18 Sep Five years after Lehman, is the bubble reinflating?
Minutes before 2 a.m. on Sept. 15, 2008, Lehman Brothers became the biggest U.S. company ever to file for bankruptcy. The collapse of this New York investment bank five years ago Sunday touched off a panic that sent the stock market down _ and the housing market down and out for years.
A bubble in the real-estate market, after inflating for a decade, went pop. Values plunged for the most important investment held by everyday Americans as housing suffered its worst implosion since the Great Depression. Prices are rising again, but hold the celebration: Conditions that enabled the bust, and the collapse of Lehman, persist today.
Some of the same risky securities that helped drive Lehman into bankruptcy are staging a comeback on Wall Street. The federal tax code, with excessive mortgage-interest and property-tax deductions, still encourages Americans to overspend for big homes. Speculative fever, with houses flipping as if they’re commodities on the Chicago Board of Trade, is rekindling in a few hot markets.
And you, taxpayer, are guaranteeing practically every transaction.
That’s right: If a real-estate bubble goes pop _ again _ Uncle Sam will be left holding the bag _ again.
For all the reams of new rules being dreamed up in Washington to prevent another collapse, the nation’s political leaders haven’t acted on a key lesson of the bust: They have failed to get the government out of the mortgage market.
The two quasi-governmental companies at the center of housing finance live on. If anything, Fannie Mae and Freddie Mac are more central to the housing market than ever. The government guarantees nine of every 10 mortgage loans being made in the United States. The full faith and credit of the U.S. Treasury _ that is, of you, U.S. taxpayer _ backs that guarantee. If the loans go bad, it’s bailout time again.
The proper role of government is to provide oversight, enforcing sensible rules that protect consumers and investors. The proper role is not to backstop loans up and down Main Street. Such sweeping guarantees undermine market discipline and encourage risk-taking.
Banks and other regulated financial institutions should be the primary source of mortgage credit. They should reap the benefit for making profitable loans, and bear the burden for losses.
Congress pays lip service to the idea of avoiding another round of financial-industry bailouts. Many lawmakers say they agree in principle that they need to wind down Fannie and Freddie. President Barack Obama endorsed exactly such a move in a speech last month, saying the era of bailouts is over: “And we’re ending those days,” he said. “We’re not going to do that anymore.”
Yet our leaders, from the president on down, haven’t delivered. Legislation known as the PATH Act that would start winding down Fannie and Freddie has stalled in Congress. The reason most often cited for doing nothing is the need to protect fragile green shoots sprouting from debris of the housing bust. The real-estate market is so fragile, the theory goes, that it couldn’t possibly survive without government life support.
Nonsense. The real-estate market would be stronger if the feds stopped doing the job of banks and private investors. The upshot, however, would be unpopular in the short run: Loans only would go to qualified buyers. In other words, the American dream of homeownership would be available only to those who could afford it based on their creditworthiness, not the U.S. government’s.
More Americans would rent. Fewer of them, though, would be vulnerable to devastating foreclosures when they encounter job losses or other financial hardships.
The other big factor in this collective failure to act is the clout of real estate agents, homebuilders and financiers who reap the benefits of misguided government policy. Witness the reaction to one overdue reform: Federal officials are preparing to reduce the maximum size of loans eligible for the backing of Fannie and Freddie. As of Jan. 1, taxpayers no longer will stand behind the loan when a New York banker or San Francisco tech whiz borrows up to $625,500 for a house in a high-priced ZIP code.
New loan limits haven’t been set, but still will be substantial. No congressional action is required. The regulator of Fannie and Freddie can make the change. It should have been done already.
Despite the government’s ubiquitous presence, commercial banks already are making these so-called “jumbo” loans. In fact, many banks see the high end of the mortgage market as attractive. In a reversal of the usual dynamics, some are offering lower rates on huge loans than on smaller, so-called “conforming” loans.
The market clearly is itching to issue more jumbos. Yet the National Association of Realtors, clinging to the government loan subsidy, opposes any change to the loan-guarantee limits, saying that in spite of the marketplace signals, private capital isn’t ready to shoulder the burden of making these big mortgages.
But if private lenders want the risk, why should taxpayers who backstop Fannie and Freddie not step aside?
Artificially generous federal loan policies in effect encouraged the real estate speculation that flattened Lehman. When its overleveraged portfolio collapsed, the global financial system followed.
Washington’s failure to get the government out of this market invites a housing bubble that may be reinflating. In the name of homeowners and taxpayers victimized by the Great Recession, Congress and the president should make sure that doesn’t happen again.