WaPo Catches Obama Recycling Policies That Sunk Housing Market

To his credit, the Washington Post's Zachary A. Goldfarb reported yesterday that the Obama administration is possibly repeating the same policy mistakes that sank the housing market.   To get to the heart of the matter, our national housing bubble quickly inflated as a result of too many people with poor credit buying homes that they couldn’t afford.  As that number multiplied, banks created more unstable mortgages to keep up with demand until eventually the bubble burst

Well, it seems that Mr. Obama is pushing banks to restart this self-destructive economic policy.  Goldfarb wrote:

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

[…]

The FHA, in coordination with the White House, is working to develop new policies to make clear to banks that they will not lose their guarantees or face other legal action if loans that conform to the program’s standards later default. Officials hope the FHA’s actions will then spur Fannie and Freddie to do the same.

The effort requires sign-on by the Justice Department and the inspector general of Department of Housing and Urban Development, agencies that investigate wrongdoing in mortgage lending.

“We need to align as much as possible with IG and the DOJ moving forward,” FHA Commissioner Carol Galante said. The HUD inspector general and Justice Department declined to comment.

The effort to provide more certainty to banks is just one of several policies the administration is undertaking. The FHA is also urging lenders to take what officials call “compensating factors” into account and use more subjective judgment when deciding whether to make a loan — such as looking at a borrower’s overall savings.

“My view is that there are lots of creditworthy borrowers that are below 720 or 700 — all the way down the credit-score spectrum,” Galante said. “It’s important you look at the totality of that borrower’s ability to pay.”


Galante seems to miss the point of credit scores.  If you have a bad one, it usually means the probability of payment is pretty low.  That's why banks don’t give out home loans or credit cards to people with awful credit.  Additionally, if someone lacks a credit score but has the means of paying the monthly bill – it’s their fault for failing to build a credit score.

According to Ed Pinto, senior fellow at the American Enterprise Institute and former executive at Fannie Mae, who Goldfarb quoted in his piece, “if [this] were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from.”

So, when will other media outlets, besides the Washington Post, report on this reversion to a policy that has proven to be lethal to every taxpayer in America?  It seems like another $700 billion dollar troubled asset relief program could be on the horizon.