“Another major impediment to reform is that many in Congress are passionate about prudent lending only when house prices go down. Prior to the housing-market collapse, Congress had few misgivings about relaxing lending standards to accommodate borrowing by those with poor credit records and low down payments…

…Then, for five post-crash years, the same members of Congress climbed on their high horses and screamed about the imprudent standards of greedy bankers. Now that there has been a modest rebound in house prices, banks are encouraged to resume making loans to less-qualified borrowers. Either the criteria for “prudent lending” are as variable as cyclical prices in the housing market or the default position of Congress is to prioritize social engineering over lending standards, as long as bankers are standing by to be piñatas when necessary.The fact that the CBO believes private lenders will be more prudent when private investors, not taxpayers, absorb all losses on loans is an indictment of Washington—the White House and Congress—as a catalyst for the housing-market meltdown. If Washington truly wanted prudent lending, it never would have inserted government guarantees into the marketplace.”, Jeff Adams, “Letters to the Editor: Wall Street Journal”

Letters

‘Prudent Lending’ May Need Bankers to Be Piñatas

Another major impediment to reform is that many in Congress are passionate about prudent lending only when house prices go down.

You recap a recent Congressional Budget Office report indicating that Fannie Mae and Freddie Mac could be replaced by private companies over the next 10 years and that “Life Without Fannie and Freddie” (Review & Outlook, Dec. 27) would not be so bad for the housing market. Mortgage rates for some borrowers would go up a little as Fan and Fred reduce taxpayer-backed guarantees. House prices might drop by a small percentage, but that also would make housing marginally more affordable for renters and first-time buyers.

One big benefit of mortgage-market privatization cited by the CBO is that it would incentivize “financial institutions to be prudent in their lending and securitizing because private investors, rather than taxpayers, would bear all losses.” As you note, however, mortgage-market reform faces an uphill battle because of “the housing lobby’s hooks into both political parties.” Another major impediment to reform is that many in Congress are passionate about prudent lending only when house prices go down. Prior to the housing-market collapse, Congress had few misgivings about relaxing lending standards to accommodate borrowing by those with poor credit records and low down payments. Then, for five post-crash years, the same members of Congress climbed on their high horses and screamed about the imprudent standards of greedy bankers. Now that there has been a modest rebound in house prices, banks are encouraged to resume making loans to less-qualified borrowers. Either the criteria for “prudent lending” are as variable as cyclical prices in the housing market or the default position of Congress is to prioritize social engineering over lending standards, as long as bankers are standing by to be piñatas when necessary.

The fact that the CBO believes private lenders will be more prudent when private investors, not taxpayers, absorb all losses on loans is an indictment of Washington—the White House and Congress—as a catalyst for the housing-market meltdown. If Washington truly wanted prudent lending, it never would have inserted government guarantees into the marketplace. As a general rule, it is not possible to owe $18 trillion and support prudent standards for any purpose.

Jeff Adams

Atlanta

Bravo to the Congressional Budget Office for its report on how to phase out Fannie and Freddie! And bravo to you for telling us about it. The free-market benefit alone would be worth the effort, not to mention the relief of risk to taxpayers.

But until the Supreme Court puts a fork in “disparate impact” doctrine and a new administration dismantles the racialist network of bureaucrats driving the current jihad against businesses that engage in the very rational gauging of risk based on the individual records of would be customers, private bankers will have little hope of avoiding extortionate demands by a rogue Justice Department under Democratic regimes of the future. Who would want to take that risk?

John W. Howard

San Diego

Posted on January 4, 2015, in Postings. Bookmark the permalink. Leave a comment.

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