chicagotribune.com

Some of us shouldn't be homeowners

Dennis Byrne
6:33 PM CST, February 7, 2011

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The Great Recession brought plumes of new laws and regulations, raining down like suffocating volcanic ash on just about every aspect of America's financial sector, except for one.

That's the one that caused the housing bubble and its explosion: The Community Reinvestment Act and related government policies that encouraged lenders to write mortgages to people who couldn't afford them. America ended up racking up 27 million mortgages valued at $4.5 trillion that were subprime or risky, many of them ready to default at the economy's slightest hiccup.

Astonishingly, the CRA remains on the books, still diverting portions of its lending resources to families that can't afford mortgages.

More astonishingly, its backers, ever blind to the law's consequences, tried to extend the CRA's reach to nonbanking financial institutions. Rep. Luis Gutierrez, D-Ill., last September introduced the American Community Investment Reform Act, but it died in the lame-duck session of the last session of Congress, despite a push by Rep. Barney Frank, D-Mass., and other "affordable housing advocates."

Wait, there's more. The Financial Crisis Inquiry Commission, appointed by Congress last summer to investigate the causes of the recession, concluded that the CRA "was not a significant factor," and then proceeded to ignore it. This conclusion, issued last month, was reached by the six Democratic appointees to the 10-member commission.

The four dissenting Republican appointees included Peter J. Wallison, a fellow of the American Enterprise Institute, who issued a biting and reasoned dissent. He described in detail how for years the federal government, inch by inch, regulation by regulation, and law by law, had been coaxing, cajoling and eventually requiring lenders to soften their underwriting standards to increase homeownership among low- and moderate-income families. That policy ultimately infected the entire federal housing sphere, from the Federal Housing Administration to the government-sponsored enterprises Fannie Mae and Freddie Mac.

Originally, the idea was to prevent the "redlining" of struggling neighborhoods, a worthy goal. But — surprise! — the lenders ran into the reality that those neighborhoods were not teeming with mortgage-qualified folks. So, to bring up to snuff the numbers of loans issued in those communities, the underwriting standards had to be softened.

That wasn't the banks' or Wall Street's idea. But buoyed by the backing of federal policy that supposedly reduced the risk of making loans to underqualified buyers, they naturally concocted new schemes that would maximize their profits. Fault the government for not watching these schemes close enough, but also fault the government for creating an unrealistic market environment that inflated the housing bubble to start with.

Ironically, while the CRA still requires banks to issue loans in neighborhoods that typically have fewer qualified buyers, banks are cracking down on lending to qualified homebuyers. Clearly, the pendulum has swung too far; a few years ago, lenders were carelessly handing out huge amounts to unqualified buyers. Now even a qualified buyer can't get a loan without underwriters examining every crevice and orifice.

We're told that lenders are hoarding cash, for whatever accounting and business reasons I probably could not understand. That's one reason, say experts, for the lousy housing market that is making this recession unusually long. I don't know how that cash can be shaken loose for qualified borrowers, but how curious that a web of federal laws, regulations and agencies continues to push lending to borderline borrowers.

Both Presidents Barack Obama and George W. Bush (remember his "ownership" society?) subscribed to increasing home ownership as a worthy goal. But it takes more than good intentions to navigate the obstacles to ownership. If we are to pursue this worthy goal, we've got to think of another way to do it. The costs of failure are too high.

The Obama administration says it will attempt to wean the housing market from such overreaching government support. That would be good, because we've seen what can happen when ideology and politics compel us to blindly rush ahead with a "solution" that backfires.

Dennis Byrne, a Chicago-area writer, blogs at chicagonow.com
dennis@dennisbyrne.net