In the recent mortgage crisis, much blame was laid at the feet of America’s financial institutions. Many finger-pointers completely disregard the key role U.S. government policy played in the debacle.
For decades the government has pushed home ownership as a social panacea, much to the detriment of other elements of public policy.
I recently reviewed Niall Ferguson’s Ascent of Money. Chapter 5, “Safe as Houses” provides detail:
Since the New Deal, the federal government has provided various guarantees—from deposit insurance to the explicit backing of Fannie Mae, Freddie Mac, and Ginnie Mae—to encourage mortgage lending. At best this primes the pump when liquidity gets, well, less liquid. At worst this encourages irresponsible lending, because, after all, the government (taxpayers) will bail us out.
By providing federally backed insurance for mortgage lenders, the FHA sought to encourage large (up to 80 per cent of the purchase price), long (twenty-year), fully amortized and low-interest loans. This did more than merely revive the mortgage market; it reinvented it.
…From the 1930s onwards…the US government was effectively underwriting the mortgage market… That was what caused property ownership—and mortgage debt—to soar after the Second World War.
—pp. 247 ff. Homeownership, generally, has been extolled by various public officials, from Roosevelt to Reagan to Bush to Obama, as a civic virtue. To be sure, property ownership engenders a sense of ownership in society; however, the government has pursued the goal recklessly. While pushing banks to keep mortgage rates down, inflation rose, so that, “For a time, lenders were effectively paying people to borrow their money,” (p.253) an obviously unsustainable trend.
The government has also encouraged lending to poorer borrowers—to the point of irresponsibility. The Community Reinvestment Act of 1977 was designed to encourage minority ownership; however, it pressured banks to lend in ways that borrowers could ill afford (p 251). More recently, the government actually encouraged the ‘sub-prime’ mortgages that have caused our recession.
George W. Bush declared at various times, “We want everybody in America to own their own home.” and “It is in our national interest that more people own their home.”
Having challenged lenders to create 5.5 million new minority home-owners by the end of the decade, Bush signed the American Dream Downpayment Act in 2003, a measure designed to subsidise first-time home purchases among lower income groups. Lenders were encouraged by the administration not to press sub-prime borrowers for full documentation. Fannie Mae and Freddie Mac also came under pressure from HUD to support the sub-prime market.
This naturally encouraged dangerous lending practises. See pp. 268 f.