Friday, September 4, 2009

Housing Bailouts: Lessons not Learned

The housing boom and bust that occurred earlier in this decade resulted from efforts by Fannie Mae and Freddie Mac - the government sponsored enterprises with implict backing from taxpayers - to extend mortgage credit to high-risk borrowers. This lending did not impose appropriate conditions on borrower income and assets, and it included loans with minimal downpayments. We know how that turned out.

Did U.S. policymakers learn their lessons from this debacle and stop subsidizing mortgage lending to risky borrowers? NO. Instead, the Federal Housing Authority lept into the breach:


The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can't make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

And what is the result of this surge in FHA insurance?

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

This is madness. Repeat after me: TANSTAAFL (There ain't no such thing as a free lunch).

6 comments:

Gordon Hutton said...

Is it madness if you don't have to respond to the results? FHA, like Freddie and Fannie, will not be going out of business.

Madness is when this happens in the real world of business, but even there, whether it is an R or D administration, you can hold out hope for a bailout if you're in an appropriate business or the right firm.

If you can expand the money supply, the lunches are indeed free. Accountability is for chumps.

Steve M. said...

the free lunch fallacy is kind of like spot training... the belief that I can do sit ups to get fat off my abs... it is completely absurd, and yet it won't die...

Gordon Hutton said...

Man, I hope my sarcasm was recognizable.

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