Stop Insuring Mortgages

Stop Insuring Mortgages
John Stossel
Wednesday, December 02, 2009

The Federal Housing Administration announced this week that it wants tougher rules on mortgage lenders. It's about time.

Maybe FHA got spooked by the recent New York Times story titled "Easy Loans to Wealthier Areas," which said: "In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default."

The Times explained that San Francisco, one of the priciest real estate markets in the country, had no government-insured mortgages two years ago, but now "the government is guaranteeing an average of six mortgages a week here. ... The Federal Housing Administration is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling."

And some of those loans are surely questionable.

The Times explains that 27-year-old Mike Rowland and his friends were able to buy a two-unit apartment building for almost a million dollars. "They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary."

"It was kind of crazy we could get this big a loan," Rowland said.

Yes, it was crazy. Such policies do not end well. Young Rowland gets that. Even the Times does: "With government finances already under great strain, the policy expansions are creating new risks for American taxpayers."

But our leaders plunge ahead, with your money. Has the administration forgotten that today's financial mess was precipitated in part by government's moves to encourage mortgage lending to unqualified or at best unproven borrowers? In the 1990s, the Federal Reserve Bank of Boston, concerned that blacks and Hispanics were "underserved," issued guidelines to banks stating: "Policies regarding applicants with no credit history or problem credit history should be reviewed. Lack of credit history should not be seen as a negative factor ..."

Soon, the lower standards spilled into the prime-mortgage market. The risk to lenders seemed small because government-sponsored Fannie Mae and Freddie Mac happily bought the dubious loans. An entire financial edifice was built on these securitized mortgages and derivatives based on them.

Then the good times ended. Interest rates rose. Home prices flattened and then declined. Then those AAA mortgage-backed securities became "toxic."

After all that, it's crazy that government still subsidizes housing rather than letting the market work. The economy will recover from recession only when it is allowed to discover the real value of assets like houses. But the government refuses to allow this to happen. FHA has been blowing air into another bubble, while other agencies do everything they can to boost prices.

This includes leaning on and bribing banks to ease mortgage terms for people in default. The Obama administration announced that it would increase that pressure because "the banks are not doing a good enough job," said Michael S. Barr, assistant treasury secretary for financial institutions. Some Democrats want to go further. They demand that the government compel mediation over defaulted mortgages or empower judges to change the terms.

This sounds humane, but it is typical political shortsightedness. When government helps delinquent borrowers to get easier loan terms, it simultaneously makes it harder for marginal borrowers to get loans in the first place. That's because lenders must now factor in the likelihood of a judge changing the terms.

The know-it-alls in Washington "help" Americans by hurting them.

Why won't the government let housing prices seek their own level? After a Washington-inflated bubble, that would seem to be the wise thing to do. Sure, some people get hurt when prices fall, but others -- prospective home-buyers -- are helped. By artificially raising prices, the Realtor-Construction-Banking-Big Government Complex cheats honest low-income people who would otherwise have been able to afford a first home without begging the government for help.

Home ownership, all else equal, is a good thing. But when government lumbers into the market and subsidizes folly, that's a very bad thing.