Biden administration threatening to plant the seeds of another housing market collapse
In an ominous sign that parts of the nation’s financial apparatus have totally forgotten the lessons of the 2007-2008 Great Recession, it looks like a mortgage buying binge, all in the name of social justice, and trying to make housing more affordable.
The Wall Street Journal writes:
…the [Biden] administration wants people who would otherwise rent to become homeowners. These young families would take on the risk and the burden of a mortgage, which the government—through Fannie Mae and Freddie Mac—will make much cheaper. Investors, of course, will buy these risky mortgages from Fannie and Freddie because they are backed by the government.
Here we go again. The only difference between what the administration is proposing, and what brought about the 2008 financial crisis is that the economy is already in an inflationary period, induced by the administration’s other policies. This will make homeownership even riskier. In addition, Fannie and Freddie will be buying mortgages of up to $1 million, instead of $450,000.
But the government’s lower underwriting standards drive down standards for private lenders, too. Banks and other mortgage lenders—if they want to stay in the business—have to offer their mortgages on similar terms. People who own homes then dive into the market to take advantage of the low down payments, and housing prices rise even faster. This encourages cash-out mortgages, in which homeowners reduce the equity in their homes, sometimes to buy a boat.
The process goes on for years until prices are so high that sales growth falls and homeowners can’t sell their homes to pay off their mortgages. Housing prices then collapse, mortgages go unpaid. Banks, other lenders, and even Fannie and Freddie incur losses and another financial crisis begins.
We can certainly hope this doesn’t happen again – the last crack-up sent the global economy into a tailspin. But that was then, and memories in official Washington – even of near-Depression level economic hardship — are nearly non-existent.