by John M. Curtis
(310) 204-8700

Copyright Sept. 24, 2009
All Rights Reserved.

          Sales of existing home dropped 2.7% in August to 5.1 million annual rate, the second highest in the last 23 months, according to data released today by the National Association of Realtors.  Prices also declined 12.5% during the same time period, not nearly as disturbing as the decline in sales, less a glitch along a slow path to recovery in the real estate market and more a systemic problem.  Since credit markets seized up in Dec. 2007 following a collapse of the “derivative’s market,” Fannie Mae and Freddie Mac have tightened lending standards.  Both Fannie Mae and Freddie Mac, the nation’s largest formerly independent mortgage-buying agencies, essentially went broke Sept. 8, 2008, forcing a Federal Reserve Board and Treasury Department takeover.  Both received bailouts exceeding $200 billion, forcing the government to takeover both mortgage agencies.

            Tightening lending standards, both Freddie Mac and Fannie Mae blamed unqualified borrowers for the home loan meltdown, essentially ending so-called “subprime” borrowing.  New federal lending guidelines, permitting lenders of package and sell mortgages to Freddie Mac and Fannie Mae on the secondary mortgage market, no longer qualify borrowers based on home equity or credit histories known commonly as FICO scores.  Despite cash down payments or FICO scores, new guidelines require strict income verification, favoring what’s known as W-2 borrowers or salaried employees.  Self-employed borrowers have been virtually wiped out of the lending game, no longer able to qualify for mortgages.  So-called “stated income” loans have been eliminated.  Strict income verification prevents otherwise qualified borrowers from getting loans.

            Wiping out self-employed borrowers, the backbone of American homeowners, over 50% of borrowers, despite their good credit, can no longer qualify for home loans.  Discriminating against self-employed borrowers hurts the real estate market and economy by artificially suppressing real estate sales, preventing credit worthy borrowers from homeownership.  Freddie Mac and Fannie Mae went under because of Wall Street’s wild speculation with “derivative” investments.  When former President Bill Clinton signed the Gramm Leach Bliley Act in 1999, he gave the green light to bank holding companies to engage in Wall Street speculation.  Since the end of the Great Depression, the Glass-Steagall Act, passed in 1933, created the Federal Deposit Insurance Corporation and banned depository institutions from playing the stock market to seek high-risk quick profits.

            Blaming borrowers for mortgage defaults and foreclosures doesn’t tell the whole story of how banks played the “derivative’s” market and got burned.  Trying to recoup losses, banks have gone after homeowners and small businesses, tightening lending standards under new federal guidelines that have made borrowing next to impossible.  When former President George W. Bush and his Treasury Secretary Hank Paulson pushed the $690 billion Toxic Assets Relief Program, it was designed to provide emergency funds to cash-strapped banks.  Banks now have the cash but new federal lending guidelines prevent them from getting the funds to consumers.  No one expected the housing bubble to last forever.  But banks hastened the collapse by pushing adjustable rate loans that kept increasing borrowers’ payments.  Eventually, borrowers couldn’t make the payments.

            Federal agencies have done very little to require predatory lenders to restructure bad loans.  No homeowner, whether employed or not, can afford to have mortgage payments jump to unaffordable levels.  Predatory lenders like Countrywide Financial, now owned by Bank of America, made homeownership affordable by offering artificially low “teaser rates,” keeping mortgage payments only a fraction of the real principal-and- interest payments.  Where federal regulators, like the Fannie Mae, Freddie Mac and Federal Deposit Insurance Corporation, went wrong was not preventing these loans from adjusting too quickly.  Homeowners simply couldn’t make their payments.  Treasury Secretary Timothy Geithner should work with Congress to stop foreclosures and restructure bad adjustable rate loans.  Geithner must work with the Federal Reserve Board to pull this off.     

             Getting the economy back on track requires more than a Wall Street rally.  While corporations need the cash to rehire laid off workers, borrowers also need long-term relief to have the cash for consumer spending.  Economists, like New York University Stern School economist Nouriel Roubini, fear a double-dip recession, unless consumers can begin spending.  Economists can’t see yet where consumers are supposed to get the cash needed fuel long-term economic growth.  Restructuring bad loans and keeping borrowers out of foreclosure should go a long way, together with stable employment, in assuring homeowners do their part for consumer spending.  If homeowners remain cash-strapped, Roubini’s predictions of a double-dip recession could come true.  Restoring the real estate market requires the government to ease lending standards, making home loans, once again, more accessible.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.