In most things that it does with business, government takes what it wants and then gives it away to someone else, usually he who was responsible for electing the government. Not surprisingly, this is precisely what happened in the run up to the current crises in the less-than-creditworthy mortgage market.
The subprime mortgage, as it is known now, did not exist until the mid-1990s, when the Clinton Administration urged lenders to make more money available to low-income people so they could share in the great American dream of home ownership. The Federal Housing Administration, which guarantees mortgages for lower-income home buyers, dropped its requirement for a down payment (it was put back in 2004). The private market sprang forth with no-down-payment, no documentation "lair" loans. The Bush Administration happily continued the policy. Congress was pleased.
And a boom, or shall we say bubble, ensued. But, as with any bubble, there was an excess of excess. Interest rates were low, perhaps artificially low, and private investors snapped up packages of risky mortgage paper that paid high rates with aplomb. People who never should have received mortgages got them anyway. Then some started defaulting. The housing market swooned. The subprime mortgage industry sank.
Now, the Bush Administration is silent. Congress is buzzing with activity, with Rep. Barney Frank's Financial Services Committee and Senator Chris Dodd's Banking, Housing and Urban Affairs Committee holding hearings and threatening legislation.
Legislation now, according to one expert who watches the mortgage market carefully, would be a disaster. "There are many different pieces to this issue," said Bert Ely, principal of Ely & Associates, an Alexandria, Va.-based consultancy that advises banks and other lenders. "You get into GSE reform, you get into predatory lending, you get into FHA reform, you open a legislative can of worms. Everybody is very nervous about Congress acting quickly, because they will screw it up."
Actually, Ely, who predicted the S&L crises back in the 1980s and frequently testifies before that very same Congress, isn't quite so down on the government. "I think there's a lot of blame to go around," he said. "I think a lot of the problem ultimately comes back to the securitization process. The link was broken between the originator and the person who bears the risk of holding the mortgage."