Kat, June 13, 2014 8:16
How many opinion pieces have they run proclaiming the housing bubble/financial crisis was caused by the heavy hand of government forcing banks to lower their standards. I'm thinking it is roughly 2,585-- give or take a few.
As for stalling our "engine of growth", perhaps it is time to reach into our bag of tricks and pull out a new engine?
Re Heavy hand of government forcing banks to lower standards causing meltdown
written by John Wright, June 13, 2014 9:32
And the opinion pieces never mention that the financial industry, supposedly forced by the government into harmful mortgage lending practices, seemed to magically discover the industry had great political power to engineer a legislative rescue effort for itself in 2008.

Why did the financial industry NOT use their lobbyists and political connections ("revolving door" employees) to pass pre-2008 legislation to remove this harmful "heavy hand" of government before it wreaked destruction?

It is as if in 2008 the financial industry awoke from its political slumber and realized it had great political clout in the Bush/Obama administrations.

The industry MUST have been aware it could successfully lobby for removal of government regulation (see Glass-Steagall in the 1990's) so why was the financial industry so powerless to do the same for government regulations allegedly pushing the industry toward financial destruction?

Deja vu all over again
written by Squeezed Turnip, June 13, 2014 10:42
And now the stage is set for a new set of suckers. The only hope is to have a Treasury Secretary who will charge a very high rate indeed when the Banker bozos come back with hat in hand. Bagehot's rule, for modern times (see Perry Mehrling's book on the matter)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.