Policymakers who built a housing market based on lax underwriting for political purposes are now stalling a housing recovery with aggressive legislation and a failure to let the housing market clean itself up, according to Edward Pinto, resident fellow at the American Enterprise Institute.
"Once the housing market collapsed, many of these same supporters of loose lending effortlessly switched gears and undertook a multiyear effort to delay and prolong the market clearing process," Pinto said.
"Much of this effort has focused on rewarding millions of borrowers who overleveraged their homes. Neither massive amounts of government spending nor innumerable government interventions have led to robust economic growth or hastened a housing market recovery. In fact evidence is mounting that a recovery has been impeded."
Pinto, who has long been a critic of the way the housing fallout was handled, made those assertions in prepared testimony for the House Committee on Oversight and Government Reform. The committee meets Monday at a field hearing in the offices of Brooklyn Borough President Marty Markowitz.
Pinto is appearing to discuss how policymakers dating back to 1991 built a mortgage finance structure that would eventually over leverage borrowers, while creating artificially steep home prices.
Pinto even cites 1991 Senate testimony from Gale Cincotta, who at the time was representing the National People’s Action.
Pinto quotes Cincotta as saying, "Lenders will respond to the most conservative standards unless (Fannie Mae and Freddie Mac) are aggressive and convincing in their efforts to expand historically narrow underwriting," Cincotta said.
Pinto says this testimony is proof that both the GSEs and banks had a history of safe underwriting — a system destroyed by political maneuverings that pushed for more lending to expand homeownership.
"The race to aggressively loosen lending standards was on. In the years following, numerous others policies promoting so called 'flexible and innovative' underwriting standards were adopted, led principally by HUD," Pinto said. "These include the national homeownership strategy, expansion of CRA (Community Reinvestment Act), and HUD’s best practices initiative."
Pinto says the same policies that encourage the problem are resurfacing, with a focus on lending to low- to moderate-income households. Pinto also alleges that the Fed recently approved Capital One Financial (COF) acquisition of ING Direct on the grounds that once again concessions would have to be made to consumer groups.
"Capital One committed to a $180 billion CRA commitment," Pinto said. "This included an agreement to originate FHA loans to borrowers with FICO scores as low 580. My estimates are that the FHA’s recent loans with a FICO score of 580–599 have an estimated claim rate of nearly 30%."
Pinto outlines the steps that should to be taken to reboot the recovery and housing market. One is to end delays in foreclosure which, he says, are slowing down the housing recovery and driving up costs tied to Fannie Mae and Freddie Mac.
He also recommends repealing two bills that are stalling a jobs recovery, "ObamaCare" and Dodd-Frank, while also promoting the conversion of rental properties from short sales, REOs and foreclosures by increasing the GSE individual investor loan limit. Pinto also advocates helping underwater homeowners who have done the right thing by making consistent loan payments for the past five years obtain a lower rate.
"This way the loan would amortize much faster, helping the homeowner get himself out from under water," he wrote.