Obama administration promotes junky, risky mortgages at taxpayer expense, ignoring history’s lessons

by Hans Bader on October 16, 2009 · 5 comments

in Bailout Watch, Legal, Politics as Usual, Precaution & Risk, Sanctimony

George Mason University Professor Ilya Somin explains how the Obama administration is expanding the awful policies that caused the mortgage crisis, like having taxpayers effectively underwrite risky-mortgage loans by bailing out GSEs at a cost of hundreds of billions of dollars.  Now, the administration is stepping up Federal Housing Administration subsidies for risky, junky mortgage loans that are likely to default in large numbers.

(The Obama administration doesn’t seem to have learned history’s lessons overseas, either.  White House Communications Director Anita Dunn cites as her favorite political philosopher the Chinese communist tyrant Mao Zedong. That may explain why it has sometimes pursued left-wing policies overseas.)

President Obama is also pushing for financial regulations that reinforce the worst features of the status quo.  They would increase pressure on lenders to make the risky, low-income loans that helped spawn the financial crisis.  At the same time, they would worsen the credit crunch by shutting down banking operations known as “industrial loan corporations,” that are convenient for consumers.  Earlier, Obama backed a new law that is wiping out many credit-card rewards programs and rebates, and leading to the return of annual fees on some credit cards.

Even though Obama’s proposals would lead to even more junky loans in the future, both he and Senate banking chairman Chris Dodd (D-CT) claim that his proposals would fight the “status quo.”  But they are part of the status quo.  Dodd is famously corrupt, having received sweetheart loans from the reckless, bankrupt subprime lender Countrywide, and having received a massive gift from a crook, Edward Downe, in the form of a luxurious “cottage” in Ireland he received in a “cut rate real estate deal” for hundreds of thousands of dollars less than fair market value.  Obama was the third biggest recipient in Congress of campaign contributions from the government-sponsored mortgage giants Fannie Mae and Freddie Mac, which went broke, costing taxpayers perhaps $200 billion.  (Fannie Mae was a corrupt bully that engaged in massive accounting fraud and used intimidation to fight reform.)

Banks will now be pressured to make even more risky, low-income loans. Obama has sent to Congress his proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”

Government pressure on banks to make low-income loans was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s disturbing proposal would empower the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.  The Community Reinvestment Act was a key contributor to the financial crisis.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants (“GSEs”) Fannie Mae and Freddie Mac, and by federal affordable-housing mandates.

But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, Obama’s plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

Me October 18, 2009 at 2:38 pm

Even if Obama didn't do it, Congress would push these risky loans. Congressmen like Barney Frank are enraptured with the idea of "affordable housing."

To a lesser extent, Bush bought into it too, with his "ownership society" concept.

Myself October 18, 2009 at 2:39 pm

The "ownership society" concept turned out to be almost as dumb as the "Great Society."

I October 18, 2009 at 2:41 pm

Given its economic ignorance, small wonder the Obama Administration treats economists like the plague in policy deliberations. Even the economists in the Administration complain privately of being excluded from formulating (as opposed to carrying out) policy.

Hans Bader October 25, 2009 at 6:54 am

I have a series of commentaries on this issue and related issues of financial regulation and the mortgage meltdown, at the Examiner.

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