This Won't End Well

Steve Chapman via Ilya Somin:

Watching Washington policymakers in action, I sometimes think they make mistakes because of unrealistic goals, flawed thinking, blind obedience to party, or dubious information. And sometimes I think they make mistakes because they are"”how to put this?"”clinically insane.

There is no other way to explain what is going on at the Federal Housing Administration, which provides federal guarantees for home mortgages. Given the collapse in real estate prices, the weak economy, and the epidemic of foreclosures, banks are acting with more caution than before. They now commonly require home buyers to make down payments of 20 percent to qualify for a loan. But the FHA often requires only 3.5 percent.

That's the equivalent of playing pool with a guy named Snake, and it's had two predictable effects. The first is that the agency is insuring about four times as many home loans as it did just three years ago. The other is that the number of FHA-approved borrowers who are not repaying their loans is climbing. Since last year, the default rate has jumped by 76 percent.

Another likely consequence looms: you and I eating the losses. A former executive of mortgage giant Fannie Mae told a congressional subcommittee that the FHA "appears destined for a taxpayer bailout in the next 24 to 36 months." Commissioner David Stevens had to assure the subcommittee that it would not need help"”well, unless there is a "catastrophic home price decline." But who says there won't be? It's not as though anyone at the FHA foresaw the housing bubble or the housing bust. Yet now it feels confident betting its $30 billion cash reserve that prices won't fall.

Somin comments:

Unlike Chapman, I don't think the policymakers are "insane." They are responding rationally to perverse incentives. If another mortgage crisis occurs, they hope to shift the blame to a supposedly insufficiently regulated private sector "“ which is more or less how many of them managed to escape blame the last time around. The public did punish the Republican Party in the 2008 presidential election. But most of the members of Congress and federal bureaucrats who supported the GSEs got off scott-free. Moreover, the full negative effects of risky government-backed lending may not become evident for years to come "“ perhaps at a time when some other administration and Congress will be in office. In the meantime, the administration, the FHA, and key members of Congress can reap the political benefits of getting support from grateful borrowers, real estate developers, and other interest groups that benefit from easy credit.


  1. Fred from Canuckistan . . .:

    Sane or insane, the Obama Administration is asleep at the switch.

    Just another bailout. Wonder which will come first, this second round of Freddie & Fannie or GM+Chrysler, Pt. Deux.

  2. Dr. T:

    "Unlike Chapman, I don’t think the policymakers are “insane.” They are responding rationally to perverse incentives."

    What are these perverse incentives for policymakers? Do they get higher salaries or bonuses or promotions for pissing away more money? No. If they are politicians, do they get more votes for such foolish behavior? No. If they are bureaucratic administrators, do they get a bigger staff and a bigger budget? Yes. Is this status increase a big enough benefit to overcome common sense? Yes, but only if you are a career bureaucrat.

    That's my take on this (and other) idiotic expansions: the only beneficiaries are career bureaucrats who want larger staffs and bigger budgets. No other policymakers gain much, including the politicians who support the expansions.

  3. ColoComment:

    I respectfully suggest that campaign contributions (which lead to votes, which lead to reelection and a lifetime career in congress), not salaries, bonuses or promotions, may be the operative "perverse" incentives here. I don't recall the figures, but I believe that the various GSEs, among other very special financial-oriented interest groups, contributed lots and lots of campaign bucks to those under whose policies they are/were governed. For anyone else it would be an apparent conflict of interest and an ensuing ethics investigation that really investigated as opposed to being a stalling tactic (see, Rangel, C.), but of course that somehow doesn't matter when it's the U.S. congress.

  4. James A. Donald:

    If there is any way wherein the government can give money away that the cost does not become apparent until after the next election, a rational politician will use it to give money away.

  5. tomw:

    The young lawyer that asked Bawnee Fwank if he bore any responsibility for the fiscal meltdown has decided to run for the seat in Congress held by Jan Schakowsky(sp) in Illinois. Per FNC.
    Wish him well. Rep Jan is a communist. Or socialist.

    Most citizens are not aware of the bill festering its way through congress requiring more loan jiggering.


  6. Mesa Econoguy:

    On Friday, CNBC interviewed one of the FHA talking heads (don't think it was commissioner David Stevens, sorry, couldn't find online), who was off the charts. He is in complete denial of the dangerous current state of his agency’s affairs. He may very well be clinically insane. I'm entirely serious.

    There are very explicit laws prohibiting false statements and material misrepresentations in the securities industry. He stepped way over that very bright line, though he will likely not face punishment.

    This guy is out there on the taxpayer dime, running a government agency, making blatantly obvious false statements that would get him arrested in just about any other context. It’s time for a few GSE-employees and their Congressional protectors (including Mr. Frank) to go to jail, and for this interview to be played over and over and over again publicly. It is nothing short of astonishing that someone as pitifully unqualified and misinformed as this was able to go on national television and flatly lie.


    The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.

    Barney Frank, Predatory Lender(Peter Wallison, WSJ, 10/16/09)