June 13, 2014
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.”
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