Earlier this month the U.S. Senate Banking Committee passed the so-called “Housing Finance Reform and Taxpayer Protection Act of 2013” by a bipartisan 13-9 vote. This cheerily christened piece of legislation purports to inject market reforms into the mortgage industry – while “re-privatizing” government-owned lending behemoths Fannie Mae and Freddie Mac (whose recent bailouts cost taxpayers an estimated $317 billion).
Proponents argue that the bill is a model of how the federal government can manage the major challenges in our economy, and point to it as the framework for how the housing finance system should look.
What supporters neglect to mention is taxpayers remain very much on the hook for public losses under this new proposed housing finance framework. In fact their legislation foolishly pledges the “full faith and credit of the United States” in the event a new government-run mortgage insurance fund goes belly up due to a worsening economy (or ravenous politicians).
In other words Congress doesn’t have to approve the next housing bailout – it’s already written into the law.
Additionally there’s a new fee subsidizing this insurance fund, which lending institutions will no doubt pass onto borrowers (including the 32.6 million Americans who either paid 20 percent down on their homes or whose loan-to-value rate is less than 80 percent). And to what end? So government can continue backing risky loans for people who shouldn’t be buying a home in the first place?
That isn’t taxpayer protection – and it certainly isn’t permitting the marketplace to work. In fact it’s more of the same command economic nonsense that landed us in this mess in the first place.
The beginnings of America’s housing bubble – and the ongoing malaise resulting from its rupture – can be traced back to a 1992 study issued by the Federal Reserve of Boston. This report – based on local data riddled with inaccuracies – alleged racial discrimination in the lending business. Despite multiple warnings regarding its veracity, the federal government took the Boston Fed report as gospel – and moved decisively to eliminate “arbitrary or outdated criteria that effectively disqualify many urban or lower–income minority applicants.”
Suddenly bad credit, no down payment or an insufficient income stream no longer constituted barriers to receiving federally guaranteed loans. This relaxation of standards wasn’t voluntary, either, as banks were warned that failure to comply with the new mandates could “subject a financial institution to civil liability for actual and punitive damages in individual or class actions.”
By July 1999 full-on politically correct, bureaucratic insanity had taken hold – with the U.S. Department of Housing and Urban Development (HUD) rolling out its plan to force government-backed mortgage behemoths Fannie Mae and Freddie Mac to buy $2.4 trillion worth of loans aimed at providing “affordable housing” to 28.1 million “low- and moderate-income families.”
It didn’t take long for the bubble – and the red flags surrounding it – to start rising. In July 2003 it was reported Freddie Mac had misstated its earnings by as much as $4.5 billion – prompting the administration of George W. Bush to propose what The New York Times called “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis.”
The “overhaul” went nowhere, though. U.S. Rep. Barney Frank (D-Mass.) claimed Fannie and Freddie were “not facing any kind of financial crisis” – while then-U.S. Rep. Melvin Watt (D-N.C.) blasted Bush’s reform proposal as “weakening the bargaining power of poorer families and their ability to get affordable housing.” Of course both lawmakers led the “corporate greed” chants five years later when the market eventually collapsed under the weight of all that “affordable housing.”
Watt, incidentally, was recently chosen by Barack Obama to lead the Federal Housing Finance Agency (FHFA) – further evidence that no failed policy goes unrewarded in Washington.
You wouldn’t know it watching “bipartisan” Washington work, but there is a shockingly simple solution here: Letting the private sector determine who should (and shouldn’t) receive home loans – and removing any guarantee of taxpayer assistance in the event mortgage writers make bad decisions.
Permitting government to re-inflate this bubble – and then obligating taxpayers to pay for it when it pops (again) – is the very last thing Congress should be doing.
Nathan Mehrens is president of Americans for Limited Government.