The Patriot Post® · Mortgage Roulette Is a Losing Gamble

Here’s an idea: Bring back the easy mortgage policies that caused the 2008 financial panic. That should fix everything.

Federal Housing Finance Agency Director Mel Watt told a group of mortgage bankers this week that he is going to direct Fannie Mae and Freddie Mac to “develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97%.” Once again, then, borrowers may be able to obtain mortgages by putting only 3% down. Watt’s play was backed up by the FDIC and the Office of the Comptroller of the Currency.

Watt displays precisely the thinking that got us into this trouble in the first place, and it’s no small irony he made his announcement at the Mandalay Bay casino in Las Vegas.

These financial bureaucrats reason they can jumpstart the long-struggling housing industry. Home sales are half what they were prior to the financial meltdown, and the share of Americans who own a home is at 65%, the lowest since 1995 and four points below its peak in 2004. Mortgage lending has also slowed dramatically due to weak demand in a lousy economy and tighter credit conditions made by lenders.

It is logical in a difficult economy for mortgage lenders to demand greater proof of borrowers’ ability to pay. It also makes sense that they would fall back on the long-standing standard of a 20% down payment. Well, forget logic. This is Washington we’re talking about here.

Democrats remain committed to the idea of having more minorities own homes, even if they can’t afford them and end up back out on the street. Going as far back as the Carter administration, liberals have accused lenders of racist business practices because they weren’t lending to enough minorities. The Community Reinvestment Act in 1977, as well as Bill Clinton’s push to ease lending standards during his presidency, finally created an atmosphere in which minority borrowers with little or no credit could obtain mortgages.

Democrats patted themselves on the back as the housing market exploded. But by 2006, the warning signs were all too clear: 30% of all mortgages went to people who would not qualify under normal circumstances. Then, when it all went bust, liberals blamed the banks again, this time for taking advantage of hapless borrowers who didn’t know any better. And the phrase “predatory lending” entered popular usage.

Now, Watt and company are looking to take us down that same road all over again.

How will it all play out? Former House Majority Leader Dick Armey once said of the Clinton-era lending changes, “As you can imagine, wonderful things happen when the government strong arms corporations as to how they should spend their money, and, better yet, how they should assess the qualifications of home buyers.” He was right then, and his words ring true now.

It took many years and a whole string of bad decisions to put America in the economic turmoil we’re in today. Watt is a former Democrat congressman who assumed his current post only in January. He’s yet another political appointee with no realistic worldview or clear sense of the impact of his actions. Like so many other members of the Obama administration, his motivations stem not from doing right for the sake of others, but doing right to make himself feel better, or worse still, to simply gain more power for his Democrat friends.

The loosening of mortgage lending restrictions, whether it’s to create more minority homeowners or to boost the housing market, is not a good idea. It may seem profitable to all concerned in the short run, but eventually the bill comes due. Bubbles burst, and booms go bust. This is an immutable law of economics, and liberals, with all their regulatory might, will never change that.