Americans have lost more than $4 trillion in assets since the housing market collapsed in 2006. Risky government mortgage lending regulations helped inflate prices beyond reason, but those policies have not gone away. Instead, they've just moved into a new home, the Federal Housing Administration (FHA). Unless Congress acts to renovate eligibility requirements for borrowers, we could see an even worse financial disaster unfold.
Signed into law in July, the Dodd-Frank Act pulled Fannie Mae and Freddie Mac lending institutions out of the subprime loan business. Those government-sponsored monstrosities were fingered as prime culprits in the financial collapse, so the Obama administration has enlisted the FHA to perform the same functions. Peter Wallison and Edward Pinto of the American Enterprise Institute have raised the alarm, writing, "As in the period leading up to the 2008 financial crisis, these loans will again contribute to a housing bubble, which will feed on government funding and grow to enormous size."
Congress began blowing the initial bubble in 1992 when it amended Fannie's and Freddie's charters to compel the mortgage giants to back financing for low- and middle-income families seeking housing. Subsequently, those enterprises induced mortgage lenders to relax their qualification standards, allowing millions to buy homes with no or little money down. As these properties went into foreclosure starting in 2006, the red ink at Fannie and Freddie ran into the hundreds of billions - with the public footing the bill. In October, the Federal Housing Finance Agency estimated the eventual cost to taxpayers would be up to $360 billion.
The pressure to perpetuate dicey lending has begun already. The National Community Reinvestment Coalition, a housing rights group, filed complaints on Dec. 7 with the Department of Housing and Urban Development, claiming 22 banks across the country have violated fair-housing laws by denying FHA-insured loans to black and Hispanic borrowers with credit scores above the federal minimum. The FHA insures loans for borrowers with a minimal credit score of 580 and a down payment of 3.5 percent. The feds responded the next day by launching an investigation into the banks' practices.
Participating lenders are caught between the Scylla of penalty for denying loans to marginal borrowers and the Charybdis of sanction for having too many defaults on their books. It will only get worse: The FHA has announced it intends to pump up its loan volume to $1.34 trillion by 2013 and make nearly half of its loans subprime by 2017. Thus, the stage is set for a second housing-market crash. If Republicans in the 112th Congress intend to make good on their promise to set the country back on the path to financial stability, they should toughen FHA mortgage lending standards by requiring higher credit scores and larger down payments. Better yet, the feds should get out of the mortgage business altogether and let the free market reach an equilibrium free of bubble and bust.
While Uncle Sam may appear compassionate in assisting low-income families become homeowners, this "charity" has been disastrous. Millions have lost homes in the recent crash, with the burden falling most heavily on financially responsible Americans to clean up the billions in damage done. Learning from these mistakes of the past will prevent their return in the future.
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