The Mortgage Market Tightens

The Federal Housing Administration announced today a tightening of its lending standards for borrowers.

A little background is in order. The FHA provides an alternative financing option for borrowers who are short on cash. While private market lenders historically expected down payments in the 10-20% range of the sale price, the FHA underwrote loans with down payments of 3.5%. FHA interest rates are very competitive.

The agency has an interesting and pivotal history itself. Founded in 1934 as part of the New Deal, the FHA primed the housing market and accelerated middle class wealth accumulation and home ownership. Basically, the agency does not fund loans as much as it indemnifies private lender against default. This makes the agency carries out a credit insurance function as opposed to a banking function. Bankers traumatized by the collapse of the American financial system were suddenly incentivized to lend since the government covered their losses.

Additionally, the FHA did not spend tax dollars. Borrowers paid for the insurance as part of their closing costs and monthly payments. This is similar to mortgage insurance for those readers who own a home.

Prior to the FHA, bankers required borrowers to bring 50%-60% of the sale price to the closing table. Loans typically lasted five years and included a balloon payment which forced homeowners to scurry to the nearest lender and re-finance. The FHA changed this reality permanently by requiring willing and conforming lenders to fiance borrowers for 20 years with reasonable interest rates. This allowed middle income Americans to enter the housing market which created a real estate explosion.

While the FHA is still very much a significant player in the housing market, the agency simply cannot afford to underwrite loans for questionable borrowers absent some assurance of re-payment. This reality forced the FHA to increase the down payment to 10% for some borrowers with low credit. This move could significantly affect the housing market since 40% of all current mortgages are FHA paper.

One final note-bankers in the 1930's and 1940's were still leery of doing business with the FHA. specifically, the 20 year term (which eventually became 30 years) scared many lenders. While the mortgage insurance against default was nice, 20 years was a long time to tie up capital. enter the Federal National Mortgage Association or Fannie Mae. Fannie Mae paid lenders cash for their existing loan which allowed the banking industry to increase the churn rate of capital. This churn provided more money to lend and contributed to the American real estate explosion.

What are the lessons here? Both the FHA and Fannie Mae have changed the way they do business. of course, Fannie Mae has bigger problems than the FHA. Also, remember these lessons when the banking industry cries fouls over government regulation and interference. The government they criticize for limiting their wealth options actually played a large role in creating the modern real estate market.

William T. Cavanaugh, Being Consumed; Economics and Christian Desire: Review Part 1

Jekabs Bikis and I reviewed together Cavanaugh's Being Consumed. We've both agreed to post our reviews and our responses to each other here. Below is the first section of mine:

William T. Cavanaugh’s book is a slim volume on a broad topic. Just under a hundred pages, Being Consumed brings to our attention the impact of consumerism, commodification, and globalization on personhood, free markets, multinational corporations, marketing, shopping, tourism, self-identity, and human freedom. Yet despite such a wide range of concerns, Cavanaugh’s target is much more defined. As “a contribution to a kind of theological microeconomics,” he desires above all to help Christians “to discern and create economic practices, spaces, and transactions that are truly free” (viii). To do this, requires a theological critique of the spiritual and moral temptations of global capitalism. So rather than mount a macro-level reform of multinational markets, Cavanaugh is more concerned with how Christians might live differently at the local and particular level, and how by living in such a way they might further incarnate the eschatological promises that God has extended in the Lord’s Supper.

In chapter 1, “Freedom and Unfreedom,” Cavanaugh asserts that “true freedom requires an account of the end (telos) of human life and the destination of creation” (2), which for the Christian is to desire and participate in God. We need to keep this end in view because otherwise we cannot distinguish true and false desires. A model that judges the freedom of economic exchange as simply equal to the exchange itself is not truly free, for it has no standard by which to judge human flourishing. A model that values exchange in itself doesn’t care whether that exchange is about bread and beans or pornography and breast augmentation. Christians, on the other hand, are called to cultivate true desires, and we must do this in the face of marketing that seeks to create imprudent yearning in us and to addict us to the constant stimulation of those desires. We also have to work against large-scale organizations which ignore the needs of their employees. Charges Cavanaugh, we delude ourselves if we think that late capitalism is truly free for all its participants. Multinational corporations may choose to relocate their operations from one cheap source of labor to the next, quickly abandoning their workers, who after all, cannot easily move without disrupting their lives and communities. The ownership of property, Cavanuagh insists, is intended by God to serve the common good, not to pursue the maximization of profits at the expense of people. Christians then should work to create companies which keep this as one of their preeminent purposes.

Were Father's Manors Best?

The following exchange took place between myself and two other DBU professors on Facebook. With both professors' permission, I'm posting it here. It began with a quotation by James K.A. Smith in my status line. What do you think, is capitalism incompatible with Christianity?

"Construing our relationship to the world as one of 'consumption' is to take a good, creational reality of dependence and the need for acquisition in a direction that runs against the grain of God's universe. In sum, consumption i...s a way of relating to the resources of the world that runs counter to shalom."--James K. A. Smith

Professor Hatcher: Absolutely. What is the opposite of shalom? That's what we have.

Doctor Collins: So, what does this say about capitalism?

Hatcher: Is capitalism the opposite of shalom? I don't see the hand of God in capitalism. Eden was agrarian.

Collins: It seems to me that capitalism is based on consumption, so whatever Smith says about consumption, I think should apply to capitalism, too. I agree with you Elaine. Whether capitalism is the opposite of shalom or not, it leads in that opposite direction.

Mitchell: Capitalism is such a big, magic word, that can be scary for some and miracle-working for others. I think there is much positive to be said about free markets, the production of goods, and the creativity that goes into investing capital. However, I'm fully in agreement that in the extreme consumerist version we live in, it's hard not to kiss the devil's hand and say you're only kidding.

Hatcher: I can't even imagine how a godly, Christ-like capitalist system would operate.

Mitchell: However, I certainly don't think socialist systems have proved themselves capable of producing long-term prosperity for a people. They tend to devolve into either utopian projects and/or totalitarian collectives. What capitalism offers at its best is the ability to people to use their creativity and drive in work and production of goods. Is radical consumption the natural end of all capitalism or only the kind we've developed in the West?

Hatcher: I certainly don't consider socialist systems a viable solution! The end result is much worse than our "radical consumerism." Due to the fallen nature of humankind, radical consumption is probably the natural end of all capitalism. We just can't seem to do anything right on a large scale although individuals might practice a godly form of ... Read more capitalism on a local scale. But I don't know of any society where either capitalism or socialism has ended well for all. I say back to the land! Maybe manorialism with benevolent landlords?

Fun with charts - Well-being and stock market

The first graph is Gallup's Healthways Well-being index (this link explains how the index is calculated, page 2). It measures people's well-being in particular in how they evaluate their life, how they feel emotionally, how satisfied they are with their work environment, what their physical health is, and what is their level of healthy behavior and basic access.

The second chart is the stock market (Dow, Nasdaq, and S&P500) for the same time period.

Surprisingly similar, aren't they? What does that mean?