by Michael Tennant, The New American:
In the first several years of the 21st century, federal policies encouraging banks to grant mortgages to borrowers who couldn’t repay them, government purchases of mortgage-backed securities, and other housing-market interventions led to skyrocketing housing prices and record consumer debt, precipitating the 2008 crash.
Yet the Biden administration, having learned nothing from this fiasco, has enacted similar policies that are virtually certain to result in similar outcomes, reports the Daily Caller.
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), the same government-sponsored corporations that played a major role in the 2008 crash, are behind much of the current mischief in the housing market. Under May 2023 guidance from their regulator, the Federal Home Financing Administration (FHFA), these entities have been using low-risk borrowers to subsidize high-risk ones.
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“The new Fannie and Freddie mortgage pricing directive raised rates on low-risk borrowers and reduced them on high-risk borrowers,” Jason Sorens, senior research fellow at the American Institute of Economic Research, told the Daily Caller. “This is not really a free market to begin with, but the risk here is creating something like the subprime crisis, where high-risk borrowers are encouraged to take on debt they can’t repay. Again, this has the potential to hit the bottom line for Fannie and Freddie.”
Further FHFA directives have made matters even worse. In November, the agency announced that it would be increasing the mortgage limit for single-family homes in most areas to $766,500, a $40,350 jump over the previous year. In high-cost areas, however, borrowers could get almost $1.5 million from government-backed lenders. On top of that, the FHFA has proposed allowing Freddie Mac to purchase second mortgages.
The administration also promulgated a rule last year to prevent “racial and ethnic bias” in home valuations, which will undoubtedly cause banks to make unwise loans to minorities to keep regulators off their backs — precisely the same scenario that preceded the 2008 crash.
These policies, combined with high inflation and a lackluster job market, have produced both record housing prices and record private debt, with consumers owing $17.7 trillion as of the first quarter of 2024. “Around $190 billion of the increase in the first quarter,” notes the Daily Caller, “was in mortgage debt.”
“The reality is that you have to look at Fannie, Freddie and FHA [the Federal Housing Administration] as one big entity, its [sic] government mortgage: it’s all run by the government, and as a single entity, it’s tilting towards higher-risk loans and higher debt ratios,” Edward Pinto, senior fellow and co-director of the American Enterprise Institute’s Housing Center, told the website. “So you may be able to handle that debt ratio for a period of time. It’s when economic stress increases that you find out; as Warren Buffett said, ‘It’s only when the tide goes out that you learn who’s been swimming naked.’”
The Federal Reserve, for one, could get caught skinny-dipping in very deep water if the market crashes. It now owns more than $2.3 trillion worth of mortgage-backed securities bought from government lenders.
Pinto told the Daily Caller that a small increase in the unemployment rate — from its current four percent to, say, six percent — could trigger a 2008-sized crash.
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