mortgage crisis

Under government mortgage bailout/modification programs, the mortgage payments of many delinquent borrowers were cut to 31 percent of income, even for borrowers with high incomes and big houses. That cut was based on the false assumption that anything over that percentage was unaffordable (and perhaps even predatory lending). But people often pay far more than that in rent and mortgage payments, especially in prosperous regions like Washington, D.C. So mortgage deadbeats are sometimes getting their payments cut well below what their responsible neighbors have to pay — not merely getting relief from a bad deal.

“One in five renters and one in seven homeowners in the Washington area spend more than half their income on housing, according to census figures,” notes a recent Washington Post storyMuch of the population in the counties surrounding Washington, D.C. spent more than 30 percent: “In Fairfax County, for example, more than half the renters with household incomes of $50,000 to $75,000 spent more than 30 percent of their income last year to keep a roof over their heads,” as did “more than six out of 10 homeowners in that income bracket in Prince George’s and Prince William counties,” and “more than half” in Washington, D.C. itself.

Senior government officials, who mostly purchased their homes long ago, long before the housing bubble (and thus often have mortgage payments that are just a tiny fraction of their income), seem oblivious to this reality.

Many borrowers aren’t making any payments at all. They’re just defaulting on their mortgages, knowing that it will take years for the bank to evict them for non-payment: 492 days is the average number of days since the typical borrower in foreclosure last made a mortgage payment.  As law professor Glenn Reynolds notes, this all “seems calculated to make people who are struggling to make their payments feel like suckers.”

These mortgage bailout programs are harming the economy, say some economists and real estate experts.

I understated things a bit when I noted earlier that some mortgage deadbeats had their mortgage payments cut to just 31 percent of income. Actually, it’s lower than that. That 31 percent figure includes not just mortgage payments but also real estate taxes.  So if a delinquent borrower has a mortgage that’s 20 percent of income, and property taxes that are another 15 percent of income (for a total of 35 percent of income), that borrower could have gotten a reduction in mortgage payments under the 31 percent test, despite having a modest mortgage.

Right now, there’s a big manufactured outrage over the fact that at a few banks, paperwork errors occurred in foreclosures.

The Wall Street Journal summarizes it well:

A consumer borrows money to buy a house, doesn’t make the mortgage payments, and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front. The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington’s financial crisis of the week.

At CNBC, John Carney has an insightful column entitled “Let’s Not Start Lionizing the Anti-Foreclosure Deadbeats.”

Dismissing foreclosure actions based on technicalities that have nothing to do with whether a borrower defaulted on a loan will lead to negative “consequences” for borrowers in the future, like much more costly handling of paperwork, that will likely lead to increased closing costs for people purchasing a home.  “Total war over missing paperwork” is a bad thing for honest borrowers and lenders alike.

As The Journal notes,”Now President Obama is refusing to sign a previously noncontroversial measure to have states recognize notarized documents from other states,” vetoing it last week simply because one possible use of this measure would be to speed foreclosures otherwise slowed by interstate red tape.  At the liberal publication Slate, Stephen Sachs explains why that bill was a good idea for reasons having nothing to do with mortgages or foreclosures, and how it will promote interstate commerce and protect honest creditors.  Sachs notes, “The vetoed bill wasn’t aimed at the housing crisis. It was introduced back in 2005 and passed the House with bipartisan support in December 2006.”

I was an outspoken critic of the 2008 bank bailout at the time it was being pushed through Congress (I called it “unconstitutional,” “dangerous,” and “unnecessary”), and I completely understand and share public outrage at mismanaged banks that ended up being bailed out.  But I don’t understand why people think the bailouts should be compounded by letting deadbeat borrowers avoid hundreds of billions of dollars in unpaid mortgages without consequences — which would be the result of a permanent foreclosure freeze — at the expense of healthy banks that never wanted a bailout and repaid their “bailout” in full with interest.   (Healthy banks like BB&T that didn’t need or want any bailout were pressured by the Treasury Department into accepting a bailout loan along with their unhealthy competitors, so that the public would not know which banks really needed a bailout, resulting in a possible run on those banks).

It’s worth keeping in mind that a $75 billion mortgage bailout program backed by the Obama administration actually ended up harming the real estate market and the economy.  Other Obama administration mortgage bailouts have involved giveaways to even high-income borrowers who were financially irresponsible and had mortgage payments that were not especially high as a percentage of their income.  Preventing foreclosures may also end up creating a class of bailout-seeking deadbeats who don’t pay their mortgages and then agitate for giveaways at taxpayer expense.

When Obama was elected, he claimed he would “go through our federal budget– page by page, line by line–eliminating those programs we don’t need.” But as president, he seems to have forgotten about this pledge. The Cato Institute reminds him of it in a full-page advertisement in today’s Washington Post and other newspapers, identifying $525 billion he could cut annually from the federal budget by eliminating unnecessary or harmful programs.

For example, it notes that “Federal interference in housing markets has done enormous damage to our cities and the economy at large. HUD subsidies have concentrated poverty and fed urban blight, while Fannie Mae and Freddie Mac stoked the financial crisis by putting millions of people into homes they couldn’t afford. Getting the government out of the housing business will save $45 billion annually.” It also notes that “Federal workers enjoy far greater job security than their private sector counterparts—and far better total compensation: an average of $120,000 a year in wages and benefits. Cut federal compensation by 10 percent to save $20 billion annually.”

In 2008, Obama pledged to implement a “net spending cut,” but he has instead exploded government spending.  Federal domestic spending increased by a record 16 percent in 2010.  In 2010, the Congressional Budget Office concluded that “President Obama’s policies would add more than $9.7 trillion to the national debt over the next decade.”

The Obama administration’s housing spending is particularly wasteful.  It is now using regulations and billions in tax dollars to promote more of the risky lending that led to the financial crisis.  It is ratcheting up affordable-housing mandates that created markets for junk sub-prime mortgages (thus spawning the mortgage meltdown, as even the liberal Village Voice has conceded), and it is increasing regulatory pressure on banks to make risky loans.  A $75 billion federal mortgage bailout program harmed the very real estate markets it was supposed to help.

The Obama administration will launch today a new $14 billion program to bail out some people who are underwater on their mortgages.  During the housing bubble, hundreds of thousands of people made such small down payments on their home that their mortgage was almost as big as the price of their home.  When the housing bubble ended, their home value fell to less than their mortgage.  Thousands of these people will now receive taxpayer bailouts (although a majority of underwater borrowers won’t — read this Wall Street Journal article for some of the details).

So if you saved money for a down payment, you were a sucker.  If you’d spent your money instead, the government might give you a bailout.  But since your down payment reduced the size of your mortgage, your mortgage is smaller than the value of your house, and you don’t qualify for a bailout.

This bailout comes exactly two years after federal regulators took over the government-backed mortgage giants Fannie Mae and Freddie Mac, which were bailed out at a cost that may ultimately reach $400 billion.  The government took them over in order to stop their risky practices, but after Obama took office, he did the exact opposite.  Obama made them increase their losses by ordering them to bail out irresponsible mortgage borrowers, at a cost of $30 billion to Freddie Mac alone.  The Obama administration rewarded Fannie Mae and Freddie Mac executives for carrying out these foolish bailouts by showering them with $42 million in pay.  The bailouts benefited even irresponsible borrowers with high incomes.

Another Obama mortgage bailout program that cost taxpayers $75 billion actually harmed the real estate market and the economy, according to economists and real estate experts cited in the New York Times.  On first glance, it seems like the Obama administration is incapable of learning from its mistakes.  But the purpose of this new bailout is probably not to help the economy, but rather to buy votes in the upcoming election in states like Nevada, Florida, and California, which had the biggest housing bubbles.  It is a desperate form of political pandering.

Liberal politicians spawned the mortgage crisis through misguided policies such as affordable-housing mandates.  The mortgage crisis was also caused by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac. But the new Dodd-Frank financial “reform” law backed by Obama does absolutely nothing to reform Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.“ The Dodd-Frank law also creates a new bureaucratic agency to enforce the Community Reinvestment Act CRA without regard for banks’ safety and soundness.  The CRA, which pressures banks to make risky loans, was previously expanded through regulations in the 1990s, regulations often cited as a cause of the financial crisis.

Facing rising criticism of his economic policies, the president whined Monday about the way people  ”talk about me.”

The bailouts are getting even bigger, for the most undeserving recipients.  “More Aid Expected for Fannie, Freddie,” reports The Washington Post.

The Obama administration earlier lifted a $400 billion limit on bailouts for Fannie Mae and Freddie Mac, two mortgage giants known as the Government-Sponsored Enterprises (GSEs).   It was just the beginning: “Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie,” reports The New York Times.

At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)

Fannie and Freddie helped spawn the mortgage crisis by buying up risky mortgages and repackaging them as prime mortgages, thus creating an artificial market for junk.  ”From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud–$6.3 billion at Fannie Mae alone–to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

The Obama administration refuses to reform these mortgage giants, saying it is “too hard” to do.  Earlier, Senate Democrats blocked reform of the mortgage giants in a party-line vote.

The financial “reform” bills recently passed by the House and Senate do nothing to reform Fannie Mae and Freddie Mac.  But they would wipe out jobs, increase pressure on banks to make risky loans in depressed neighborhoods, and increase credit card costs.   Fuller coverage of the financial “reform” bills can be found here.  How CEI worked to make the bill less awful than it otherwise would have been is discussed here.

The Senate has just passed a 1,500 page financial “reform” bill that deliberately leaves unreformed the corrupt mortgage giants that spawned the financial crisis–while wiping out jobs and potentially driving up fees for many credit cardholders.

In a party-line vote, Senate Democrats earlier blocked any reform of Fannie Mae and Freddie Mac, the corrupt, government-sponsored mortgage giants that even Obama administration officials admit were at the “core” of “what went wrong” in the financial crisis.

(Obama received $125,000 in contributions from these mortgage giants as a Senator, second only to the corrupt Senator Chris Dodd, who is retiring this year due to his financial scandals, yet is the chief drafter of the financial “reform” bill.)

Business groups warn that the new rules will wipe out jobs and slow the economic recovery. “If you want to drive capital out of the United States, this is your bill,” said Thomas Donohue, president and CEO of the US Chamber of Commerce.

The bill also increases banks’ costs by restricting the ability of banks to enter into contracts charging retailers for the convenience of using credit or debit cards to collect payment from customers.  When Australia did this credit card holders suffered, as banks passed on the increased costs to them by hiking annual fees and getting rid of cash-back, rebate, and rewards programs.  (Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.)

In the Wall Street Journal, Professor Todd Zywicki notes that such provisions harm consumers: “This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs.”

The so-called financial “reform” bill would also give government officials the ability to nationalize businesses that they claim are at risk of failing — and block meaningful judicial review of such seizures by shareholders alleging violations of their constitutional rights.  (That will increase the ability of presidents to shake down businesses for donations to their political allies, since a business in danger of being seized by the government will try to curry favor with government officials.)  The bill’s House architect, Barney Frank, boasts that it will create “death panels” for American companies (this is the same Barney Frank who for years blocked any reform of the corrupt mortgage giants Fannie Mae and Freddie Mac).

Mortgage giant Fannie Mae is getting another $8.4 billion in federal bailout money, after the Obama administration earlier lifted a $400 billion limit on bailouts for Fannie Mae and Freddie Mac, two mortgage giants known as the Government-Sponsored Enterprises (GSEs).  The other GSE, Freddie Mac, is getting $10.6 billion more in bailouts.  Soon, they will be receiving much more: “Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie,” reports the New York Times.

At the direction of the Obama administration, Freddie Mac ran up more than $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)  By contrast, the Republican alternative, rejected by the Senate, aimed “to wind down, and break up” the mortgage giants and “limit taxpayer exposure” to their losses.

The Obama Administration showered the mortgage giants’ executives with $42 million in compensation.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter Wallison, who warned for years about the risky practices of Fannie and Freddie, said the financial “reform” bill would lead to “bailouts forever,” contrary to Obama’s claims.

Government pressure on banks to make loans in economically-depressed neighborhoods was a major cause of the mortgage crisis.  That pressure will increase under the financial “reform” legislation.  Legislators approved Obama’s proposal to create a new consumer “protection” agency.  But it may harm rather than help consumers.  Why?  “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Government-sponsored mortgage giant Freddie Mac is demanding another $10.6 billion in bailouts, which the Obama administration is expected to give it. Obama’s so-called financial “reform” proposal does absolutely nothing to reform Freddie Mac, admits Obama’s Treasury secretary, tax cheat Timothy Geithner, even though he admits that Freddie Mac was “a core part of what went wrong in our system.” (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)  By contrast, the Republican alternativeaims to wind down, and break up” Freddie Mac and “limit taxpayer exposure” to its losses.

“American taxpayers are paying for $6.8 billion of the Greek bailout” through contributions to an international bailout fund backed by the Obama administration.   Greece is being bailed out by Europe and the international community because it is running up huge budget deficits due to a bloated bureaucracy and government pensions that let many retire in their 50s. “The Obama administration wants to use U.S. tax dollars to bail out a nation that is in a financial death spiral brought on by years of amazingly irresponsible deficit spending and similar behaviors often found in socialist states.”

Rioters in Greece killed three bank employees yesterday in their rage over possible budget cuts.  “The protesting civil servant workers trapped the bank employees in a burning building.”

Government spending is out of control in America, too.  Earlier, the Obama administration lifted the $400 billion limit on bailouts for the government-sponsored mortgage giants Freddie Mac and Fannie Mae, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.  The Obama Administration is now expanding the bailouts of these mortgage giants so that they can lavish pay on their CEOs and reduce the payments of deadbeat mortgage borrowers.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically-connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.

Obama claims that it will not lead to more bailouts, but even congressional Democrats admit that it will.  As Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority. . .The bill contains permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed neighborhoods was another key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s 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.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

There are plenty of problems with the financial “reform” bill, but the media aren’t interested in that.  They’re much more interested in revelations that senior enforcement staff at the federal Securities and Exchange Commission, which would gain new powers under the bill, spent many hours looking at porn on their office computers.

The porn issue certainly deserves some attention, given just how much time some SEC staff wasted looking at porn at taxpayers’ expense: “A senior attorney at the SEC’s Washington headquarters spent up to eight hours a day looking at and downloading pornography. When he ran out of hard drive space, he burned the files to CDs or DVDs, which he kept in boxes around his office.”  You have to wonder if this kind of inattention to its duties led the SEC to ignore the $50 billion fraud by Bernard Madoff, which was repeatedly brought to its attention to no avail, and the multi-billion dollar Ponzi scheme committed by Robert Allen Stanford.  But it probably didn’t.

While the media, including the New York Times, has reported on the porn, it has largely ignored substantive criticism of the financial “reform” bill, which is a Trojan horse that would reinforce risky practices that led to the housing bubble, while ignoring needed reforms, harming insurance policyholders, and giving executive branch officials arbitrary power to bail out or take over banks and financial institutions.

As journalist Matt Welch notes, Obama “is lying his face off about financial reform.”

President Obama has collected millions from Wall Street special interests, his administration contains many Wall Street lobbyists, and he supported the unnecessary $700 billion bank bailout.  But now, he’s pushing a deceptive financial regulation bill with phony rhetoric about “reform,” claiming it is “not legitimate” to point out that the bill could lead to yet more bailouts and government takeovers (as economists and banking experts like Peter Wallison have demonstrated).

Obama’s legislation would do nothing to rein in the worst offenders behind the mortgage crisis, the government-subsidized mortgage giants Fannie Mae and Freddie Mac, even as it would enrich the politically-connected liberal Wall Street firm Goldman Sachs (recently accused of fraud), enrich left-wing lobbying groups and community organizers, and give the government the permanent ability to bail out and take over Wall Street firms.

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, the Obama administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.  The Obama administration is now expanding the bailouts of these mortgage giants so that they can lavish pay on their CEOs and reduce the payments of deadbeat mortgage borrowers.  (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in lossesto bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”

Why did they buy these risky loans?  They put up with Clinton-era affordable-housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically-connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.  His colleague Alex Pollock notes that Obama has not lived up his Administration’s claims that it would back reform of Fannie Mae and Freddie Mac.

Obama claims that it will not lead to more bailouts, but even congressional Democrats admit that it will.  As Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority. . .The bill contains permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed neighborhoods was another key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s 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.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Obama’s proposed financial regulations would also harm retail banking operations used by middle-class people and small businesses.

The Obama administration and Congressional leaders are pushing a trojan-horse financial “reform” bill that would enrich the wealthy and powerful investment bank Goldman Sachs, which was recently cited for massive fraud by the Securities and Exchange Commission (SEC).  That’s the discovery of John Berlau, who won the National Press Club’s Sandy Hume Memorial Award for exposing the conflicts of interest of a former IRS Commissioner.

Earlier, the administration used the AIG bailout to give billions in legally unnecessary payments to Goldman Sachs, which is so rich that it has admitted it didn’t even need the money.  Goldman Sachs, one of the Democratic Party’s biggest donors, is using its political connections to reap record profits.

Moreover, Obama’s legislation would do nothing to rein in the worst offenders behind the mortgage crisis, the government-subsidized mortgage giants Fannie Mae and Freddie Mac, even as it would give the government the permanent ability to bail out Wall Street firms.

Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” Worse, the Obama administration lifted the $400-billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

The administration is now expanding the bailouts of these mortgage giants, which are now giving lavish pay to their CEOs and reducing the payments of deadbeat mortgage borrowers.  (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public).

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”

Why did they buy these risky loans?  They put up with Clinton-era affordable-housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.  His colleague Alex Pollock notes that Obama has not lived up his administration’s claims that it would back reform of Fannie Mae and Freddie Mac.

Government pressure on banks to make loans in economically-depressed neighborhoods was another key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a 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.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

Some in Congress want to impose interest rate ceilings on credit cards and restrictions on interchange fees.  Australia tried the same thing, and it backfired, harming consumers by forcing credit card companies to increase annual fees on responsible credit cardholders and scale back rewards programs.  (Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.)

As law professor Todd Zywicki notes in the Wall Street Journal, the proposed legislation would harm both consumers and small businesses, since it would

reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.  The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards. Cardholders now carry and use multiple cards at little or no cost. The consequences for consumer choice and competition have been profound—card issuers compete for consumer business literally every time they open their wallet to make a purchase.  Annual fees are essentially a tax on card-holding. Policies that produced a return of annual fees would strangle this process of competition by making it more expensive for consumers to hold multiple cards and to switch cards easily. Small businesses, three-quarters of which rely on credit cards, would also have to pay more to maintain access to multiple credit lines, stifling the most potent engine of economic recovery.

Earlier, Congress and the President misguidedly attempted to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act), that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

All these bailouts are taking their toll on the economy.  Economists and real estate experts say a $75 billion mortgage bailout program devised by the Obama administration is actually harming the economy, the housing market, and the construction industry.