This OpEd by Gretchen Hamel, executive director of Public Notice, ran in the Shrevesport Times, California Chronicle, the Prince George’s Sentinel and the Carroll Standard.
Who is to blame for our recent economic crisis? Greedy bankers, lax regulators, irresponsible borrowers, and misguided policymakers usually top the list. There’s something unseemly about this high stakes blame game, but it’s critical to identify, at the least, policies that precipitated recent troubles are identified so we can avoid those mistakes again. Unfortunately, many to want to forgo that kind of analysis; they continue to offer up warmed-over versions of the policies that contributed to the problems in the first place.
Consider the National Housing Trust, which could receive a $1 billion infusion as a result of a massive tax and spend package the House of Representatives passed just before their Memorial Day recess. The Housing Trust’s goal is to assist individuals in financing homes they otherwise could not afford. The program was launched in 2008 and was supposed to be financed with proceeds from Fannie Mae and Freddie Mac – this obviously was not an option after they went belly up later that year. Instead of rethinking the program, Congress decided to capitalize the Trust with taxpayer funds.
Meanwhile, the Federal Housing Administration (FHA) is also pushing new efforts to assist those with “underwater” mortgages. Even some borrowers currently on time with payments will have the opportunity to refinance into FHA-backed loans, and the FHA will provide banks incentives to reduce the borrowers’ principle.
Many Americans object to the inherent unfairness of these efforts: The federal government is providing significant financial assistance to Americans buying homes they cannot afford. Those who opted for more modest, affordable homes or kept renting instead of risking buying a house and taking on a mortgage are big losers in this equation.
Furthermore, these new efforts are just the latest in a long line of programs seeking to prevent people from losing their homes. Most of these have been a dismal failure. As The Washington Post reports, an earlier version of the FHA’s refinance program was expected to help 400,000 mortgage holders, but to date only helped 35. In spite of these efforts, the foreclosure rate continues to climb. The Associated Press reports that a record 2.8 million homes were threatened with foreclosure in 2009, and experts expect that number to climb to more than 3 million in 2010.
More fundamentally, the public should question why policymakers continue to embrace strategies that clearly contributed to the initial crisis. After all, regardless of who you blame for precipitating the economic meltdown, the housing market was indisputably central to it.
For decades, the government-sponsored entities Fannie Mae and Freddie Mac explicitly sought to encourage banks to offer mortgages to high-risk borrowers. Millions of Americans bought homes with little or even no down payments. The government should have known this was risky: mortgages made with no down payment are between two and three times as likely as others to end in foreclosure.
Cheap, readily available mortgages pushed housing values higher and higher. Owners saw house values spike, and many took equity out of their homes to finance other spending. When housing values stalled and then declined, millions found their homes worth less than what they owed on them. The equity that had once been a reservoir for other purchases dried up, and consumer spending sunk, with effects that rippled throughout the economy.
Individuals weren’t alone in betting heavily on housing values remaining high; the entire financial industry was exposed. Mortgage-backed securities were ubiquitous in financial institutions. As individuals began defaulting on mortgages and the assets backing millions of loans declined, investment houses and other banks found themselves cash strapped and unable to comply with government regulations meant to ensure their solvency.
We all know what happened next: the government spent hundreds of billions of taxpayer dollars to prop up specific banks and other “too big to fail” entities. Through the stimulus program, the government also sought to directly support home-owners, to prevent default and boost home values.
Perhaps some of these efforts were necessary to avert a total economic collapse. Yet Americans should question if the government efforts to artificially inflate home values is really good policy today.
Inevitably, the breaking of the housing bubble was going to be painful. Yet allowing this process to occur naturally, letting housing values find a bottom, so that people can begin safely purchasing and reinvesting in the housing market, surely is preferably to the protracted, seemingly ad-hoc process we have today.
Grownups recoil from unnecessary finger-pointing. Yet we need sober analysis of what went wrong in our housing policy so that we can prevent future economic disaster.
Gretchen Hamel is the executive director of Public Notice, a independent, bipartisan, non-profit organization dedicated to providing facts and insights on the effect public policy has on Americans’ financial well being. For more information please visit www.thepublicnotice.org.
