Tuesday, June 10, 2008
Here’s a shocker: The Washington Post reports today that the U.S. Department of Housing and Urban Development encouraged Fannie Mae and Freddie Mac to purchase subprime-mortgage-backed securities early in the decade. This encouraged risky loans that are now often resulting in foreclosures; as many as three or four million families may be unable to pay off their subprime loans. Like other articles on the topic, the Post article implies incredulousness at the practice of terming such loans as “affordable,” and an academician is quoted as calling HUD’s policy “indifferent” as to whether the loans eventually hurt their recipients.
What articles such as this miss is that it had long been federal housing policy is encourage as many families as possible to purchase a home. Lenders were chastised for not offering loans to low-income families and members of racial minorities. Subprime loans did precisely this, and enabled many low-income and minority families to buy a home for the first time. Many such families have been able to pay back their loans, even probably though more of them have been pinched by rising mortgage interest rates and falling equities.
Yes, it is true that many of these loans should not have been made, because they were unlikely to be completed successfully, with adverse consequences for the borrower, the creditor, and the economy. But we must remember that these were voluntary market transactions (putting aside the issue of whether lenders effectively fooled borrowers as to the terms). Considering the long-standing national policy of favoring widespread “affordable” homeownership, it seems a little silly to assign much of the blame to government authorities, as opposed to the parties to the loans. After all, where were the protests from low-income advocacy groups in front of HUD, Fannie Mae, and banks with signs reading: “Stop allowing risky mortgage loans to poor families!”?
Now that housing credit has shriveled and that builders aren’t constructing new developments in exurbs far from jobs (especially with $4 gasoline), government housing policy will have to change to encourage more in-fill and encourage more dense housing, in spite of local zoning laws that restrict such housing. The changes in policy are likely to include a number of missteps, but we shouldn’t be surprised when government is slow is recognize adverse and unexpected consequences ….