Making Homes Affordable Makes Others Poor
Imagine that you are in the business of lending money. At one time, the business model was simple; money was lent to people who had a high probability of repaying it. The rules were then changed by federal government in the interest of "fairness," with laws passed such as the Community Reinvestment Act (CRA) and federal agencies like Housing & Urban Development (HUD) activated. To stay in business, you must follow the government's dictates.
Then the government changes the rules again by changing the percentage of loans that go to certain types of borrowers in the interest of "fairness." Just asking you to increase loans to people with poor credit ratings isn't enough. Community activist groups like ACORN threaten to sue you under the CRA if you don't make enough loans, or if you don't loan to the "right" people, or if you make it too hard to get a loan.
Fast-forward ten years.
Now the DOJ is suing you for making too many loans, to the "wrong" people, and you are being accused of making loans too easy to get. What used to be called "making the American dream a reality" is now called "predatory lending practices." Yesterday's good corporate citizen is today's corporate boogeyman. This is the schizophrenic environment home mortgage providers have to try to navigate while attempting to pay their employees, shareholders, and taxes, and all that while trying to stay in business.
The massive housing bubble is a legislative creation that would not have been as big or economically damaging if it hadn't been for government intrusion. If it hadn't been for the government trying to make homes affordable, millions more Americans would have jobs today. Government's attempt to socially engineer the housing market coupled with a luddite energy policy has cost our nation its prosperity.
The Obama administration's response to the inevitable housing crash has been a set of programs whose stated aim is to keep homeowners in their homes, even if they can't pay their mortgage. The unspoken truth of the program is that lenders and taxpayers are expected to take a haircut on these mortgages. Is it any wonder that banks are trying to build strong balance sheets and pump up capital reserves? A portion of their business can't be written off and must remain on the books, losing a little more money year after year.
In a normal market, lenders would attempt to foreclose on the bad debt and either sell the property or rent it to cover the ongoing taxes, maintenance, and other costs. The market is so bad that in some markets, it's actually cheaper to bulldoze abandoned homes. Bulldozing reduces supply in a saturated market and gets the worthless asset off the books ASAP. Lenders shedding property creates a buyers' market and depresses prices. Only after the excess inventory has been sold or is generating revenue as a rental property will property values start to rise. The market has to hit bottom before it can start to rise again, and that happens faster when you wipe out inventory.
Programs like "Making Homes Affordable" are combined with political pressure on lenders to forestall foreclosures, which forces banks to keep properties off the market but still on the books. Since the inventory stays on a bank's books and isn't sold or rented, the bottom never comes, and the market says in a perpetually depressed limbo. The bureaucrats will point to families that have remained in their homes as a success. Those same bureaucrats are oblivious to their own role in producing a market where a family can't move because that family can't sell its current home. They won't show the family that will "strategically" default because its home value is so much lower than its home loan, with no hope of a recovery. They won't show you the tens of thousands being sent to the unemployment lines due to government interference in the market.
A free and functioning market would do a lot to start the healing process for housing. Unfortunately our elected officials don't believe in markets, so we get solutions that look exactly like previous ideas that put us in this horrible economy, with 9-percent unemployment and $15 trillion in debt.
The next time you hear about "evil banks," do mention the politicians who made homes affordable by making a nation poor.