Prolonging Government-Sponsored Housing Agony

Article excerpt

ITEM: The Washington post for August 16 reported:

  President Obama has directed a small team of advisers to develop a
  proposal that would keep the government playing a major role in the.
  nation"; mortgage market, extending a federal loan subsidy for most
  home buyers, according to people familiar, with the matter. The
  decision follows the advice of his senior economic and housing
  advisers, who favor maintaining the government's role as an insurer
  of mortgages for most borrowers. The approach could even preserve
  Fannie Mae and Freddie Mac, the mortgage finance giants owned by the.
  government, although under different names and With significant new
  constraints, said people knowledgeable about the discussions.

ITEM: The Obama administration said it had a new plan to help "struggling home owners," reported CNNMoney.com for July 8. "At a town hall meeting this week. President Obama conceded that his administration has failed to provide enough support to homeowners."

CORRECTION: We can't afford any more such help. The federal government wants us to concentrate on what it is supposedly doing for us--when the bigger problem is what it is doing to us.

Previous supposedly helpful government policies pumped up the housing bubble, which predictably burst amid a financial crash. This left the taxpayers holding the bag for around $150 billion that the quasi-governmental housing giants lost when the bubble popped in 2008 and Fannie Mae and Freddie Mac were nationalized outright.

Since the market's peak in 2007. total housing values in the United States have plummeted about 30 percent, dropping about $6.6 trillion by some estimates. Yes, markets go up and down. However, in this case the markets were purposely distorted by the federal government's backing of the huge financial enterprises that encouraged risky loans as well as the loosening of lending standards for political reasons.

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The government-sponsored enterprises (GSEs)--which privatized profits and socialized losses--essentially twisted the arms of banks to make loans to people who couldn't afford them. While some of the big boys with Fannie, Freddie, and the banks feasted on the mortgages for a good while, it was inevitable that the bill would come due.

George Mason University economist Russ Roberts has described in his paper "Gambling With Other People's Money" how the GSEs took over risky loans even as the housing market was starting down--with Fannie and Freddie buying "25.2% of the record S272.81 billion in subprime MBS [mortgage backed securities] sold in the first half of 2006." The year before, they purchased 35.3 percent of all subprime MBS. and in 2004. the two purchased almost 44 percent of all of the subprime MBS sold.

Thereafter, when the defaulting of the bad loans generated a crisis, the GSRs sot bailed out by the taxpayers. Washington has taken over direct control of more than half of the mortgage market in the country--leaving the taxpayers even more exposed, although the liabilities of the GSFs are not even accounted for on the federal budget books.

As summarized by Gretchen Morgen-son and loshua Rosner in their book, Reckless Endangerment: How Outsized Ambition. Greed, and Corruption Led in Economic Armageddon (Times Books. 2011), "By 2008, the American economy was in tatters, jobs were disappearing, and the nation's middle class was imperiled by free-falling home prices and hard-hit retirement accounts. Perhaps most shocking, home ownership was no longer the route to a secure spot in middle-class America. For millions of families, especially those in the lower economic segments of the population, borrowing to buy a home had put them squarely on the road to personal and financial ruin."

Taking into consideration those loans guaranteed or owned by Fannie Mae (Federal National Mortgage Association -FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation--FHLMC), plus Federal Housing Administration loans, the U. …