06.23.2011 0

No Relief In Sight: Inside The Housing Meltdown

By Howard Rich – As Barack Obama eyes a weakening employment situation and an escalating bailout tab for government-owned lenders Fannie Mae and Freddie Mac, his administration is confronted by an untenable, imposing new calculus.

Eager to extricate itself from the housing market, government can’t do so until the private sector sufficiently rebounds from decades of disastrous federal mismanagement — which doesn’t appear likely to happen anytime soon.

After an aberrational uptick that came as a result of the government’s latest ill-advised meddling, home prices are once again in a full-fledged free fall. Within the last year, America’s median home value has dropped by more than twice the value of Obama’s recent first-time buyer tax credit — and there’s no end in sight to the decline.

“We expect our credit-related losses to remain elevated in 2011 as we continue to be negatively impacted by the prolonged decline in home prices,” Fannie lending czar Michael Williams said last month.

Not only will these plummeting prices add to Fannie and Freddie’s estimated $317 billion bailout tab, they will further flatten job growth as a glut of bank-owned homes continues to cripple the construction market. Also, the $26 billion taxpayers shelled out to subsidize the recent Obama tax credit has gone down the drain — consumed by the lost value.

Believe it or not, this ruinous road actually began a month before Bill Clinton was elected president, when the Federal Reserve Bank of Boston issued a controversial study concluding that mortgage applications in the city’s metropolitan area were being denied based on race.

“The results of this study suggest that for the same imperfections whites seem to enjoy a general presumption of creditworthiness that black and Hispanic applicants do not, and that lenders seem to be more willing to overlook flaws for white applicants than for minority applicants,” the authors of the study claimed.

Sixteen months later, numerous federal agencies including the Department of Housing and Urban Development (HUD), the Department of Justice (DOJ) and the Federal Deposit Insurance Corporation (FDIC) used this study as their excuse to assume broad new regulatory and law enforcement powers in an effort to combat this alleged discrimination.

Was the Boston study accurate, though? A Cato Institute report published after the new federal regulations were issued revealed “substantial data errors and inconsistencies” in its research methodology — including poorly-defined variables, a refusal to consider other determining factors and the exclusion of data that was available to those individuals who were making the loans.

The Cato report also stated the obvious — that “racial differences in lending approval rates cannot simply be assumed to result from racial or other prejudice.”

Nonetheless, “on the basis of poor data and analysis, regulators now are delaying mergers until lenders accused of bias establish special funds for minority lending or for ‘compensatory’ payments to past loan applicants who were denied credit, and agree to enhance marketing and other efforts among potential minority customers,” the Cato report concluded.

Nearly a decade after the promulgation of these new regulations, Fannie and Freddie were caught cooking the books Enron-style in an effort to justify their massive $1.5 trillion lending spree — which it’s worth noting did not discriminate for literally any reason. These dishonest, irresponsible accounting practices — and the obvious danger they posed to the mortgage market — prompted the administration of George W. Bush to propose reforms aimed at curtailing years of reckless, politically-correct lending.

Bush’s rare moment of clarity was successfully blurred and blunted, however — beaten back by an army of politicians and taxpayer-funded lobbyists equipped with a limitless reservoir of class warfare rhetoric.

“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” U.S. Rep. Barney Frank famously proclaimed in 2003. “The more people exaggerate these problems … the less we will see in terms of affordable housing.”

As a result of this failure to take action, even more explosive power was added to this ticking time bomb of “toxic assets.”

“Political correctness married Wall Street chicanery as Maxine Waters, Chris Dodd and Barney Frank led the band; crooked accountants and clueless rating agencies performed the ceremony; big government dowered the couple with a debt guarantee and bankers dressed as flower girls showered the happy pair in a confetti of junk mortgages and junk bonds,” writes Walter Russell Mead.

The ultimate irony of this ongoing implosion? That would also be its cautionary tale — the fact that government is now relying on a private sector rescue that simply isn’t coming. Why not? Because government has effectively destroyed the housing market in America — all in the name of imposing its definition of the American dream on a country that, in more ways than one, simply couldn’t afford it.

The author is chairman of Americans for Limited Government.

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