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Why government wants you to take out loans you can’t afford

Special to SEGAZINE

By Robert Romano

On April 2, the Washington Post published an article entitled, “Obama administration pushes banks to make home loans to people with weaker credit.” The report cites a recent speech made Federal Reserve Board Governor Elizabeth Duke advocating that more home loans be made to people with fragile credit scores.

“The drop in purchase mortgage originations, although widespread, has been most pronounced among borrowers with low credit scores,” Duke noted. She suggested the drop in originations was leading to depressed household formation (i.e. the amount of new homebuyers entering the market), which was down 59 percent in 2006 to 2011 versus the five years prior. This, in turn, is slowing down the economic recovery.

The solution, says Duke, is to start giving them loans. “I think the ability of newly formed households, which are more likely to have lower incomes or weaker credit scores, to access the mortgage market will make a big difference in the shape of the recovery,” she declared.

Duke further predicted, “I expect the strongest impetus to recovery to come from pent-up demand for housing in the form of household formation.”

So, there you have it. In order to foster a faster economic “recovery,” you, I, and everyone else need to take out more loans on houses we cannot afford. Never mind that the financial crisis, the ensuing credit contraction and recession were all caused by banks making loans to people who could not afford to repay.

“To suggest that lowering credit standards is the solution to the financial crisis is to ignore the past 20 years of history,” Americans for Limited Government President Bill Wilson said, pointing to previous episodes of government intrusion into the housing market.

“The same thing happened after the 1991 recession when credit slowed down. By 1992, Congress had agreed to institute and expand the GSE ‘affordable’ housing goals, which required an increasing percent of government-backed mortgages to be of lower quality,” Wilson noted.

“By 2007, when the bubble popped, those goals had expanded from 30 percent of Fannie and Freddie’s portfolios to 55 percent,” Wilson added. Meaning, by the time it all came crashing down, the government was requiring that more than half of the mortgages purchased by Fannie Mae and Freddie Mac, government sponsored enterprises (GSEs), needed to be to individuals with lower incomes, which tend to have a higher risk of default.

But why would the government do that? Wilson answers, “Since the economy is addicted to credit expansion, in order to grow, the incentive is for lending standards to become progressively weaker over time.”

That is because whenever credit contracts or even slows down its expansion, as Americans for Limited Government has previously noted from data by the Bureau of Economic Analysis and the Federal Reserve, the economy tends to follow suit.

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