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Today’s New York Times carries an article by Floyd Norris lamenting the fact that student loans are now showing high and rising delinquency rates. Other kinds of consumer loans, he notes, are being made under tighter credit arrangements; “those who should not borrow,” he says, “generally do not.” For some reason, he does not mention mortgage lending, the biggest consumer lending market of all.
Norris does not seem to recall that the last time we had what he calls a “binge of irresponsible lending” it was in mortgages and in that case most of the irresponsible lending was by the government. In 2008, when it all came apart, 58% of all the mortgages in the United States were subprime or otherwise weak. Of these, 76% were on the books of government agencies, primarily Fannie Mae and Freddie Mac. The government, in other words, created the demand for the mortgages that ultimately brought down the financial system.
The pattern should be clear, although it is doubtful that Norris and his New York Times colleagues will ever admit it. The housing bubble, the crash, the mortgage meltdown and the financial crisis were all the result of what were called the affordable housing goals, a program that required Fannie and Freddie—two government-backed mortgage firms that dominated the housing finance market—to acquire mortgages that had been made to borrowers who were at or below the median income where they lived. To meet these requirements, Fannie and Freddie had to reduce their underwriting standards, which they did beginning in the mid-1990s and continued until they became insolvent in 2008.
The Fannie and Freddie story, and the high delinquency rates that are now plaguing student loans, spring from the same source—the government’s desire to spread credit widely, no matter what the risk, in order to achieve certain social purposes and to satisfy certain pressure groups. For student loans, as Norris recognizes, it is colleges; for mortgages, which he does not recognize, it is the government mortgage complex (the Realtors, homebuilders, large banks and community activists). Politically, it makes all kinds of sense. Financially, it means disaster for the taxpayers, who ultimately pay the bill.
If you follow what is happening with mortgages today, you will find that, once again, Congress is being pressed to weaken mortgage underwriting standards, and the regulators who should be the guardians against this behavior are preparing to follow their political masters by adopting mortgage standards that they themselves admit will result in delinquency rates of 23%.
The only way to prevent the return of the same cycle in mortgages that we are now witnessing in student loans is to eliminate the government’s role in housing finance.
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