In 2007-2008, the mortgage crisis hit America. Millions of mortgages given to folks who could not afford to pay the loan back began to go into default because the values of homes had stopped rising. That meant that the people who had borrowed while thinking that rising home prices would allow them to take more out of their homes for use in making mortgage payments had nowhere to turn. Defaults skyrocketed and home values plummeted as mortgages were foreclosed. In the simplest terms, this disaster struck because people who did not have the ability to pay off the mortgages were given loans, because banks were pressured by the government to lend to all sorts of shaky borrowers and because the risk of loss for mortgages was transferred for the most part to Freddie Mac and Fannie Mae and ultimately to the government.
So here are the current questions:
1) Does it make sense for the government to step into the market again to force lenders to make loans to folks who do meet the criteria for safe loans?
2) Should the government take actions to drastically cut the revenues coming in to Fannie Mae and Freddie Mac while at the same time not reducing the risk of loss for those institutions?
3) Should the government reduce the profitability of mortgage loans for the financial industry which is still struggling to recover from the massive losses of the recession?
These seem like simple question and the answers are no-brainers. It would be maniacal for the federal government to recreate the conditions that led to the last major recession. Nevertheless, president Obama and the Democrats in congress seem bent on doing just that. Obama is pushing a "mortgage relief" plan that would force lenders to make loans to people who do not meet the criteria for safe loans. Indeed, homeowners would be allowed to get loans for more than the current value of the house being mortgaged. Obama also wants to force the refinance of loans held by Fannie and Freddie, an effort which would reduce the income of those companies while not reducing the risk at all. Finally, the Obama plan calls for a reduction in fees paid in connection with mortgages. Such a reduction will not reduce expenses, just profits. It simply makes no sense.
Some day, I hope that the government comes to realize that when it mixes into the market, it creates distortions which will come back to bite the country in the behind. Seriously, I hope this happens even though I realize that it never will.
So here are the current questions:
1) Does it make sense for the government to step into the market again to force lenders to make loans to folks who do meet the criteria for safe loans?
2) Should the government take actions to drastically cut the revenues coming in to Fannie Mae and Freddie Mac while at the same time not reducing the risk of loss for those institutions?
3) Should the government reduce the profitability of mortgage loans for the financial industry which is still struggling to recover from the massive losses of the recession?
These seem like simple question and the answers are no-brainers. It would be maniacal for the federal government to recreate the conditions that led to the last major recession. Nevertheless, president Obama and the Democrats in congress seem bent on doing just that. Obama is pushing a "mortgage relief" plan that would force lenders to make loans to people who do not meet the criteria for safe loans. Indeed, homeowners would be allowed to get loans for more than the current value of the house being mortgaged. Obama also wants to force the refinance of loans held by Fannie and Freddie, an effort which would reduce the income of those companies while not reducing the risk at all. Finally, the Obama plan calls for a reduction in fees paid in connection with mortgages. Such a reduction will not reduce expenses, just profits. It simply makes no sense.
Some day, I hope that the government comes to realize that when it mixes into the market, it creates distortions which will come back to bite the country in the behind. Seriously, I hope this happens even though I realize that it never will.
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