The Corrupting Influence of Federal Housing Policy
The U.S. government recently filed suit against Wells Fargo, the nation's largest mortgage lender, for failing to check or otherwise misrepresenting the creditworthiness of borrowers to whom the bank issued mortgages guaranteed by the Federal Housing Authority.
Manhattan's U.S. Attorney, Preet Bharara, alleges a "long-standing practice of reckless underwriting and fraudulent loan certification for thousands of FHA-insured loans that ultimately defaulted." ... The government alleges Wells Fargo took shortcuts on thousands of mortgages from May 2001 through October 2005 and illegally foisted them upon the FHA. It also alleges the bank failed to report more than 6,000 loans that went bad between 2002 and 2010 -- which may be one reason why it took so long to file this lawsuit.
The collapse of the housing market caused taxpayers to fork over billions of dollars to bail out private companies holding, purchasing, and selling bad mortgages and investments, debt, and insurance based on those bad mortgages. If these allegations against Wells Fargo are true, the bank's fraudulent behavior represents another example of a private, housing-related company making profits at the taxpayers' expense.
Liberals will be quick to point their fingers at the evils of corporate greed, and this accusation is true as far as it goes. Greed is the vice by which men let their desire to make money cause them to bring harm upon others or themselves. The employees at Wells Fargo who made commissions on these loans, and the bank itself that collected the fees, certainly brought harm up on us taxpayers in their pursuit of profit.
A deeper analysis, however, will ultimately place the blame on the housing policy of the federal government. As Al Lewis of the Wall Street Journal explains,
Why should Wells Fargo know [the credit-worthiness of its mortgage applicants]? Wells Fargo wasn't taking the risk. In 1986, the Department of Housing and Urban Development gave Wells Fargo authority to certify loans for Federal Housing Administration insurance. Once these lousy loans were FHA-insured, they were the government's problem.
In the natural order of things, a bank will take great pains to determine whether or not a borrower is likely to repay a loan, because the bank will lose a great deal of money if the borrower goes into default. Once the federal government makes it possible for banks to lend large amounts of money without needing to be concerned about whether or not it will ever be repaid, there is no longer any compelling reason for the bank to check the borrower's credit. By suspending the natural order of things in order to make it possible for low-income borrowers to purchase homes, federal housing policy promoted the greed to which Wells Fargo succumbed.
More than 250 years ago, Benjamin Franklin saw this same principle at work when considering the unintended consequences of excessively generous public assistance to the poor.
"To relieve the misfortunes of our fellow creatures is concurring with the Deity, 'tis Godlike, but if we provide encouragements for Laziness, and supports for Folly, may it not be found fighting against the order of God and Nature, which perhaps has appointed Want and Misery as the proper Punishments for, and Cautions against as well as necessary consequences of Idleness and Extravagancy. Whenever we attempt to mend the scheme of Providence and to interfere in the Government of the World, we had need be very circumspect lest we do more harm than Good."
When government makes it possible for people to avoid the negative consequences of vicious behavior, more and more people will engage in vicious behavior -- whether laziness, lust, or greed. This is the story of federal housing policy over the last thirty years, and it may well be the story of federal policy in general since th New Deal.