Washington's role in the housing crisis still hasn't hit home
We're nearing the fifth anniversary of the 2008 financial crisis boil-over, but Washington is still in denial about its role in the meltdown. The numbers, which weren't well known in 2008, now tell the real story.
As a result of Washington's arduous efforts to expand homeownership for lower-income Americans, by 2008 almost half the loans in the market — some 27 million — were risky, subprime or otherwise nontraditional. Two-thirds of these risky loans were held by entities controlled by or within the federal government. Fannie Mae and Freddie Mac held almost half — 12 million. So it's no surprise that these "government-sponsored" behemoths that buy home loans from loan originators had to be nationalized in September 2008 at the height of the financial crisis.
The Federal Housing Administration and other federal agencies, such as the Veterans Administration and Federal Home Loan Banks, held 5 million, and Community Reinvestment Act and Department of Housing and Urban Development programs had another 2.2 million. That's a whopping total of 19.2 million risky loans held by government or government-controlled actors, leaving 7.8 million for Countrywide Financial, Wall Street and so forth.
Superficially, it might appear that things have changed. If you've tried to buy a house in the past few years, for instance, you know that it's now harder to get a large loan than it was before the crisis. And President Obama recently proposed that the federal government begin to wind down Fannie Mae and Freddie Mac.
Both of these facts look like evidence that the federal government has disentangled itself from housing. However, the visible hand of government is still manipulating the market. Indeed, Fannie, Freddie and the Federal Housing Administration now backstop 87 percent of all home loans, up from about 40 percent before the crisis.
The president is wise to want to get Fannie and Freddie off the government books (even though, at the moment, they're posting profits — enjoying the housing recovery and their government-protected status). He is merely treating visible symptoms, though, not the underlying illness. He still wants Washington to underwrite private home loans and "encourage" homeownership.
Indeed, those poorly conceived goals have not been quietly retired. The Community Reinvestment Act, notes former White House Counsel Peter J. Wallison, still "requires all insured banks and [savings and loans] to make loans to borrowers at or below 80 percent of the median income in the areas the banks service." Although this may sound like a worthy goal, we now know that it has treacherous implications.
The truth is, Washington has yet to face reality about its role in the 2008 meltdown. Certainly, House Republicans are calling for more of a government retreat from housing than the president is, but even they still want it to encourage homeownership among lower-income Americans.
At least some of these House Republicans understand the problem, so why keep calling for half-measures? Perhaps they suspect it is still too politically risky to call for an end to government manipulation of the housing market. Despite the crisis, these actions are popular with mortgage brokers, homeowners and many other voters.
Their political calculation is probably rational given media misunderstanding and bias. Few politicians would want to face this wall of resistance. After all, for five years, the media has been relentless in reinforcing the narrative that Wall Street greed, not Washington policy, caused the financial crisis.
A few months after the government took over Fannie Mae and Freddie Mac, for example, Public Broadcasting Service's influential series, "Frontline," ran a special on the key events of the 2008 crisis, "Inside the Meltdown." It gave just two of its 60 minutes to Fannie and Freddie. This is a bit like giving two minutes to the bubonic plague in an hourlong documentary about the deadliest medieval epidemics.
With such consistent media messaging, is it any wonder that most people are still confused about the real causes of the crisis?
As the fifth anniversary of the financial meltdown looms on the horizon, it's time to make some real changes to protect the future. Many more Americans must understand the problem with government manipulation of the housing market, and actively encourage and reward politicians who tell them the truth about it. Until we change the calculation in the minds of our politicians about what is politically profitable, we shouldn't expect any real reform in housing policy.
Jay W. Richards is the author of "Infiltrated" (McGraw-Hill, August 2013), a distinguished fellow at the Institute for Faith, Workf and Economics, and a senior fellow at Discovery Institute.