Some 70 percent of new home loans are currently coming from Fannie Mae and Freddie Mac (or what’s left of them)—which in other words means that they come from the government. Or to be precise, they come from the American taxpayer. The mortgage giants, now nationalized by the federal government just a scant month ago, place that government completely in charge of the housing market. And the nightmare
deepens.
With the credit contraction, one should expect that 70 percent number to rise, as the only bank that can afford to give out a loan to aspiring homeowners during these hard economic times will be the federal government. Which is ironic. Fannie Mae was created in 1938 during the Great Depression to provide liquidity in the mortgage markets. To make credit available. In the end, it was one of the institutions that caused liquidity to dry up.
On more local scales, too, this has played out before. Just a year before Fannie Mae was created, Section 8 housing was fashioned in the Housing Act of 1937. The idea was to provide “affordable” housing to low-income families who otherwise could not afford a place to live. Sound familiar?
Those, of course, were the aims to the Community Reinvestment Act of 1977 and the 1995 Clinton administration regulations overseen by HUD Director Andrew Cuomo. In the late 1990’s, the government pushed Fannie and Freddie hard to give out cheap loans, to unqualified applicants, as reported by the New York Times.
At least with Section 8 housing, the economic distortions were contained to the communities public housing destroyed. Over the years, Section 8 housing has artificially increased the property values of neighborhoods. Thus, the economic base of those communities has eventually been destroyed, because businesses could no longer afford set up shop there. This was compounded by the fact that the government had spent too much on the property enabled slumlords to rent in the first place, as it essentially set up a monopoly on housing in those communities it first invades and then pervades.
Fast forward years later, and there is no question that public housing has been anything but an abysmal failure. Only Soviet urban planning could have been any worse.
It was when similar principles were applied to the mortgage market that government—and yes, it was government—created the current financial crisis. And instead of destroying one community at a time, this government-created crisis threatens to bring the entire global financial system to its knees.
Through a combination of low-interest rates, poor oversight of the mortgage giants Fannie and Freddie that bought and then sold mortgage-backed securities all over the world, and a willingness on the part of banks and mortgage brokers to lend to practically anybody, the government again monopolized an entire sector of the economy. And prices followed suit.
They soared. Through the combination of loose lending and loose monetary policy, banks were able to give out mortgages on an unprecedented scale. This created a demand bubble that translated into the housing bubble. Prices in some cases went up by as much as 200 percent. In more cases, they doubled.
This was clearly unsustainable. Yet even when the warning bells were rung on Capitol Hill about the situation at Fannie and Freddie they were ignored by the politicians who instead wished to maintain the expansive housing welfare program they had created. And who, it should be added, were on the take from the organizations—like ACORN—that lobbied for the loose lending to begin with.
Even at the height of this crisis—just last week—Senator Christopher Dodd was touting his “agreement in principle” bailout bill that included payouts to the so-called “Affordable Housing Fund” and the “Capital Magnet Fund” both of which direct public monies to organizations like ACORN. Only thanks to Republican whistleblowing were these provisions finally removed from the agreement.
But even without those provisions, the damage was already done. After heavily subsidizing the mortgage industry—to the tune of half of all outstanding mortgages—government destroyed the housing market.
So, Big Government, instead of being the lender of last resort, is now the lender of first resort. And, perhaps, soon, the only resort. They back housing loans. Student loans. Health insurance. All of which is insane.
So, now the American people are being led down a road to nowhere—or more explicitly, in the words of Hayek, “the road to serfdom.” The solution is to get government—once and for all—out of the housing business, and out of every other business it is in danger of destroying. The alternative is a Utopian nightmare.
