Obama's New Home Loan Plan Sounds Dangerously Familiar

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The economy is doing well, but could be doing better. So President Obama is reportedly reaching for a old idea that didn't work so well the last time. The Washington Post reports that the administration is pushing a plan designed to encourage banks to lend money to riskier borrowers, in order to boost the housing market. The plan is designed to help young people (who have little to no credit history) and folks whose credit may have been damaged by the great recession.

Raise your hand if you see the flaw. The reason some of those people got ruined by the recession is because they were given loans they probably shouldn't have been given. A surge in shaky home loans over the last 10 years is often the first thing people think of when they think about the collapse of the economy in 2008.

The problem that President Obama is trying to solve is a real concern. The housing market did collapse in the latter part of the last decade and it still hasn't clawed its way back to where it used to be. Unemployment has come down and business is on the upswing, but even with mortgage rates at historic lows, house buying and building still drags behind. And the people missing out the most are lower-income and new home purchasers, who are missing out on the recovery. According to the National Association of Realtors, the number of first-time home buyers has declined almost ten percent.

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But the reason that number's not where it was is because the market was wildly overinflated—thanks to banks giving out too much money to too many people who couldn't really afford it. It's one thing to "encourage" more lending, and quite another to pressure banks to lend to as many people as possible. And as we saw the last time round, it's almost impossible to have one without sliding into the other.

Maybe the president's plan—which includes guarantees for some loans and rules to protect banks from legal punishments if the loans go bad—can avoid some of the pitfalls of the last housing boom. But if you don't think things can get out of hand quickly, check out this Wall Street Journal story about companies using Twitter and social media connections to judge creditworthiness and then ask yourself how much faith you have in home mortgage lenders to do the right thing. Are we doomed to repeat history?

This article is from the archive of our partner The Wire.