The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Risky Federal Home Loans: What Could Go Wrong?

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


On Tuesday, the Washington Post published a story on the Obama administration's latest efforts to get banks to offer home loans to people with riskier credit.  Currently, the U.S. housing market is experiencing a fairly strong resurgence, but, according to the Post, "President Obama's economic advisers and outside experts say the nation's much-celebrated housing rebound is leaving too many people behind."  Accordingly, "administration officials" have been pleading with the Department of Justice to promise banks that they will not be punished for making loans to borrowers who meet the government's credit standards.  You read that right: next time the housing market crashes and taxpayers are on the hook for a few hundred billion dollars (which, it should be noted, will probably happen during a different presidency), the Obama administration wants the DOJ to turn the other cheek. This strategy is infuriating on several counts.  First, the notion that banks lending money to people who cannot afford to pay them back constitutes some sort of crime that must be pardoned by the omnipotent and benevolent hand of the federal government - rather than simply bad business that will be rewarded with bankruptcy - is proof of a fairly warped worldview. Second, we have been down this road before.  The housing crisis that precipitated the latest recession was complicated, to say the least, and private banks made mistakes that have rightly challenged many a dogmatic free-market perspective.  But that crisis was made much, much worse by the fact that the two federal housing giants with an "implicit guarantee," Fannie Mae and Freddie Mac, were hoovering up a huge percentage of bad loans originated by private lenders.  This blog post doesn't have room to describe the process that has already led to taxpayers paying more than $150 billion (perhaps $400 billion when all is said and done) to the two GSEs.  Suffice  it to say that the federal government has pushed hard for cheap mortgages in the past, and things got messy. Third, the Obama administration's Goldilocks complex makes it awfully hard to discern just what banks are supposed to do.  Five years ago they loaned too much, now they loan too little.  Indeed, to hear many on the left tell it, the financial crisis was caused entirely by banks making "predatory" loans to people without the ability to repay.  Last year, the White House announced the creation of a mortgage-related section of the Consumer Financial Protection Bureau dedicated to punishing lenders that gave money to people without the means to give it back.  Now banks are being much more careful about who gets a mortgage, and the administration is still angry. Perhaps the most laughable part of the entire Post piece is the quote at the end from Federal Housing Administration Commissioner Carol Galante, who is certain that there are worthy borrowers being given the cold shoulder by those mean ol' banks:

My view is that there are lots of creditworthy borrowers that are below 720 or 700 — all the way down the credit-score spectrum,” Galante said. “It’s important you look at the totality of that borrower’s ability to pay.

Best of all, she could be right!  As a non-banker who rents, this author is hardly qualified to say.  What's clear is that if Galante believes there is money to be made by lending to people with lower credit scores, she should start a bank and get rich.  Along the way, she'll be expanding the middle class and giving people a boost toward the American Dream.  What she should not be allowed to do is force taxpayers to foot the bill while she does her darndest to change the way markets allocate credit. Of course, bossing people around from a powerful position in the federal government is much easier - and if history is any indication, much more likely - than putting your money where your mouth is.

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