Why Are We Promoting Policies That Got Us Into This Mess?

Politicians are trying all sorts of things to restart the housing market, including policies that created the mess we're in.

The FHA is insuring all sorts of questionable loans with low down payments and that require a ridiculous proportion of the buyer's monthly income. Getting people into mortgages that they can not afford is what got us into this mortgage debacle in the first place.

The United States has long subsidized home ownership. The subsidies got ridiculous, tipping us into this mess.

Charles Lane writes:

The predatory lenders are back! Oh, wait: The U.S. government is supporting this transaction. The Federal Housing Administration made the loan possible by promising to pay it off if the teacher can't.

Now you know why many housing experts, including the FHA's own inspector general, are fretting that the agency may be headed for a taxpayer bailout. The only remaining major source of middle-class mortgage liquidity, the FHA has increased its insurance portfolio from $323 billion in 2006 to $695 billion today — with the inevitable inclusion of some apparent clunker loans like the one in the Times story. Its default rate is 7.8 percent, up from 5.6 percent a year ago. Its capital reserves are below the statutory minimum, which is 2 percent of its portfolio.

Actually, concern about an FHA collapse is slightly misplaced. To be sure, it might happen. The agency, which pays for losses out of the insurance premiums it collects, says it's tightening controls and can withstand anything short of a severe double-dip recession. Let's hope it is right — and that the business cycle cooperates. The real point, though, is what FHA's predicament suggests about the broader exhaustion of U.S. housing policy.