A letter in Washington Post: Affordable homes or investment assets?
Washington Post: Letters to the Editor December 28
Should houses be affordable homes, or should they be investment assets? They can’t be both.
In 2004, under the Basel II business standards, if securities obtained a AAA rating, European banks and U.S. investment banks regulated by the Securities and Exchange Commission needed to hold only 1.6 percent in capital against them. That created an enormous demand for highly rated securities. The truth of securitization is that, as when making sausages, the worse the ingredients the larger the profits.
And the highly rated securities backed by mortgages to the subprime sector became the primary cause for the 2008 crisis.
After the crisis, ultra-low interest rates and huge liquidity injections fed the price of houses. In the process, houses morphed from being homes into investment assets.
That aspect of the housing market is what I most missed in the Dec. 26 front-page article “Quick to evict, properties in disrepair.”
If you want easy financing to help someone afford a house, then house demand and house prices go up, and you need to give even more help to the next person who wants to afford a house.
Do we want affordable homes or houses as investment assets? There’s no easy answer, because going back to just homes would also cause immense suffering for all those believing they have, with their houses, built up a safety net.
Per Kurowski, Rockville
PS. “The assets assigned the lowest risk, for which bank capital requirements were therefore low, were those that had the most political support…home mortgages” Paul Volcker 2018
PS. "Lower bank capital requirements against residential mortgages allows easier financing that will cause house prices to increase, and so we bureaucrats can get more in property taxes… and everyone’s happy.”
PS. In the Financial Times, May 2006, I asked: Who on earth has decided that the increase in the price of houses is not inflation?
A tweet: If banks are allowed to leverage their equity/capital twice as much with residential mortgages than with loans to small businesses & entrepreneurs, you will get too many mortgages and too few jobs providing the income to service these. It ain’t science!
A tweet: Economy 101: Allowing banks to leverage capital much more with residential mortgages than with business loans will cause: a) increased house prices, b) decreased job opportunities and, consequentially, more children having to live in their parents’ house.
My letters in the Washington Post on bank regulations:
June 20, 2008: An Aspect of the Bubble
December 27, 2009: Another 'worst': Faulty bank regulation
January 6, 2012: Handcuffed by a triple-A rating
May 1, 2013: An American approach to banking
December 23, 2014: Let the market rule on risky trades
November 11, 2015: Reverse-mortgaging the future
August 9, 2016: Banks, regulators and risk
April 16, 2017: When banks play it too safe
July 11, 2018: There is another tariff war that is being dangerously ignored.
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