A Fiscal Domino Effect

I could hardly believe my eyes when I read it. How could this possibly occur again? Don’t they remember what happened the last time? But there it was, in print. Mel Watt, who was confirmed late last year as the president’s appointee to serve as director of the Federal Housing Finance Agency – which is the regulator over Fannie Mae, Freddie Mac and the Federal Home Loan Bank System – is going to liberalize the rules that guide what types of mortgage loans can be purchased by Fannie and Freddie. Mr. Watt wants to permit loans with as little as a 3 percent down payment and a credit score as low as 660 to be purchased.

Really? This is representative of decisions made by Congress and regulators that started the domino effect that created the recent financial crisis. While it is laudable to encourage consumers to aspire to homeownership, it is counterproductive and irresponsible to promote financially unrealistic homeownership. Not everyone is prepared for the fiscal demands of owning a home. Subprime loans, such as those that Director Watt advocates, were the tipping point that set the financial crisis in motion. Mortgage companies, many owned by residential homebuilders, and some banks kept pushing the envelope to get these loans on the books and the underlying real estate sold. Then the investment banks, encouraged by the rating agencies’ inflated ratings for these packages of loans, bundled them up and sold them to investors worldwide. Real estate prices then escalated to record highs … until, inevitably, there were no buyers remaining. The bubble burst, real estate prices plummeted, and those homeowners who had secured homes with very low down payments were suddenly caught in the trap of owing more on their homes than they could possibly sell them for. What began as a subprime mortgage crisis quickly grew into a monstrous mortgage crisis, resulting in massive job loss, which further worsened the destructive force of the crisis. Why doesn’t Watt remember this recent history?

We need a voice of reason, and it is the banking community that must lead the charge. Because banks have yet to recover from reputational damage miscast on them from the last crisis, they simply cannot let this vicious cycle reoccur. Fortunately, the bankers who are in leadership with the Indiana Bankers Association are concerned and are determined to bring this issue to the attention of bankers nationwide. Watt and those who share his illogic must be challenged and reminded of the cause of the recent financial crisis. If legislators and regulators repeat the same mistakes, nothing will stop another crisis from happening. Of course, when the next financial crisis hits, Watt will be long out of office and, I fear, everyone will again blame banks – not the misguided government policy that started the problem.

For the banking community, an extreme loosening of mortgage standards is a “lose-lose” situation. If banks refuse to participate, they lose, because they will face regulatory pressure, media criticism and damaged consumer relationships. And if they do participate, a likely result is that we all lose, because of the disastrous chain of events that may follow.

I hope to read better news soon: That people have come to their senses, and that this decision has been reversed. We must do all we can to stop the first domino from falling.

-S. Joe DeHaven

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