Mortage Disaster : Government Involvement

This shouldn't come as a surprise - the government is making the housing problem worse and is the cause of the problem in the first place.

If you remember, this all started with Clinton, or even before him with Carter. The Republicans are not guiltless here as well. Bush thought home ownership should be something everyone could achieve. Bush did go to congress on several occasions and told them to this policy was headed in the wrong direction.

But it was Clinton who forced the issue by driving banks to loan to anyone that had a pulse. The borrower didn't need an Social Security number, speak English or even the ability to write their own name.

It got so bad that when banks screamed that this would lead to a disaster, the justice department, under the guiding hand of Sec. Janet Reno, threatened them with suits unless they continued to lend to everyone even knowing individuals could never pay the money back.

Nearly 5 million loans were made to individuals that had no SS number. Fannie and Freddie bought the bad loans from the banks, sold them the everyone around the world which caused a world financial crisis.

Many individuals were buying several homes at the same time, "flipping" is the term for buying several homes then trying to sell them at a profit. Well we all know all this turned out. Worse, most everyone knew this would happen and they were right. It was just politics?

Housing Market Problems and Solutions in a Nutshell
Source: Anthony Randazzo, "Housing Market Problems and Solutions in a Nutshell," Reason Foundation, August 31, 2011.

There are a million things being said about the housing market and about a dozen different interpretations of the data. On top of it all there are several different programs being discussed by the White House as solutions to the market turmoil. So what is going on? Anthony Randazzo, director of economic research at the Reason Foundation, provides a snapshot.

Ignoring household debt does not make it go away. Before we are going to see consumer confidence and demand return in force, household debt needs to fall.

There are four ways that debt can be lowered: (1) Programs that incentivize high debt like the mortgage interest deduction could be cut; (2) The default and foreclosure crisis could be allowed to accelerate its current course; (3) Wages could rise dramatically and the unemployment rate could fall; (4) The Federal Reserve could inflate away the problem. A combination of the first two possibilities in this list would be the best policy approach by the White House and Congress.

It's the housing programs.

There are two big "ideas" on the table right now to try and solve the housing mess. Both would simply perpetuate the problem, says Randazzo.

First, a refinancing program that would essentially let homeowners whose mortgages are owned by Fannie and Freddie get lumped into a universal refinancing deal, setting their interest rate at today's extreme lows of around 4 percent.

Second: Selling government sponsored enterprise homes to create a national rental program.

In summary, we are in a bad place in terms of the housing metrics and household debt is holding us back. Overall, the government has created more problems in housing and failed to address the real problems in the system with its programs, a significant reason why the housing market climate is so stormy at the end of August 2011. The only thing our government hasn't tried is the free market approach, says Randazzo.