Over a period of some 40 years, following pressure initially exerted by the Carter administration, United States financial institutions were egged on into making mortgage loans to high-risk households. The outcome in 2007-2008 was all but inevitable, when the housing market collapsed and a huge raft of worthless mortgage securities brought the global economy to its knees.
Central to the entire corrupt enterprise were the government agencies that forced uneconomic mortgage lending down the throat of reluctant financial institutions. Fannie Mae and Freddie Mac, of course, were the Fagin fences that established markets for junk securities under the stamp of their approval. Operating behind the scenes as the evil and menacing Bill Sikes of the underworld, however, was the Federal Housing Association (FHA), a government agency that does not make loans, but that insures the loans made by others that satisfy its standards.
Throughout the years building up to the crisis, it turns out that the FHA had no standards whatsoever concerning loans made to the poor and the unemployed, the profligate and the irresolute,who flooded into the housing market in search of easy gains from a rising market. As the chickens come home to roost, and as the FHA exhausts its reserves in covering defaults by high-risk borrowers, the Obama administration is now soaking the very financial institutions pressured by the FHA to make such loans.
In February 2012, Bank of America agreed to a $1 billion settlement of False Claims Act fraud allegations involving FHA-backed loans without admitting any wrong-doing. Three other large banks since then have agreed to pay more than $490 million in similar cases. Last week, New York’s top prosecutor filed a civl lawsuit against J.P. Morgan Chase
alleging widespread fraud by the company’s Bear Stearns unit in the sale of mortgage-backed securities.
Yesterday, the U.S. government sued Wells Fargo & Co., accusing the nation’s biggest mortgage lender of reckless lending and of leaving a federal insurance program to pick up the tab. Wells Fargo denies the allegations, but, like its illustrious predecessors, it most likely will settle out of court.
The FHA is desperate to extract such protection money because its reserves are seriously under threat. Because of its own ideological preference for expanding home ownership into high-risk markets, the FHA’s reserves, standing at $4.7 billion one year ago, would have been wiped out in 2012, forcing the agency to seek $700 million from the U.S. Treasury. Instead, it has soaked the financial institutions to cover the cost of its own malfeasance.
The good news should be that financial institutions will never make mortgage loans into high-risk territory in the future. As a consequence, the housing market should prove less vulnerable to price bubbles and to bubble bursts. At best, the market for mortgage loans will tighten significantly as borrowers’ credit ratings are properly evaluated and suitably high down-payments are required.
The bad news is that such is the grip of the federal government over liquid and insolvent financial institutions that the FHA will continue to press for bad loans on the one hand while recouping the default losses from those loans from those self-same banks. The Fagins and the Sikes of this U.S. mortgage- securities underworld will continue their nefarious activities unless they face the dreaded drop or a Bow Street runner’s bullet, as the case may be.
That is life under crony capitalism.
Hat Tip: Shane Raice and Nick Timaraos, ‘U.S. Sues Wells Fargo For Faulty Mortgages’, The Wall Street Journal, October 10, 2012