Tag: Bailout

FHA’s New Stringent Standards

The Federal Housing Administration will reportedly announce more stringent lending requirements and higher borrowing fees. The move comes in response to growing concerns that rising losses on mortgages it insures will require a taxpayer bailout. Although any credit tightening is welcome, the agency will not propose an increase in the minimum downpayment, currently 3.5 percent. (Borrowers with credit scores below 580 will be required to put down a minimum of 10 percent, but most FHA lenders already require a 620 minimum score.)

Yesterday, the Wall Street Journal noted that “home builders are worried” the FHA would propose raising the minimum downpayment. The CEO of a Texas builder said it would be a “game changer,” meaning that it would hinder the nascent housing recovery. However, other industry observers believe otherwise:

In markets where home values are still falling, buyers who put little money down could see their equity wiped out quickly. The FHA is “just manufacturing more upside-down homeowners by the truckload in Arizona, California, and Nevada,” says Brett Barry, a Phoenix real-estate agent who specializes in selling foreclosed homes.

FHA commissioner David Stevens counters that inhibiting lending by increasing downpayment requirements would “perpetuate” price declines. But falling prices are a painful, but necessary, correction needed to bring the housing market back into equilibrium. Government interventions in the wake of the housing bubble’s burst have created an artificial cushion. Thus, any alleged housing recovery could prove illusory when the cushion is removed. In addition, the longer the government tries to prop up the housing market, the greater the economic distortions and risk to taxpayers.

The article cites the example of a 42-year-old air-conditioning repairman who just bought a house with the FHA minimum 3.5 percent downpayment. To meet the requirement he had to borrow part of the money from his father-in-law, which he then repaid with the $8,000 first time homebuyer tax credit. He now has a $1,466 monthly mortgage payment on a $50,000 salary. Factoring in utilities and other homeownership costs, it’s not inconceivable that half of his pre-tax salary will be devoted to just his home. Is it any wonder the FHA is experiencing large default rates?

Obama Bank Tax Is Misguided

Perhaps I am a little confused, but didn’t the Obama Administration tell the American public only months ago that TARP was turning a profit?   But now the same administration is proposing to assess a fee on banks to cover losses from the TARP. Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer. He appears, however, to be missing the critical reason why: the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

If the effort is really about deficit reduction, then it completely misses the mark.  Any serious deficit reduction plan has to start with Medicare and Social Security.  Assessing bank fees is nothing more than a rounding error in terms of the deficit.  Let’s put aside the politics and get serious about both fixing our financial system and bringing our fiscal house into order.  The problem driving our deficits is not a lack of revenues, aside from effects of the recession, revenues have remained stable as a percent of GDP, the problem is runaway spending.

The bank tax would also miss what one has to guess is Obama’s target, the bank CEOs.  Econ 101 tells us (maybe the President can ask Larry Summers for some tutoring) corporations do not bear the incidence of taxes, their consumers and shareholders do.   So the real outcome of this proposed tax would be to increase consumer banking costs while reducing the value of bank equity, all at a time when banks are already under-capitalized.

But now the same administration is proposing to assess a fee on banks to cover losses from the TARP.  Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer.  He appears, however, to be missing the critical reason why:  the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

The Bailout Bowl

Neal McCluskey wrote an op-ed on the ways that taxpayers subsidize college football bowl games. As a college football fan, it pains me that I can’t even get a respite from big government on game day. This Wednesday’s matchup between Central Michigan and Troy will be particularly insulting to taxpayers because it’s the annual GMAC Bowl.

GMAC, the former in-house financing arm of General Motors, has been sponsoring the bowl game since 2000, when it paid $500,000 for the right. More recently, the firm was battered by the collapse of GM and the housing market, and it was allowed to restructure as a bank holding company, which made it eligible for TARP bailout funds. The federal government has given GMAC $12.5 billion in return for 35.4 percent ownership stake in the company. However, the bailout just got larger. From last week’s Wall Street Journal:

The Treasury Department on Wednesday said it will provide GMAC Financial Services with an additional $3.8 billion in capital and assume a majority stake in the firm. The money, along with adjustments to existing aid already provided to the firm, aims to close a capital shortfall identified by government stress tests in May. The additional aid brings the total U.S. investment in GMAC to $16.3 billion and raises the government’s ownership interest to 56 percent from the current 35 percent. In exchange for committing more funds, the Treasury will appoint a total of four directors to the company’s board instead of two as previously planned. The company will also continue to be subject to pay limits set by U.S. pay czar Kenneth Feinberg.

Whatever GMAC is currently paying to sponsor the bowl game, it’s not a large sum compared to the billions in billion funds it has received. Nonetheless, it is a poke in the eye to bailout-fatigued taxpayers that a government-owned corporate failure continues to blow money on a largely irrelevant football game.

People used to think of the government’s proper role in the game of business as a neutral referee between competing companies. Today, when private companies lose the game, Uncle Sam can step in to be the quarterback. Although Uncle Sam isn’t any good at the game, he’s able to change the rules to benefit his team at the competition’s expense. In addition, Uncle Sam’s team doesn’t pay his exorbitant salary –- the competition and the fans (i.e., taxpayers) foot the bill.

Blank-Check Bailout for Fannie and Freddie Means Taxpayers Get a Lump of Coal from Obama

Even though politicians already have flushed $400 billion down the rathole, the Obama Administration has announced that it will now give unlimited amounts of our money to prop up Fannie Mae and Freddie Mac, the two government-created mortgage companies. While President Obama should be castigated for this decision, let’s not forget that this latest boondoggle is only possible because President Bush did not do the right thing and liquidate Fannie and Freddie when they collapsed last year. And, to add insult to injury, Obama’s pay czar played Santa Claus and announced that that a dozen top “executives” could divvy up $42 million of bonuses financed by you and me. Not a bad deal for a group of people that more properly should be classified as government bureaucrats. Here’s an excerpt from the Washington Post about the Administration’s latest punch in the gut for taxpayers:

The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress. The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama’s current term. But even as the administration was making this open-ended financial commitment, Fannie Mae and Freddie Mac disclosed that they had received approval from their federal regulator to pay $42 million in Wall Street-style compensation packages to 12 top executives for 2009. The compensation packages, including up to $6 million each to Fannie Mae and Freddie Mac’s chief executives, come amid an ongoing public debate about lavish payments to executives at banks and other financial firms that have received taxpayer aid. But while many firms on Wall Street have repaid the assistance, there is no prospect that Fannie Mae and Freddie Mac will do so.

University of Michigan Study Confirms Link between Financial Bailout and Corruption

Since Senators engaged in open extortion and bribery to enact Reid’s government-run health care plan, it is hardly newsworthy that Washington is riddled with corruption. But the magnitude of sleaze is probably far greater than most people realize. There is a new study from a couple of academics at the University of Michigan, who found significant relationships between lobbying and bailout money, as well as a greater chance of getting bailouts depending on a bank’s ties with either the Federal Reserve or key members of Congress. Hopefully, people across America will draw the obvious conclusion and realize that big government is inherently corrupting, as discussed in this video. Reuters has the details on this latest example of big government and malfeasance:

U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday. Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan’s Ross School of Business. Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds. Political influence was most helpful for poorly performing banks, the study found. “Political connections play an important role in a firm’s access to capital,” Sosyura, a University of Michigan assistant professor of finance, said in a statement. Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP’s Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.