Tag: GSE

It Wasn’t the Butler

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By Karen and Basil Petrou

Summary

In the raft of crisis retrospectives released during the ten-year anniversary of the Great Financial Crisis, general consensus continues the conventional wisdom that subprime mortgages were the spark of the subsequent conflagration.  A new study from the Federal Reserve Banks of Atlanta and New York mobilizes formidable data to show that hapless subprime purchase-money borrowers were victims, not perpetrators.  The borrowers who did the damage that precipitated the debacle were, they find, prime borrowers whipped into a speculative frenzy by the combination of low rates and flagrantly-unwise mortgage lending.  Theoretically, post-crisis reforms have solved for this.  Actually, maybe not given the exodus of mortgage securitization from regulated entities, sharp rise in cash-out refis, and investment-focused borrowing with house prices well above affordability thresholds in many major markets.  Continue reading “It Wasn’t the Butler” →

Disquiet on the Home Front

~ Karen Petrou ~ 2 Comments

By Karen Shaw Petrou and Basil N. Petrou

On June 20, FRB Chairman Powell said, “Nine years into an expansion that has sometimes proceeded slowly, the U.S. economy is performing very well.”  Although Mr. Powell noted low labor participation, puzzling inflation, and problematic wage growth, he said that all will come right as long as the Fed stays the course.  No mention was made of unprecedented U.S. income and wealth inequality or of a housing market serving mostly the oldest, wealthiest, and most coastal among us.  Too bad – inequality and the impediments to effective monetary-policy transmission it erects are among the most important reasons that the nine years Mr. Powell cites have seen the slowest recovery in decades in concert with new threats to financial stability. Continue reading “Disquiet on the Home Front” →

How to Turn CRA into a Positive Force for Economic Equality

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By Karen Shaw Petrou

On January 10, the Wall Street Journal confirmed that Trump Administration regulators plan to advance the reforms to the Community Reinvestment Act (CRA) first outlined in a 2017 Treasury Department report.  The CRA dates backs to an era when progressive Democrats controlled federal financial regulation and is now a hallowed artifact of policy that progressives believe advances economic equality.  Community advocates and many Democrats will thus cry foul as this Trump Administration initiative begins.  Are they right?  Does the CRA really advance economic equality?  Continue reading “How to Turn CRA into a Positive Force for Economic Equality” →

Refi Madness

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By Karen Shaw Petrou

The ability of U.S. borrowers to refinance their residential mortgages may seem like a small matter when considering economic inequality, but it’s actually a critical question given the central importance of homes to wealth accumulation for all but the richest Americans.  Some have suggested that mortgage refinancings (refis) simply be banned for lower-income households to prevent wealth-destroying equity extraction, while others have claimed that refis not only promote home ownership and economic growth, but also validate the equality benefits of post-crisis monetary policy.  A new paper from the Federal Reserve Bank of Philadelphia demonstrates that refis aren’t economic equality curses or blessings – instead, they’re procyclical accelerants that put vulnerable borrowers at risk in booms when credit flows far too freely and that then excludes those most in need of lower-cost loans as post-crisis loans go only to the wealthiest households in the highest-priced homes.  Continue reading “Refi Madness” →