Defining madness: Obama administration encouraging sub-prime mortgages

**Posted by Phineas

Isn’tΒ thisΒ how we got into the current mess?

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

President Obama’s economic advisers and outside experts say the nation’s much-celebrated 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.

In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs β€” including those offered by the Federal Housing Administration β€” that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps.

Obama pledged in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery, but critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars.

Quick summary for those to whom this might look familiar, but not recall why: In the late 80s and early 90s, urban community organizing groups such as ACORN, particularly in the Chicago area (1), pressured banks from below to give easy credit to borrowers with bad credit or low incomes so they could buy homes.Because many were minority buyers, the groups would charge “racism” and levy bogus accusations of discriminatory “red lining” when banks (sensibly) resisted. These leftist groups found allies in progressive Washington Democrats, particularly the Clinton administration’s Department of Housing and Urban Development headed by Secretary Andrew Cuomo, now New York’s governor.

To complement the interest group pressure from below, HUD put “carrot and stick” pressure on the banks from above: the stick was the threat of anti-discrimination lawsuits and the blocking of mergers that required government approval. The carrot was the willingness to have Fannie Mae and Freddie Mac buy these risky loans from the banks, then bundle them and sell them into the securities market backed by the full faith and credit of the US government, and therefore us.

This went on into the 2000s, with Democrats (2) fighting tooth and claw against any effort to fix the growing problem and rein-in these bad, dangerous, monstrously stupid practices. Finally the asset bubble collapsed in 2007-08, people lost their homes, banks collapsed, nearly a trillion taxpayer dollars were burned trying to stem the tide, and the world was thrown into a severe recession. All because of government engineering of the marketplace.

And now Obama wants to do it all again, because this time will be different? (3)

Madness!

Via Dan Mitchell, who hasΒ excellent explanationsΒ of why this kind of intervention is wrong, harmful, and doomed to failure.

Footnotes:
(1) Gee,Β whom do we knowΒ who came from there, and who, asΒ a young lawyer, was an attorney for these same groups? Hmm…
(2) Yes, I know Republicans tried to take advantage of this, too. Home ownership was a big part of their “ownership society” spiel. But at least they saw the potential danger and tried to avert it, unlike the Democrats. Oh, and let’s not forget the Democrats’Β corruption, either.
(3) Actually, to distract from the fact that his housing policies since coming to office have been miserable failures.

(Crossposted at Public Secrets)

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