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One Subprime Crisis Wasn't Enough?


Are we really this imprudent?

Mel Watt, currently head of the Federal Housing Finance Authority, recently announced plans — in a speech at a Las Vegas casino, of all places — to allow mortgage giants Fannie Mae and Freddie Mac, which he regulates, to purchase loans with down payments as low as 3 percent. The goal is to enable more borrowers with bad credit or low income to buy homes, which may be good for banks and the housing industry in the short term, but would be an unmitigated disaster for the American people.

And it's one we already lived through a few short years ago. It's been dubbed "the Great Recession." We know exactly what bad lending policies led us up to the brink of that precipice, and, yet, here we go again.

We've accepted as a culture that it was greedy bankers who sparked the crisis, and they were certainly happy to join the party. However, it was just this type of deliberately loose standards at Fannie Mae and Freddie Mac, encouraged at the time by the George W. Bush White House, that actually lit the fuse by promoting and buying high-risk loans from banks because the government was on a political crusade to encourage homeownership, even for those who fundamentally could not afford it.

Mel Watt is a longtime Democratic congressman appointed to the FHFA by President Obama in January, and he is clearly more interested in pursuing ideological goals than keeping lending policy stable and sensible.

"Through these revised guidelines ... enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower down-payment mortgages by taking into account compensating factors," Watt said to mortgage bankers gathered in a ballroom at the Mandalay Bay hotel and casino.

What are those "compensating factors"? We have no idea.

We do know he could not have picked a more appropriate venue to announce his plan than a casino, because this is gambling on a breathtakingly reckless level.

Banks love to write lucrative loans to people with little financial understanding, then sell the risk of holding them to Fannie Mae and Freddie Mac, which had to be bailed out by the government to the tune of $187 billion the last time this was tried.

And make no mistake, the pervasive and perverting influence of ideological social-justice initiatives will prove an economic disaster for the very people they intend to help.

With only a 3 percent down payment, and poor credit to begin with, these subprime borrowers will have virtually no ability to weather dips in the market. They will be trapped in homes with underwater values, denied the mobility that is key to pursuing job prospects in a changing labor market.

If lenders are unfair to minority borrowers with identical credit circumstances as white borrowers, as the Urban League and others who have been agitating for these policy changes assert, that is already illegal. Prosecution is the answer, not lower standards.

Good jobs and rising incomes are the only fundamentally stable way to expand access to housing. Policies enabling unsupportable consumption to stimulate certain sectors while trying to socially engineer the nation are doomed to failure, and those pushing them are simply proving they will pursue ideological goals no matter what havoc was wreaked just a few years ago.

If lenders want to lend to borrowers at high risk of default, nothing is preventing them from doing so, but they must be allowed to suffer if those practices get them in financial trouble. We must make it clear that there will be no more bailouts. We must never again allow ideologues to gamble with public money.




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