Federal programs that extended unwarranted credit, such as requiring banks to extend loans in high-risk areas, helped distort the housing market. Predictably, Washington is responding by further expanding the role of government, guaranteeing more credit, and rewarding recklessness - as if one could put out a fire by fanning its flames. President Bush's proposed rescue, for example, involves propping up the Federal Housing Administration that dates back to FDR's early days in office. Take Brian Montgomery, HUD's assistant secretary in charge of FHA. The Associated Press quoted him as saying that 'the entire mortgage market needs the stability that FHA brings.'"
"But far from bringing stability to the mortgage market, over the past decade - under both the Clinton and Bush administrations - the FHA's underwriting methods have rivaled the carelessness of many subprime lending practices, and have contributed to current housing woes. The delinquency rate on FHA-backed mortgages has been close to that subprime category and has sometimes even exceeded it. In the last quarter of 2006, for instance, the delinquency rate for subprimes had increased to 13.33% in the industry's National Delinquency Survey. But in the FHA category, the rate had risen to 13.46 percent - 'a new record.' For instance, Senator Johnny Isakson (R-Ga.) tacked on a $7,000 tax credit to buy homes out of foreclosure. As pointed out by William Niskanen, chairman of the Washington, D.C.-based Cato Institute:
One provision of this act is a temporary $7,000 tax credit for buyers of foreclosed properties, the primary benefits of which would accrue to those grieving bankers who made bad loans. Another provision is a temporary tax deduction worth up to $1,000 for families who pay property taxes, the primary beneficiaries of which would be high-income home owners. The most expensive provision is a three-year tax break for homebuilders, which would increase the supply of unsold homes and delay the recovery of housing prices.
Barney Frank, chairman of the House Financial Services Committee, blew his own horn, bragging that his piece of legislation has "no downside." Frank's proposal actually "will put billions of taxpayer dollars at risk and undermine the already successful Hope Now program," observed the Heritage Foundation. "Hope Now is a voluntary alliance of scores of servicers, investors, counselors, and other mortgage market participants ranging from Catholic Charities to the Bank of America. Partakers in the alliance seek to reach out aggressively to potentially at-risk, credit-worthy homeowners to help them rework their mortgages. With the help of the Hope Now alliance the mortgage industry is helping more than 160,000 families a month to keep their homes either by modifying their loans or by developing more realistic repayment plans."
The chairman's proposal has "two glaring problems: one moral, the other economic," comments Robert Samuelson in Newsweek:
About 50 million homeowners have mortgages or to have their homes to under stop foreclosures proceedings. Who wouldn't like the government to cut their monthly payments by 20 or 30 percent? But Frank's plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. Government punishes prudence and rewards irresponsibility. Frank is more than willing to use the force of government to twist the arms of lenders who might resist modifying their loan terms. The current crisis, as noted, has been aggravated by past interference in the market such as the Community Reinvestment Act, a law pushed by so-called liberals used to pressure lenders to make loans to people who are poor financial risks, including many minorities. Now Senator Hillary Clinton (D-N.Y.) has the chutzpah to complain that "subprime loans are five times more likely in predominately black neighborhoods." Senator Barack Obama (D-Ill.), her presidential rival, thinks that is foolish, saying, "A blanket freeze like she's proposed will drive rates through the roof on people who are trying to get new mortgages to buy or refinance a home." Ironically, one reason we got into the current mess is that Washington spent the last few decades criticizing and fining mortgage lenders for not lending to low-income households with imperfect credit records - a practice called redlining. Now Obama plans to punish lenders in criminal and bankruptcy courts until they bring redlining back."
It has taken a long, perverse chain of events to bring about the housing bubble and subprime mortgage mess. In the Fed's expansionary period, much of this money went to home loans. Through a combination of federal government inducements to lend to risky borrowers, and the Fed's supply of easy money, the housing bubble took shape. Fannie Mae and Freddie Mac were asked to purchase and securitize mortgages, while investors, buoyed by implicit government backing, rushed to provide funding. Money that could have been invested in more productive, less risky sectors of the economy was thereby malinvested in subprime mortgage loans."
Wall Street made a killing during the housing bubble, reaping record profits. Unfortunately, the rash responses of the federal bailout artists are bound to lead to even more troubles.
Neil
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