Select Page

Some lawmakers think that the way to the American Dream is to load up on more debt at the top of the housing cycle.

Consider H.R. 898, the Credit Score Competition Act introduced into Congress by three Congressional Representatives. It would direct Fannie Mae and Freddie Mac, the two government sponsored entities (GSEs) that guarantee 90% of the mortgage loans in the United States, to lower credit standards for mortgage loans.

“Alternative credit score consideration by the GSEs is a win-win: it opens up the market in a responsible manner for those qualified to buy a home and eliminates the government-backed monopoly in credit scoring. That’s why the Credit Score Competition Act has garnered such strong bipartisan support,” said sponsor Rep. Ed Royce.

“Alternative credit score” is just a misleading obfuscation of the term “low credit standards.” Kind of like “alternative facts”.

These GSEs are supposed to “provide liquidity, stability and affordability to the mortgage market.” They were one of the main reasons for the collapse of the economy in 2008. We had to bail them out of bankruptcy to the tune of $116 billion. They are still under conservatorship by the Federal Housing Finance Agency. They were strong advocates of low credit standards before the 2008 Crash. There is a move afoot to terminate these toxic agencies.

The Consumer Finance Protection Bureau (CFPB) has jumped on this bandwagon as well. The CFPB was created after the Crash by the Dodd-Frank Wall Street Reform and Consumer Protection Act which was supposed to protect consumers from getting ensnared into financial trouble by evil Wall Street. They propose to “expand debt access for consumers who lack enough loan history to obtain a credit score.”

This is what happens when politics enters the world of business. Political goals overrule prudent business considerations and the result is, as we found in 2008, disastrous consequences for the economy. They are the problem, not the solution.

I understand that most people believe that Wall Street screws America because of their rampant greed, 2008 being the latest example. Before you swallow the Kool-Aid® you might want to roll this around your skull: if greed is an ever-present character flaw of Wall Streeters, why did “greed” at that very moment rise up and swallow America? Is it possible that there were other actors involved? Not that Wall Street didn’t play its part, but it was the “animal spirits” of the Fed, your legislators, government regulators, and the GSE’s that were the triggering mechanism of 2008. Artificially lower interest rates, artificially lower loan standards, legislation promoting risky lending, government-backed guarantees of risky loans, encouragement of dubious financing vehicles (CDOs), an understanding that banks would be bailed out—only when that stage was set did “greed” play its part then.

It’s obvious from the history of the 2008 Crash that none of these stage hands ought to be let anywhere near the housing market. Unfortunately they are still at it: the Fed, your legislators, the federal bureaucracy, and the GSEs are once again conspiring to create another boom-bust cycle. It’s as if these proponents of weaker lending standards were zapped with an amnesia ray gun.

Look at where we are right now.

The total value of housing is at an all-time high ($29.6 trillion). In other words, borne on the back of cheap Fed-induced interest rates, the housing market has gained back all the losses from the Crash and then some.

A recent Fed report noted that household wealth is at an all-time high ($105 trillion) caused by booming stock and housing markets. This wealth is concentrated in older, wealthier, and often retired, folks. But what about the rest of America? The younger Americans?

Housing is becoming unaffordable for them. In places like expensive and difficult-to-build California home sales have been declining because of high prices (California Association of Realtors). Even accounting for inflation, incomes and savings of Millennials, Gens X, Y, and Z haven’t kept pace with housing costs.

There is also a connection between housing and commercial real estate, and CRE values are at an all-time high.

Total mortgage debt is about where it was pre-Crash (about $10 trillion), near an all-time high.

Household debt is near an all-time high. You can thank the Fed and ultra-low interest rates for that. Auto loans have been the fastest growing debt segment, now at more than $1.1 trillion, an all-time high. There is now a booming market in securitized subprime auto loans.

Student loans are at $1.3 trillion, another all-time high, up from $500 billion in 2006. The stories of the burden of student debt on our most promising youth are not fiction: it reduces their ability to buy homes.

But why worry? The economy is strong, debt delinquency rates are relatively low, employment is high, and interest rates are low. What could possibly go wrong?

I am not ringing the fire alarm yet, but all this sounds like the mid-2000s when the economy and housing were booming. Each boom-bust cycle is a little different, but stocks, commercial real estate, housing, real estate-related debt, and loan securitizations are the common denominators.

Just before the 2008 Crash the Fed Chairman, most economists, prominent business leaders, talking heads, and politicians told us that everything was fine; “we know what we’re doing.” So, when we hear lenders, politicians, housing lobbyists, and GSEs now saying we need to keep the housing market booming by lowering lending standards, that is a slap to head—we should take notice.

More subprime debt is not what America needs.