A Stitch in Haste

I've blogged repeatedly that the so-called "housing bubble" debate really has little to do with housing and everything to do with mortgages, specifically their affordability among sub-prime borrowers and speculators servicing multiple mortgages on multiple properties.

Well, at least somewhat related to the issue of mortgage affordability is this ominous story of yet another unjustifiable government intervention in a well-functioning private market (WSJ -$):

The Department of Housing and Urban Development plans to revitalize the Federal Housing [Administration], a mortgage-insurance program that puts relatively low-interest loans within reach of low- and middle-income homebuyers who have little or poor credit -- and provides an alternative to the commercial subprime lenders, which take on risky borrowers but charge them interest well above the prime rate.
...
Among the forces prompting its comeback plans are community activists, who say too many consumers are getting a raw deal from subprime lenders, and some members of Congress, who worry about the agency's declining market share [SIC!].

The FHA is losing share to hordes of aggressive subprime mortgage lenders, which offer a range of flexible products, including no-money-down mortgages and interest-only payments. They also have high rates and hefty closing costs. But because the subprime lenders offer fast approvals, instant home appraisals, less paperwork and fewer hassles, they are attracting many consumers who could easily qualify for a lower-cost FHA mortgage.

Some hasty stitches:

--It seems to me that an activity where one talks of the government's "market share" does not qualify as a "public good." The only legitimate "government market shares" are 100% or 0%, nothing in between.

--Stated differently, a government bureaucracy sees a legal industry (i.e., subprime mortgage lending), one that provides a vital economic function, one that is fiercely competitive (i.e., not a powerful monopoly, but rather "hordes" of smaller companies) and still decides that, gee, they "charge too much," despite the fact that consumers are tripping over themselves to do business with these companies. If the borrowers seem content with the rates and fees they're being charged, then why should the government care one way or the other? (Hint: See the reference to "community activists" in the piece.)

--People who pay higher interest rates do so for a reason: because they are higher credit risks. Whether through moral failure, financial incompetence or just plain bad luck, those who have poor credit are, for lack of a better term, deadbeats. And deadbeats are expensive. This is not "discrimination" in the invidious civil rights sense; it is assigning respective costs according to how respective customers impose those costs. This is somehow bad?

--Similar to the FEMA hurricane nonsense, we see with FHA a "private benefits, public costs" model of backdoor-socialism. The borrowers benefit, the banks benefit (do they really need government subsidies?), the politicians and bureaucrats benefit. Until a FHA-insured borrower defaults. Then everybody, especially those who were responsible enough not to need FHA in the first place, starts paying. That's not providing a public good, that's not even Rawlsian redistribution theory. That's brazen pandering -- the Politics of the Warm Fuzzy Feeling. (NOTE: The FHA claims that it is entirely self-funding and costs taxpayers nothing. But that is patently false -- if there is a "mortgage bubble" crisis and FHA goes under, of course there will be a taxpayer bailout, just as there will inevitably be a taxpayer bailout of the "harmless to taxpayers" Pension Benefit Guaranty Corporation.)

If there is a mortgage bubble and it bursts, then it will be the subprime mortgage lenders that will be first and worst hit. And they'll deserve it, since it will have been their policies that brought about their own demise. So be it. But why should the government catalyze that chain of events by underwriting even more bad credit risks and injecting an unhealthy dose of moral hazard into what, so far, is still a functioning industry?

Private parties, private risks, private benefits, private decisions.

Exactly how it should be. The government should leave well enough alone and abolish the FHA outright.