Obama to target CRA, social engineering in housing/lending market

Could it be possible that Barack Obama may dare to go where George Bush and some Republicans wouldn’t in limiting government interventions?  For most of a decade, the US government manipulated lending markets and pressured banks to get mortgages for lower-income families under both the Clinton and Bush administrations, and with Democratic and Republican Congresses.  Now, the Washington Post reports that the Obama administration wants to end the social engineering that created the housing bubble and subsequent collapse as its next target for reform:

Responding to the collapse in home prices and the huge number of foreclosures, the Obama administration is pursuing an overhaul of government policy that could diverge from the emphasis on homeownership embraced by former administrations.

“In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” said Raphael Bostic, a senior official in the Department of Housing and Urban Development. “You’re not going to hear us say that.”

Bostic, who has published leading scholarship on homeownership, added that owning a home has a lot of value, but “what we’ve seen in the last four years is that there really is an underside to homeownership.”

The administration’s narrower view of who should own a home and what the government should to do to support them could have major implications for the economy as well as borrowers. Broadly, the administration may wind down some government backing for home loans, but increase the focus on affordable rentals.

The shift in approach could mean higher down payments and interest rates on loans, more barriers to lower-income people buying houses, and fewer homeowners overall, government officials said. But it could also pave the way for a more stable housing market, one with fewer taxpayer dollars on the line and less of a risk that homeowners will not be able to pay their mortgages. And it could spell changes throughout the financial markets, as investors choose new places to put their money if the government withdraws some incentives for investing in the U.S. mortgage market.

There is an interesting axiom in American politics: Only Nixon could go to China.  It explains how it takes a leader willing to act against political interests to take a step that creates large benefits for the nation.  In this case, it would appear that only Obama could take on Barney Frank, Chris Dodd, and the redistributionist caucus of his party to put an end to the real cause of the financial collapse.

Will the White House go through with it?  It’s one thing to leak this to the Post.  It’s another thing entirely to follow through with the necessary rulemaking and legislative effort needed to succeed in it.  The Post notes that La Raza, one of the groups that gains material benefit from participating in government programs for these home-ownership efforts, is already unhappy with the idea.  At a time when Obama’s approval ratings are sinking towards Bush levels, this could alienate his ideological base and leave him utterly abandoned in 2012.

Let’s hope Obama commits to this reform.  If he does, it will easily be the most significant economic reform of his tenure, and would represent a significant retreat from the government interventions and social engineering that have ruined the American economy, and could set the stage for even further constraints on federal power.  That would show actual leadership and strength.

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