There He Goes Again!

Midterm elections are looming on the horizon and it therefore should not be surprising that President Obama is in the market for votes to stave off the loss of a Democratic majority in the U.S. Senate or gain a working Democratic majority in the U.S. House of Representatives.

An above-the-fold, front-page article in Wednesday’s Wall Street Journal (“U.S. backs off Tight Mortgage Rules” by Nick Timiraos and Deborah Solomon) reports that, “in a sharp shift from just a few years ago,” the Obama administration plans to finalize new rules for mortgage-backed securities that will loosen down-payment requirements for homebuyers. Mel Watt, installed recently as head of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, said that those two zombies “should direct their focus toward making more credit available to homeowners.”

Allowing homebuyers and people refinancing existing mortgages to make down payments of 10 percent rather than 20 percent of a property’s market value supposedly will jumpstart the weak national housing market, “a factor holding back the economic recovery”, according to Treasury Secretary Jacob Lew and Janet Yellen, Chairwoman of the Federal Reserve System.

This is déjà vu, all over again, as Yogi Berra once said. Isn’t encouraging banks and other mortgage lenders to relax their standards so as to promote the goal of making affordable housing available to more people how, aided and abetted by a compliant Treasury and Fed, the George W. Bush and Barack Obama White Houses got the economy into trouble in the first place?

Moreover, the Great Recession and the Great Depression before it never were problems of bank credit availability or liquidity. Both were balance-sheet problems associated with too much “investment” in housing and real estate, which suddenly was transformed into dead capital after the housing bubble burst and many homeowners found themselves “underwater”, holding mortgage debt that exceeded the market values of their homes.

Pumping more credit into the housing market threatens to start another boom-and-bust cycle. The only way to restore genuine economic prosperity is to allow housing prices to fall, thereby truly making housing affordable and at the same time restoring balance to the balance sheets of homebuyers and lenders. Fannie and Freddie should be punished for guaranteeing bad loans rather than being rewarded for willfully encouraging an artificial run up in housing prices that was unsustainable. Banks and homeowners also need to take their lumps.