When Federal Reserve and Government officials reasoned that lessons were learned from the credit bubble the cynics laughed in disbelief. Home prices might have dropped in many areas of the Nation but Government and Fed interference halted the decline in an attempt to re-inflate the bubble. The result is a continuation of irresponsible behavior that is being encouraged and subsidized by the various policies and economic markets that do not reflect reality.
While many politicians argued that lending standards improved and now reflect the risk variable, it was obvious then as it is now that credit didn’t significantly tighten. Irresponsible lending habits still continue as the Federal Reserve and US Government guarantee non-sense loans at below true market rates. The one crucial element that brought us the recent market rally since Spring 2009 was the changes in accounting regulation that eliminated mark-to-market accounting standards. Mark-to-market accounting ensures that assets and liabilities are accounted for according to their current market value.
Artificial low interest rates by the Federal Reserve and home loan guarantees by the Government through FHA, VA, and USDA allowed for the credit and housing bubble to reach the height that it did. Throughout the housing bubble the Government continuously increased the conventional loan limits that it would guarantee, allowing individuals to increase the debt burden they could take upon themselves. This of course was done under the pretense of making homes more affordable when nothing but the opposite is true. Artificial low rates that did not reflect a balance between supply and demand but instead are just an arbitrary number set by the Federal Reserve, amplified the ability to qualify for even greater debt. The resulting increases in home prices were not based on fundamentals but anti-free market policies that brought us a real estate bubble with values beyond affordability.
With the stock market dropping in value various lawmakers argued that mark-to-market regulations were to blame as companies had to write down their losses to the current value of those assets and liabilities at that time. With mark-to-market regulation in place, financial institutions such as JP Morgan, Bank of America, Citi Financial, Goldman Sachs, Wells Fargo, etc. had to realize their losses on their balance sheets making them in essence insolvent. Not as a result of mark-to-market regulation but as a real reflection of their financially irresponsible business decisions.
With the passage of the various bailout bills, supported and voted for by both political parties, mark-to-market accounting regulation became a norm of the past. Financial Institutions quickly adapted and posted record profits as they took the previously marked down losses and restated them as gains, allowing for business to continue as usual.
The Federal Housing Administration continues to guarantee loans at questionable terms with only 3.5% down payment, VA continues to guarantee loans of up to 102%, and the USDA made a serious effort in 2009 to increase home ownership in rural areas with a population of less than 25,000. The New York Times reports in its article “Auditors See Rising Defaults In Rural Loans”
“The response from lenders was immediate. The value of federally backed rural home loans soared to $16.2 billion in fiscal 2009, up from just $3.7 billion two years earlier. Last year, the guarantees reached nearly $16.8 billion.”
Auditors now come to the realization that a significant amount of those loans that were guaranteed in 2009 present the next wave of defaults. Tammye H. Treviño, administrator of the Rural Housing Service, acknowledges the lending program’s problems yet states
“At a time when new-home construction and home sales in rural America were struggling, we continued to make loans.”
This quote highlights exactly what many experts been stating. Government and Federal Reserve Policy are not solving the problem but merely delaying the inevitable consequences that are growing bigger in size. The current policies are solely attempting to cover the symptoms of the root problems that their anti-free market policies created.
