- The Washington Times - Tuesday, April 22, 2008


As Democrats in Pennsylvania head to the polls today to vote in the Keystone State’s pivotal primary, it is clear that Pennsylvania’s economy has been performing significantly better than the economy in Ohio, where a marked slowdown was a major reason why Hillary Clinton’s stridently populist message produced a 54-44 victory in the Buckeye State’s March 4 primary.

Indeed, the unemployment rate and the incidence of foreclosures in Pennsylvania are much higher than those in Ohio. Ohio’s unemployment rate of 5.7 percent in March was nearly a full percentage point above the Pennsylvania rate of 4.9 percent. That was not only less than the national rate of 5.1 percent in March but also a notch below Pennsylvania’s February unemployment rate of 5 percent.

While mortgage-delinquency and home-foreclosure rates have been soaring in Ohio, and especially in the Cleveland metropolitan area (where the unemployment rate is 6 percent), Pennsylvania’s prime fixed-rate delinquency rate increased only 1.45 percent last year, and its subprime fixed-rate delinquency rate rose a relatively mild 8.7 percent in 2007. Even last year’s 35 percent jump in the delinquency rate for subprime adjustable-rate mortgages was relatively modest by the standards in the Midwest states of Ohio and Indiana. On the foreclosure front, according to recent congressional testimony by Ira Goldstein of the Reinvestment Fund (“a national leader in the financing of neighborhood revitalization”), foreclosures in Philadelphia last year (6,237) were actually less than they were in 2003 (6,343).

In the current climate of falling home prices and rising foreclosures, it has been easy for Democratic presidential candidates to criticize the Bush administration and the federal government for not doing enough to mitigate the pain. Before the Ohio primary, for example, Gene Sperling, a top economic adviser to the Clinton campaign, complained about Washington’s “timidity” in the face of the unfolding credit and housing crises, which have been inextricably linked.

In fact, the federal response has been as massive as it has been extraordinary. Beyond the FHASecure and Hope Now programs for loan modification, the response has also ranged from the highly innovative, hugely expansionary monetary policies pursued by the Federal Reserve (which we recently detailed) to the below-the-radar infusion of hundreds of billions of dollars throughout the mortgage-finance markets by quasi-government institutions like Fannie Mae and Freddie Mac and lesser-known credit-generating systems like the Federal Home Loan Banks (FHLB). Indeed, taxpayers, who could ultimately bear the burden of the unprecedented opening of the money spigot if many of the mortgages financed by these institutions go down the drain, may rue the day that the money began pouring into the markets.

After the credit markets initially seized-up in August following the first rumblings from the collapsing subprime mortgage market, the FHLB, a government-sponsored network of 12 regional banks whose genesis dates to the Great Depression, opened the lending spigots. Compared to annual loans from the FHLBs to commercial banks, savings institutions, credit unions and insurance companies that totaled $31 billion (2003), $74 billion (2004), $44 billion (2005) and $21 billion (2006), FHLBs lent $232 billion in 2007, according to the Federal Reserve’s flow-of-funds data. Just during the third quarter, the annualized rate of FHLB lending approached $750 billion. While tapering off somewhat during the fourth quarter, the annualized rate of FHLB lending still exceeded $200 billion. “To fund this massive expansion, the FHLB issued $210 billion [of] debt in November alone,” the Financial Times reported.

At the end of the third quarter, the three biggest FHLB borrowers were Citigroup, Countrywide and Washington Mutual, all of which have subsequently reported billions of dollars in write-offs and losses. Asked by the Financial Times in December what would happen if house prices fell 20 percent or 30 percent, Ronald Rosenfeld, who, as chairman of the Housing Finance Board, is the FHLB system’s regulator, replied: “I do not know the answer, but I can tell you I do not want to hear the news.” Since then, Moody’s.com, Goldman Sachs and Merrill Lynch, among others, have all issued forecasts projecting peak-to-trough price declines of 20 percent or more.

Meanwhile, Fannie Mae and Freddie Mac, despite enduring recent accounting scandals and sustaining more than $6 billion in combined losses during the fourth quarter, were responsible for nearly three-quarters of all mortgage-backed securities issued during the October-December period. Until last month, Freddie and Fannie, which own or guarantee about 45 percent of all outstanding U.S. home mortgages, were limited to purchasing loans up to $417,000. That limit was recently increased by 75 percent to $729,750 through Dec. 31. That means Freddie and Fannie operations will now increase greatly in markets where upper-tier prices are falling most rapidly and steeply, like California and Florida. In a separate move, regulators lifted a third of the punitive capital surcharge levied on Fannie and Freddie, enabling these loss-accumulating delinquents to funnel an extra $200 billion into the mortgage market. The Federal Housing Administration (FHA), a Depression-era relic that provides mortgage insurance, saw its limit rise from $362,790 to $729,750. Requiring a down payment of only 3 percent, FHA can now service markets whose houses are now falling by more than 5 percent … a month.


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