According to the Washington Post, the Obama administration is pushing big banks to make more home loans available to Americans with bad credit ??? the same kind of government guidance that helped blow up the housing market:
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 ??? including those offered by the Federal Housing Administration ??? 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.
Think about this statement. The administration is asking banks ??? banks that Washington bails out; banks that Washington crafts regulations for — to embrace risky policies that put the institution and its investors (not to mention, all of us) in a precarious position. So precarious, in fact, that banks have to ask government if they can be freed of any legal or financial consequences.
Not that they have much choice. Since the housing crash, Washington, as the Post points out, ???has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans.???
And I have no doubt that demanding banks make more loans available to folks with bad credit is a political winner. But how can anyone still believe it’s good policy? Since the 90s, government has prodding banks into expanding home ownership despite every law of judicious banking and common sense. The American Enterprise Institute???s Peter Wallison has argued for years that government was the main culprit of the housing collapse. Here he is in a recent interview with Reason:
In the end, by 2008 there were 28 million subprime or very weak mortgages. Those are known as Alt-A mortgages. That???s half, incidentally, of all mortgages in the financial system. Of that 28 million, 20.4 million were on the books of government agencies like Fannie Mae and Freddie Mac and the FHA [Federal Housing Administration] and other government agencies and banks that were holding them as a requirement of the Community Reinvestment Act, which applied to banks. So that???s why I say that the government???s housing policy was responsible for creating these mortgages. They never would have been created without the government demanding that they be created and providing the funds to buy them.
Right now, the media and business columnists are fawning over Fannie Mae, because the company reported its largest net income in the company history ($17.2 billion in 2012). Let’s not forget, though, that it took $188 billion from taxpayers since the housing market collapse. Fannie and Freddie accounted for 31 percent of all bailouts. It’s not paid back. It probably won’t ever really be paid back.
So how about this crazy idea? First, let’s concede two points. Bankers are greedy and want to lend you money. So how about we allow the marketplace, and the institutions themselves, to determine what level of risk they’d like to take without the president’s help?
Follow David Harsanyi on Twitter @davidharsanyi.