Another Voice / Subprime lending
Over-regulation caused the housing crisis
Updated: 09/30/08 6:43 AM
Once upon a time, before government began “regulating” the housing market, banks had to be very careful about lending money. If loans weren’t repaid, the losses went straight to the bank’s bottom line, and the bank failed. As a result, banks required a mortgage applicant to show he could actually afford a house, and to put 20 percent down in order to protect the bank from any future decline in the market value of the house.
But not everyone in the country could afford a house or had the money to make a down payment. This was intolerable to certain members of Congress, who began to demand that banks begin lending money to “under-served” (i. e. poor) people who could not afford to buy a home.
And so government began “regulating” the housing market in two major but disastrous ways.
First, Congress passed the now infamous Community Reinvestment Act, the purpose of which was to force banks to lend to people who did not qualify for loans. Other legislation soon followed, such as interest rate subsidies to seduce uncredit-worthy borrowers to apply for mortgages they couldn’t afford.
Apologists for this policy now claim that not all banks were subject to the act’s penalties, which is true, but the act nevertheless sent a crystal clear message to all banks: It was now official government policy to seduce people into buying homes they couldn’t afford.
Second, and even more disastrously, new “regulations” issued under the Clinton administration in 1995 opened the door to the “securitization” of home mortgages, pursuant to which banks were authorized, and even encouraged, to unload their mortgages on Wall Street firms like Bear Stearns, which in turn “diced and sliced” them into securities that were sold to unsuspecting investors around the world.
As a consequence, banks no longer cared about whether the borrower ever paid back a dime of the original loan. The banks simply collected their fees for processing the loans, after which they sold the loans to Fannie Mae or Freddie Mac, or unloaded them on the Wall Street chop shops.
What followed was the greatest housing bubble in American history, fueled by government-issued “funny money” in the form of subprime loans.
This government-created bubble in turn created a deadly spiral. As home prices rose, the government had to print ever more funny money to enable even more uncredit-worthy borrowers to keep up their buying spree.
Homeowners got the message, and began taking on ever increasing amounts of debt in the belief that the value of their home would skyrocket forever.
Thus the cause of the current crisis has not been too little regulation, but too much. Had the government not attempted to “regulate” the housing market, the financial crisis would certainly never have occurred.
Robert Hardaway is a professor of law at the University of Denver, Sturm College of Law.
