Flooding the market with easy money
The philosopher George Santayana famously said, “Those who refuse to learn from history are condemned to repeat it.” Apparently no one in Washington has ever heard of good old George, which could lead to a repeat performance in the real estate market.
Let’s start with the housing market, which is significantly better than it was, even this time last year. Low interest rates, low prices and built-up buyer anticipation are resulting in a high volume of sales, low inventory and higher prices. All of this is good, especially for Fannie Mae and Freddie Mac, who if you recall received a $187 billion bailout of tax payer money in 2008, when they were seized by the government.
The government takeover of Fannie and Freddie has been so successful that they have gone from controlling 37 percent of the mortgage market to now controlling nearly 100 percent. Their profits are the highest in their 75-year history, which would be an embarrassment if it weren’t so ridiculous. They are in such good shape, thanks to the American taxpayer, that some members of Congress are starting to look at them to finance underwater mortgage programs.
Next up are sub-prime mortgages, remember those risky loans approved by Fannie Mae Freddie Mac, which ultimately led to the housing bubble and the disastrous aftermath. Well, it looks like they’re coming back. Because of the strict lending regulations imposed on banks under the Dodd-Frank Bill, banks have established very tight lending rules. One of the Dodd-Frank provisions is the Qualified Mortgage rule, which provides for the burrower to sue lenders for improperly assessing their ability to repay a mortgage. This has made it very difficult for high risk burrowers with credit scores in the 500 to 600 range to qualify for a mortgage.
As part of the refusal to learn from our mistakes narrative, the White House is engaging in a broad push to make more home loans available to people with weaker credit. This position came to light on a national level when the Washington Post ran a piece in early April revealing this plan. The White House’s attitude is that the housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.
Further they are working to get banks to lend to a wider range of borrowers by using tax payer backed programs like ones offered by the Federal Housing Administration. Naturally banks are looking for the Justice Department to provide assurance to them that they will be protected against legal or financial recriminations if they make these riskier loans. Protected translates to taxpayer bailout if the new wave of subprime mortgages go under.
Am I the only person who sees something wrong with all of this? Flooding the market with easy money is a dangerous way to jump start the slowly recovering housing market. Helping people become homeowners as a step on the road to prosperity has been a basic fundamental of our country for decades, but it will only work for those who are good credit risks. Asking taxpayers again to assume financial risks associated with weak credit buyers are simply unfair.
We’re supposed to get smarter as we get older and gain experience, at least that’s what our parents told us. Unfortunately, that basic principle doesn’t apply to government, that appears to learn nothing from the past. Why am I not surprised?