How Obama holdovers are sowing the seeds for another subprime collapse

Paul Sperry, writing in the New York Post, warns that “a pair of top Obama-appointed bank regulators still serving in the Trump administration could spark another mortgage meltdown by lowering credit standards and encouraging risky lending practices.” Sperry is the author of The Great American Bank Robbery: The Unauthorized Report About What Really Caused the Great Recession.

The two Obama officials are Mel Watt, who is serving a special five-year term as head of the Federal Housing Finance Agency, and Richard Cordray, head of the Consumer Financial Protection Bureau until the end of 2018. According to Sperry, Watt, a former liberal congressman, is pushing the mortgage-lending giants he regulates — Fannie Mae and Freddie Mac — to offer home loans to deadbeat borrowers with shaky credit. This practice led to the housing market crash that threw the U.S. into recession less than ten years ago.

Meanwhile, says Sperry, Cordray has launched a crackdown on credit reporting bureaus for alleged errors and bias, leading the industry to strip some negative information from credit reports used by home lenders. The natural consequence will be to impair lenders when they assess the risk of their loans. Indeed, a recent industry report by LexisNexis Risk Solutions warned that deleting negative public records data from credit reports could be “catastrophic” for the housing market, because home buyers with judgments and tax liens are five times as likely to default on a mortgage as people without those records.

Credit scores of approved borrowers already are trending down, according to Ellie Mae, a leading mortgage data firm. The Office of the Comptroller of the Currency recently warned that “this easing trend over the past three years is similar to the degree of easing in the years preceding the 2008 financial crisis.”

Watt wants all the “easing” he can impose. This includes absurdly low down-payment requirements. Thanks to Watt’s efforts, Sperry notes, borrowers need only put down 3 percent to get a Fannie-backed loan — even if the down-payment is a gift. Watt has also instructed Fannie and Freddie to back home loans for borrowers whose household debt consumes up to 50 percent of their income and for borrowers who do not have credit scores.

For his part, Cordray says he hopes to bring into the market for home loans more than 10 million minorities who don’t have credit scores, due to a lack of recent credit history or too much derogatory information in their credit files. He wants to accomplish this in part by having the credit reporting bureaus include “alternative data” in files to help them build a credit history and gain access to credit. Such files would draw from unconventional sources including monthly cellphone payments. However, Sperry says, such records are not loan accounts and do not predict the ability to repay debt.

The result of these machinations would be to inflate the credit scores of high-risk borrowers, making them look more creditworthy than they really are, and hurt bankers’ ability to make sound loans. The risk of a repeat of 2008 could not be more clear.

Democrats have plenty of incentive to take that risk. The availability of bad loans makes it easier for many minority group members, a core constituency, to buy homes. Eventually, these loans may well sink the economy. But the last time that happened Republicans took the blame, even though the policies at fault were instituted by Democrats at the urging of activists like Barack Obama.

The Bush administration wasn’t blameless. It did not push hard enough to reverse the policies. The lesson for the Trump administration is obvious.

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