The Subprime Mortgage Fiasco, Or, Welfare Run Amuck

Never has a single redistributionist policy done so much damage so quickly. While the loosening of credit restrictions on mortgages has been going on for decades, it's only since the beginning of the Clinton presidency that we adopted the "anything goes" mentality of Barney Frank, Chris Dodd and Jimmy Carter.

The social engineering that mandated that banks allow mortgages to be extended to people with no down payment and no means to repay the loan was a government run scam that used taxpayer dollars to underwrite millions of bad loans. I don't blame poor people. The sell job was a no brainer: borrow money to purchase a house and your monthly payment will be no more - and frequently less - than what you'd been paying for rent. Unfortunately, the no down payment piece meant they had no skin in the game, either. No risk if they defaulted, so the minute there was an economic downturn and tough financial decisions had to be made, they simply stopped paying the mortgage. No harm, no foul, the bank can take the house and I'll go back to renting.

The instruments used to facilitate home ownership were designed to encourage default. Variable Rate and Sub-prime Mortgages all had features designed to provide low payments in the short term, them blow the payments up to an unsustainable level. This actuarial nightmare was visible from a mile away, and yet the champions of Progressive Thought forged ahead, abetted by complaisant or timid Republicans.

Franklin Raines - the nefarious yet still unindicted former head of Fannie Mae - cubed the problem by famously declaring that the credit reserves necessary for Fannie Mae to guard against these bad loans should only be 2%. That's right, 2% of the total value of all the loans that FM/FM bought was all the cash they needed to keep on hand as insurance. He lobbied for, and got an exception from Fannie May's previous reserve standard of 4%. If 4% sounds too low as well, it's because it was.

4% may or may not have been enough to cover normal mortgages against an economic downturn. Common sense would tell you that riskier mortgages would require 8% or more. Raines and the Democrats doubled down and cut that reserve in half, thus accelerating the housing crash. Since there's at least $2 Trillion in mortgages likely to default, only to be resold at half that value, that's a $1 Trillion dollar hit to the taxpayer.

As bad as it is, the Mortgage Crisis didn't happen in a vacuum. It was precipitated - as are all "ala carte" financial crises - by out of control Social spending. Those unpaid bills for Social Security, our vast welfare state and unsupportable infrastructure improvements were significant contributing factors to the Mortgage crisis. As government either a) spends more or b) commits future generations to spend more, they devalue the dollar. In so doing, they increase our indebtedness and make it more difficult to repay government loans. In so doing they distort the market and devalue everything that is for sale in America.

Of course, only our policy makers could fail to observe that this entire cycle created the Perfect Storm of inflated currency and a gargantuan inventory of excess housing which depressed home values and destroyed the very foundation that supported their profligate taxation; one that will depress home values for decades to come.

Bottom line, the housing "boom" was a product of, by and for the government, and until we reform our tax structure to take away their incentives to overprice our houses, they'll do it all over again, and probably sooner than the last time they led us down this road: during the S&L crisis.