Obama administration to banks: Why aren't you making higher-risk loans?

On one level, it’s almost unbelievable that anyone would ask this less than five years after the housing-bubble crash and the near-wipeout of Western financial institutions.  On another, it’s almost inevitable, given the efforts by the governing class and the media to ignore the central failure in that bubble, which was incentivizing increasingly risky loans with government cash and coercion, which created a false-equity trajectory that nearly ruined us.  If that core cancer gets overlooked, it simply keeps coming back:

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.

In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Ah yes, the FHA, which has replaced Fannie Mae and Freddie Mac in that government-intervention role.  Fannie and Freddie can’t come out and play, because playing that role in the 1998-2008 bubble bankrupted them both, and taxpayers have had to repeatedly infuse them with bailout cash to keep them from destroying what’s left of the economy.  Without Fannie and Freddie’s intervention, the bubble never would have formed in the first place, a point offered by former Wells Fargo CEO Richard Kovacevich in January:

“If it wasn’t for Fannie and Freddie, [the mortgage crisis] would have been a small problem. Fannie and Freddie and other government agencies guaranteed 70 percent of those [bad] mortgages,” Kovacevich said in a “Squawk Box” interview. He argued that without government-sponsored guarantees, there would not have been any private money willing to buy the toxic loans that have been blamed for the crisis.

“There needs to be a decision that the government will not be in the mortgage business in the sense of a hybrid [like Fannie and Freddie],” Kovacevich said. He did say that if the government wants to be in the home loan business, it should do so through the Federal Housing Administration, which has worked well for a long time.

It used to work well, before the Obama administration turned into Little Fannie.  In November, FHA reported that its capitalization had turned negative — in other words, it had become insolvent.  The Washington Post reported then that its stated position actually underestimated the danger for the FHA.  The push for FHA to become Little Fannie has put it in the same exact position as the other, failed GSEs.  In fact, FHA will likely require a bailout of its own.

Former Fannie Mae exec Ed Pinto, who originally pointed out the failure at FHA, can’t believe the White House wants to race down the same path of collapse less than five years later:

“If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

This is what happens when one doesn’t learn the correct lessons from the past, even the recent past.

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