Team Obama to Banks: Issue Home Loans to Riskier Borrowers
The housing bust proved that the federal government isn't particularly good at anticipating how many people will default.
For Southern Californians, the housing bubble and bust weren't abstractions. We watched the market inflate, witnessed people making terrible choices long before they knew it, and marveled at the fall while perusing real-estate listings or driving through the hardest-hit neighborhoods. I've heard so many stories from people who made risky investments in real estate, bought more house than they could afford, or shouldn't have qualified for a home loan at all. And I've cursed the investment bankers and politicians who, to varying degrees, inflated the bubble.
What I never imagined is that we'd forget its lessons so quickly. Oh, I knew some people would. Twice while sitting in a coffee shop, I've overheard Orange County residents talking, as they so often did during the early aughts, about all the money to be made if they could just scrape together enough cash to make the minimum down payment on a house before interest rates rise.
But what is President Obama thinking?
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place. President Obama's economic advisers and outside experts say the nation's much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.
In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs -- including those offered by the Federal Housing Administration -- that insure home loans against default. Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default. Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan...
There are, in fact, public-policy changes that could help people who aren't benefiting from the housing market's recovery. Low-income households would benefit tremendously if the cities where they lived lifted often onerous restrictions on building more multifamily units. And at the federal level, Congress could rectify the unequal treatment of owners and renters by either getting rid of the home-mortgage deduction or extending a commensurate tax credit to rent expenditures.
But the notion that the federal government is a good judge of who can be given home loans without undue risk of widespread default has been rather spectacularly disproved in the very recent past. To see the Obama Administration encouraging banks to be less careful is frustrating, especially in instances when taxpayers will be on the hook for any loans that are defaulted upon. Perhaps instead of encouraging banks to behave more riskily by promising to bail out loans that turn out to have been bad ideas, the Obama Administration could institute reforms that reduce the rents that Wall Street is able to extract from Americans.