Wednesday, August 01, 2012

Obama, The Subprime President

Economy: That the president's highly touted rescue of GM was built on subprime lending is no surprise, given how he also champions subprime home and school loans. It's an upside-down economy not built on value or merit.

Over the weekend, Investor's Business Daily's David Hogberg broke the news that 93% of General Motors' 2012 profits were based on subprime loans, a revelation that put a damper on President Obama's claims to have single-handedly rescued the automaker and restored it to financial health.

"GM Financial auto loans to customers with FICO scores below (the subprime threshold of) 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012," Hogberg found. "The worse the FICO score, the bigger the increase. From Q4 2010 to Q1 2012, GM Financial loans to customers with the worst FICO scores — below 540 — shot up 79% to more than $2.3 billion. ... Prime loans, those above 660, dropped 42% to $676 million."

This is not a sign of a sustainable comeback. It's a recovery goosed by government fiat under the static condition of an economy that produces little but subprime buyers.

In 2009, GM avoided bankruptcy with a $50 billion taxpayer bailout. To emerge from it as other companies have, GM would have to create something of value that consumers want to buy. It hasn't. Sales of the $40,000 Chevy Volt "green" car — dumped on the market by government fiat — have made Edsel sales look good by comparison. Sales number in the hundreds, and most of those are government purchases.

With the other interest in its cars limited to people who have no other credit options, GM has a captive monopoly of buyers. But it's no longer about making good cars anymore — it's about being a welfare office for people with bad credit — and it won't sustain profits in an economic recovery.

But Obama has embraced other forms of subprime lending as well. For example, he is now pushing regulators to let Fannie Mae and Freddie Mac reduce the principal on 1.4 million delinquent housing loans, rewarding those who default over those who don't.

This is being resisted by regulators who forecast 19,000 strategic defaults to qualify for this lower principal if the White House prevails.

Obama has also championed expansion of the Community Reinvestment Act, the law that pressured banks into lowering lending standards across the mortgage spectrum, fueling the subprime crisis that brought the financial system to its knees.

Under CRA, the government threatened to malign and punish those banks that had the gall to insist that customers be able to pay back the loans they took out. In Obama's various financial reforms, this root of the problem has never been addressed.

Obama also nationalized student loans, a subprime category of its own, given that all student buyers are untested. This move drove private lenders who relied on market standards out of the business and gave government a monopoly over subprime students.

Educational financing since then has evolved into a bubble, and universities have read that as an incentive to raise tuition rates. As a result, education is no longer about balancing risk with potential reward but, like housing, about "giving everyone a college education" regardless if everyone would benefit.

All this undercuts a market of customers who have saved money, built wealth and acquired the means to repay. It flips the meaning of "success" and creates an upside-down economy built not on value, but on dictated results that in the end are unsustainable.



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