Interesting read. Very damning of government intervention in the housing crisis which forced the government to spend $700 billion of taxpayer dollars to bail insitituions out. This is horrible, given that it would seem that the government created, and fixed, most of the issue:

From the Wall Street Journal:

http://online.wsj.com/article/SB10001424052748704107204574475110152189446.html

Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government's role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.

The FHA's function is to guarantee mortgages of low-income borrowers (the mortgages are then sold through securitizations by Ginnie Mae) and thus to take reasonable credit risks in the interests of making mortgage credit available to the nation's low-income citizens. Accordingly, the larger than normal losses that will result from the 2007 and 2008 cohort could be justified by Barney Frank, the chairman of the House Financial Services Committee, as "policy"—an effort to ease the housing downturn through the application of government credit. The FHA, he argued, is buying more weak mortgages in order to help put a floor under the housing market. Eventually, the taxpayers will have to judge whether this policy was justified.

Far more interesting than the FHA's prospective losses on its 2007 and 2008 book are the agency's losses on its 2005 and 2006 guarantees, when the housing bubble was inflating at its fastest rate and there was no need for government support. FHA-backed loans during those years also have delinquency rates between 20% and 30%. These adverse results—not the result of a "policy" effort to shore up markets—pose a significant challenge to those who are trying to absolve the U.S. government of responsibility for the financial crisis.

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David Klein

When the crisis first arose, the left's explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of "predatory" lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages. This idea underlies the Obama administration's proposal for a Consumer Financial Protection Agency. The link to the financial crisis—recently emphasized by President Obama—is that these mortgages would not have been made if regulators had been watching those fly-by-night mortgage brokers.

There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?

The answer, of course, is that it was government policy for these poor quality loans to be made. Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market. Now the motives of the GSEs fall into place. Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.

It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.

The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.

Mr. Walllison is a senior fellow at the American Enterprise Institute.

I agree with the facts but not the sentiment. Government-backed, subprime mortgages were made where they shouldn't have been, but did the right-wing Bush administration attempt to stop it happening? Or try and reduce the government's footprint on that market, as true financial right-wingers would have done on principle?

The private sector had every right to make those mortgages, but it should have been transparent to buyers how much risk was involved, and more importantly when it all went wrong those institutions should have been left to go bankrupt. How can a free market learn from its mistakes if the banks get rewarded by the government (via bailouts) for bad decisions?

Those calling for more regulation of banks' lending should consider that we may have been better off with less government intervention than there was. The only measure that would have helped were stronger rules on financial transparency and disclosure.

So poor people have very little money. Who knew?

*Sigh*

Bad times.

because the free market big bussiness finances the government so when something goes wrong, in order to stay in bussiness, they say to the government "hey, you want to have money for your election campaign right? okay then, bail us out first and we will pay you back by helping you win the election", not to mention that people have there money/savings in those banks, forcing the government to at least have to protect those people.

also, the example you gave is in the US only, in the UK there was no such program, so regulation wasnt a cause here, rather here, the big bussiness lent like that anyway thus lack of regulation against it was the problem both here and in the US, the problem wasnt with regulation, but with the type of regulation, had the government regulated AGAINST that type of lending it would have been different in all likelyhood, I doubt anyone is daft enough to say the government should regulate for that sort of lending.

Business, and individuals with business interests, funding government is the #1 problem with both the US and UK at the moment. It should be outlawed, parties can get small cumulative donations from the voting public. Free market != business lobbying controls government policy.

FSA rules already provide for the government compensating savers up to £50k when a bank goes bankrupt. That should cover individuals; and businesses/governments are much more free to choose safer/riskier investments so shouldn't get such compensation. In other words, had a bank gone down due to its own mistakes then the most vulnerable savers wouldn't have lost their money. Yet it doesn't reward banks for their mistakes like bailouts do.

The UK still did bailouts, that was the worse of the two things I said. I believe recession is a good thing, it would have meant banks would have taken fewer risks. As it is, because they did not suffer from the poor investment choices, they are beginning to make those mistakes again - did you see that UK banks are now offering >100% mortgages, and mortgages that are over 5x salary, again?

Regulating against that kind of lending wasn't necessary; a recession should have taught banks not to do that. If it had been in place then it would have reduced global liqudity (cheap money) that allowed businesses to finance expansion and increase the economy.

Why are house prices so high? The bricks, land and labour are all quite plentiful and ought to be cheap.

If anything, the government should have acted against the high costs, rather than allowing more people to pay them. Social housing [i.e. government owned, rented accomodation] and government commissioned housing projects [i.e. built publicly, sold to private owners at cost rather than at market rates] would be two solutions.

Haha actually in America it is against the law for big business to give out such large sums of money to finance campaigns and interests for movements.  Of course they either find a loophole or simply break the law and no one questions it.  One of the problems in the American system is you need the big money to win a campaign but you pay a moral price for doing it. 

Funny though there is a lot of people that argue for the merits of capitalism and these big businesses guiding it but we are still inherently seeing them as corrupt.  Just with businesses we the taxpayers really have no control over (even if you do think your boycotts work).  Americans just have a fundamental problem understanding that what they want isn't what they think they want.  Capitalism might just be that.

So with this article, to go back on topic, I don't think it is any surprise that government has some corrupt parts or "silly" ideas that have helped cause this crisis and of course not surprising that big business was the ones funding it. 

Yes. The problem was that the poor people still got loans for nice big houses thanks to subsidies.

Not a smart thing to do. It did 2 things:

1. Artificially boosted housing prices by drying up the inventory due to people that shouldn't own houses, buying.
2. With price-boosted houses, it inflated the true value of houses, making it difficult for legitimate purchasers to buy houses and/or sell their houses once the market busted for a price that would cover their mortgage.

Because of the ineptitude of government's desire to give the poor unfair advantages, they have hurt many average Americans.

@Soleron -

I agree Bush and the administration did not make the right decisions. He should have recinded the Clinton-era modifications to the CRA which helped this situation become worse. This issue was Clinton and Bushes fault. I can only hope to God that somehow, somewhere, small-government politicians run in whatever party and gets votes. I recently blasted a politician's facebook (a Republican running for Secretary of State) because of passing more attempts to get more federal funding.

The lesson that should be learned from the massive failures of housing projects and government intervention in the credit markets to create affordable housing is that heavy handed government involvement in the economy creates worse problems than the ones it is attempting to solve. The counter reaction to a government action seems to be greater in scale and more damaging than the original government action in every case that I can think of; after all, ask yourself whether the low interest rates and easy to access credit really made housing more affordable being that it created a housing bubble that doubled historical prices of homes. The unfortunate problem is that most people are unwilling to learn that lesson, and in a couple of years we will be dealing with another wave of problems caused by government intervention in another area.