There’s little dispute that our current economic mess was triggered by government policies designed to prop up the real estate and housing construction industry. Such policies coerced mortgage lenders into scrapping traditional underwriting standards, resulting in a major uptick in payment defaults and foreclosures. Most rational human beings would learn a lesson from this tale, and avoid such policies in the future.
But nobody ever accused politicians of being rational human beings. As the Independent Institute’s Robert Higgs informs us:
A sensible person, surveying all of this wreckage and pondering how such a debacle might be avoided in the future, certainly would have concluded that the government should cease and desist from artificially spurring the real estate market by subverting traditional underwriting standards for mortgage loans. Those standards include, for example, a substantial down payment, usually 20 percent, and well-documented sources of income sufficient to permit the buyer to service the loan, usually a steady job or substantial assets.
During the crisis since mid-2008, however, the government has not done what a sensible person would have concluded it should do. Indeed, it has done the opposite. Rather than terminating the government policies that had encouraged the foolish behavior of real estate buyers, sellers, and lenders – foolishness that lay at the heart of the artificial boom that went bust during the past two years – the government has undertaken to continue and even to compound the selfsame policies that in large part caused our present economic troubles. For example, Fannie and Freddie, now effectively government owned and operated firms, continue to extend loans as if promising borrowers were superabundant.
Moreover, the Federal Housing Administration, a government agency created in 1934 to insure conventional mortgage loans, has greatly expanded the volume of its business, and according to a recent report in the New York Times, the FHA “is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling.” The Mortgage Bankers Association affirmed on November 19 that “more than one in six F.H.A. borrowers was behind on payments.” The FHA has backed 37 percent of all residential mortgage loans made in 2009. Reporter Patrice Hill observes that “these loans are exposing taxpayers to the same kinds of soaring default rates and losses that brought down Fannie Mae and Freddie Mac as well as destroyed many banks and the private market for mortgage loans.”
Experts cited project as many as 20% of the FHA’s $725 billion portfolio of loans will end up in foreclosure – compare that to the current all-time high rate in the entrire mortgage industry of 14.4 percent of mortgages either delinquent or in foreclosure. It isn’t difficult to see another massive taxpayer bailout coupled with a another significant economic contraction coming in the not-too-distant future.
Higgs’ entire article is well worth your time.
Politicians just can’t help themselves from constant meddling in our economic affairs. The end results rarely, if ever, match their intentions.