We’ve probably all at one time or another poked a bit of fun at our government, its inefficiency, and its proclivity towards bureaucratic solutions for every problem; and the responses to the current financial crisis are certainly no different. And while it’s easy for the public to criticize mortgage lenders for their sometimes reckless lending habits during the past decade, it’s sheer hypocrisy for the government to do so. The worst lending standards of all belong to the FHA, which now boasts a delinquency rate of 1 of every 8 of its loans.
And it’s this same government that is trying to repair the gaping hole in the housing bubble by applying a patch made of the same material as the original bubble, in other words by creating and insuring more of the same poorly secured loans as those that caused the original problem. And, this time the government wants a bigger piece of the mortgage pie, with FHA now insuring about 30% of all new mortgages, up from only 2% just 3 years ago.
Most everyone is aware that the basis of the housing bubble started many years and a couple of presidents ago. And while the talking heads and politicians have tried to put much of the blame on irresponsible homebuyers who bought more than they could afford and who sometimes lied to procure their mortgage, what they fail to mention is that the government encouraged the very lending practices that allowed the problem to expand to disastrous proportions.
Yes, homebuyers and lenders were guilty of participating in the gamble, but the government owned the casino. By maintaining downward pressure on interest rates, the government supplied us with a source of easy money, and practically insisted that we use it. With our growing equity we could remodel the kitchen, create a media center in the basement, buy an expensive car; and we could do it tax free.
Now, with the economy in deep trouble, the government is once again up to its old tricks. A robust housing market drives our economy, and our beneficent Uncle Sam is extending his hand. Instead of allowing the economy to recover from our past excesses, the government is attempting to artificially restore us to prosperity.
Thus far the government’s efforts towards stabilizing the housing market have been a failure. Hope For Homeowners died before it was out of the box, and the highly touted, Making Home Affordable program, promising to save as many as 9 million from foreclosure has successfully modified less than 2% of that number. Ultimately that may be a good thing, for if the government efforts succeed, we’ll only suffer a more serious collapse in the future.
Artificial markets, supported with borrowed money, cannot be sustained; and whether it’s housing or the stock market, government interference can do but one thing—create the appearance of success. But the charade cannot continue indefinitely. Ultimately the illusion will be discovered, and the illusionist and his deception exposed; only then will the crowd return to the normal lives they were destined to lead.
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