Thursday, October 27, 2016

The Obama administration sees its own nose.

Hey, look what the Obama administration discovered today! (HT: Andy Berner)

The impact of the financial crisis on current borrower access to mortgage credit is evident. (KE: The impact of borrower access to mortgage credit on the financial crisis is evident.  - FIFY) Today, the credit score of the typical new mortgage borrower is nearly 40 points higher than the typical borrower in the early 2000s. The average credit score for those obtaining a loan backed by Fannie Mae and Freddie Mac (collectively, the government sponsored enterprises, or GSEs) in conservatorship is nearly 750. The minimum credit score to qualify for a mortgage at the GSEs is 620, yet only 1 percent of all new mortgages originated across the industry are to borrowers with FICO scores below 665. While creditworthiness is certainly a critically important factor, this credit selectivity is especially sobering given the fact that more than 40 percent of all FICO scores nationally fall below 700. While a variety of factors contribute to these outcomes, it is clear that the GSEs and the secondary market can do more to reach a broader swathe of creditworthy households. Constraints on access to affordable credit have ripple effects across the owner-occupied housing market. When a large number of first time homeowners cannot buy a home, established homeowners may face a harder time relocating or moving up in the market.

If only the Bush administration had figured that out in the last year of their term, or if Obama had noticed in the first year of his.  The GSEs were taken over in 2008.

The curious thing about my project is many facts are slowly being accepted across the spectrum of observers.  But, will readers be willing to accept the conclusions that those facts point to when they populate a coherent narrative?  Will we admit that we fought an unnecessary war?  And, in the end, is that what the delay is about, even if that isn't a conscious choice?

It is the lack of credit what done us in, not an excess of it.  As this graph points out, and the White House memo seems to acknowledge, there was no excess to begin with.  Some try to concoct a story that FICO scores were somehow inflated by the housing boom.  But, an expansion of credit or real housing expenditures doesn't show up if we look at incomes or spending, either.  And, in any case, if the expansion of credit can happen with little discernible movement in FICO scores for nearly a decade, what does that say about the scale of a 50 point increase that happened during the bust.

The government took over most of the mortgage market, and supported the top half of it.  For the bottom half, the worst of the bust came after that - both in terms of defaults and in terms of lost equity.

If they actually follow through on this, prices at the low end of the housing market will rise significantly, which would be great.  Not because it matters whether prices are high or low, but because it matters that prices are free to reflect accessible markets.  The only reason those prices are low now is because we are killing the mortgage market, and locking middle income households out of the market, to keep them that way.  That's the rigged system.

Success might push us even more quickly into a recession, because there seems to be a consensus that we have to prevent markets from clearing.  But, at least there is are green shoots of statements of the obvious here.  Baby steps.


  1. (from Arnold Kling's site) Wow, so much on housing...
    Housing part 184 -- Is there a set of clear policy recommendations you make that I can refer to?
    (Arnold often talks about his three different axes) Maybe a few "new reader posts" would be good.

    I certainly agree with your main point about the need for more credit at the low end, now -- and there was probably too much at the low end in the 95-2005 boom.

    I'm also very interested in the CRA, claimed by Reps (like me) to be a big cause of the boom/ bust.

    1. It's a big topic. I'm working on publishing it in book form.

      The starting point is that there was no bubble. So, whether you blame the CRA or the GSEs or the Fed or the private banks or housing speculators, the argument is over who to blame for something that didn't happen.

      There was no relative expansion of debt to lower income households. To the extent that there was an expansion, it appears to have been, on net, to high income households, allowing them to bid up housing in supply constrained cities in order to access lucrative labor markets that are walled off by that lack of housing.

      Across the ideological spectrum, this supply problem was blamed on various demand factors, and the arguments have been about which demand factors to blame. As a result, there was a relative consensus that the economy had to be slowed down in order to slow down the housing market. Since demand factors weren't the main problem, we had to slaughter the economy in order to slow down the housing market.

      Then, because we continued to believe that marginal lending was what caused all the destruction, we imposed policies that prevented lending from going to middle income households. Conservatorship of the GSEs and severe tightening of lending standards through that conduit, along with vague liabilities imposed on the banks, and the DOA private securitization market, all led to a sharp change in standards. Most of the decline in low priced housing markets happened after those changes. There is a broad belief that defaults from marginal borrowers were the first domino to fall, but in many ways they were a lagging factor.