Sometimes, it seems, stupidity can only be treated with tar and feathers

A needlessly combative article but one that captures a lot of issues in one place: From Subprime to Sub-Subprime by Kevin D. Williamson. The jury is still out, and probably will be for another decade or so, regarding who and what circumstances were responsible for the housing bubble of the early aughts, leading to the great recession of 2008 onwards.

There are multiple causal agents and many good arguments for many culprits. The argument has, I think, less to do with which culprits are responsible and more to do with the issue of among all the many culprits, which ones were most culpable?

My assessment is that there are two primary culprits. Congress, under both parties, has, for noble reasons and ignoble, and over several decades, sought to increase the rate of homeownership among the population. The theory, sometimes explicit but usually not, is that middle class behaviors are strongly contributive to national well being. Homeownership is one attribute of the middle class. Therefore if we increase homeownership, people will behave more like the middle class.

The theory is ill founded, reversing the causal flow. Homeownership is a result of middle class behaviors (self-discipline, delayed gratification, saving, reliability, work ethic, etc.) not a cause of middle class behaviors.

In pursuit of growing the middle class, Congress, through its subsidiaries Fannie Mae and Freddie Mac, relaxed the various requirements for a guaranteed mortgage. Banks were allowed to extend loans to people with lower incomes, lower down-payments, fewer assets, more dubious valuations, and with more generous definitions of income.

People criticized these changes at the time with clear forecasts that there would eventually be higher defaults. And that is what came to pass.

The other guilty party, of course, were the loan originators - mortgage companies and banks. They were largely within the law but the law was allowing them to make imprudent loans. There are many things that are legal but wrong. But many or most the banks went along with what was allowed instead of what was prudent. To their later detriment and that of the taxpayer who ended up having to bail out so many of them.

All-in-all, it was institutional failure on a massive scale. Congressmen making decisions on a flawed and untested social theory, subject to direct and indirect regulatory capture and rent seeking by banks and realtors and other self-interested parties, enabling banks to do stupid things and the media never making much of the slowly unfolding tragedy.

And it was a tragedy. Those most targeted for assistance, minorities and the poor, were the ones that lost the most when the bubble burst. They were over-leveraged and under-productive with no reserves to help them ride out the cyclical economic waves. The black middle class lost several decades of economic gains because they over-invested in over-valued real estate with too little financial reserve.

The moderate, libertarian and conservative economists who predicted this outcome this outcome were proven correct.

But, as in Kipling's poem, The Gods of the Copybook Headings

the burnt Fool's bandaged finger goes wabbling back to the Fire

I have seen small articles here and there over the past five years indicating that Fannie Mae and Freddie Mac were replicating the same behaviors they did before. Targeting minorities and the poor, seeking to increase homeownership believing that it would stabilize communities, reducing down payments, etc. It is criminal behavior to know that the policy has failed, failed disastrously and with real damage to the putative beneficiaries, and yet to pursue it again, hoping for a different outcome.

Williamson is on a tear:

In lieu of the usual complex regulation larded with special-interest favoritism, here is a simple mortgage rule that could and probably should be adopted: No federally regulated financial institution shall make a mortgage loan without the borrower’s making a down payment of at least 20 percent derived from his own savings.

Period, paragraph, next subject.

Instead of doing that, we are sprinting flat-out in the opposite direction, with government-sponsored mortgage giant Fannie Mae rolling out a daft new mortgage proposal that would allow borrowers without enough income to qualify for a mortgage to count income that isn’t theirs on their mortgage application.

The Committee to Re-Inflate the Bubble strikes again: We’ve just legalized mortgage fraud.

Once upon a time — approximately yesterday — claiming on a mortgage application more income than you actually earn was a crime. Claiming that the money you are using for a down payment is yours when it has been lent to you by a family member or a friend was a crime, too. (A felony, in fact; a whole subplot in The Wire was based on that crime.) There is a reason for this: People who have saved up enough for a down payment on a house are very different kinds of borrowers from people who haven’t, and people whose mortgage debt is two times their annual income are different kinds of borrowers from those with mortgages that are eight times their income. One sort of borrower is a great deal more likely to default than the other sort — and, as we learned a few years back, mortgage default can, under certain circumstances, turn out to be everybody’s problem rather than a problem limited to the jackasses who write low-quality mortgages.

But Fannie Mae, the organized-crime syndicate masquerading as a quasi-governmental entity, has other ideas. Under its new and cynically misnamed “HomeReady” program, borrowers with subprime credit don’t need to show that they have enough income to qualify for the mortgage they’re after — they simply have to show that all the people residing in their household put together have enough income to qualify for that mortgage. We’re not talking just about husbands and wives here, but any group of people who happen to share a roof and a mailing address. And some non-residents can be added, too, such as your parents.

That would be one thing if all these people were applying for a mortgage together, and were jointly on the hook for the mortgage payments. But that isn’t the case. HomeReady will permit borrowers to claim other people’s income for the purpose for qualifying for a mortgage, but will not give mortgage lenders any actual claim against that additional income.

Williamson has more of the gory details, read the whole thing. The upshot is that we are going to once again, through virtue signalling and pathological altruism, commit a major crime against our most vulnerable citizens. Tar and feathers should be the order of the day.