Many factors contributed to the Great Recession of 2008, but its root cause was simple: In a two-decade-long bipartisan campaign to expand homeownership, especially among minority and lower-income communities, federal authorities cajoled, threatened and ultimately mandated that mortgage institutions put aside traditional, common-sense lending standards. A real estate bubble predictably followed as adjustable ARMs, subprime loans requiring little or no down payment, and other lend-at-all-costs incentives combined with corporate greed to encourage an irrational exuberance about the value of real estate. Americans borrowed trillions of dollars to buy millions of homes at unjustifiably high prices, using the overvalued homes themselves as collateral, even as commercial banks packaged millions of these shaky mortgages into securities for investors looking for quick, easy profits. And behind it all stood government-backed Fannie Mae and Freddie Mac, implicitly guaranteeing everybody that nobody would lose their shirts.
The whole house of cards collapsed when people couldn’t afford their mortgage payments. A flood of foreclosures followed, rendering all those subprime mortgage-backed securities worthless, causing panic on Wall Street and plunging the nation into a recession. Fannie and Freddie, having lost hundreds of billions of dollars to the folly of propping up the subprime mortgage market, are now under government conservatorship and bound by new, stringent lending standards. But one badly burned hand of government seems unaware that the other is thrusting itself right back into the fire. In a recent article for The American, housing expert Peter Wallison points out that the Federal Housing Administration is picking up where Fannie and Freddie left off by pursuing many of the same practices that led to the 2008 crisis.
The agency, which insures home loans with low or zero down payments, is specifically exempted from the lending standards of the Dodd-Frank financial reform bill. By law, its programs are available to those with a credit score of at least 580, the bare minimum required to qualify for a mortgage. (A perfect credit score is 800-850, depending upon the rating agency.) But FHA-participating institutions seeking to set the bar above 580 are being sued by radical community organizers. Incredibly, FHA plans to expand its portfolio, according to Wallison, to take on $1.34 trillion in additional mortgage debt by 2013.
Rather than subsidize the re-creation of the same dangerous culture of easy mortgages that got us into this mess, Congress should remedy the deficiency in Dodd-Frank by mandating stronger lending standards for FHA-insured loans and then backing up lenders who apply them. Wallison is worth listening to because in 1999 he predicted disaster when Fannie Mae first began underwriting subprime loans. He told The New York Times: “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
Wallison has since been proven right in every aspect. If Congress fails to heed the warning this time, another Great Recession or worse will surely follow.