Forget about banks being Too Big to Fail — or, per Attorney General Eric Holder, Too Big to Jail. As the Obama administration tries to restart some of the same bad decision-making that created the last housing crisis, any banks coerced into re-inflating a housing bubble may be able to say the system was Too Rigged for Them to Fail/Be Jailed. From the Washington Post:
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.
Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.
Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps. (emphasis added)
So, when the next housing crash occurs, and Americans wonder why people at the heart of it aren’t being prosecuted, try to remember it’s because they were effectively granted immunity.
Now, I have no doubt whatsoever that young people and Americans with bad credit ratings are struggling to buy houses right now. For the former, could the fact that many of them bear mountains of college-loan debt have anything to do with their difficulty in getting banks to lend them even more money? For the latter, isn’t a bad credit rating supposed to be reason you don’t get a mortgage?
I also have no doubt whatsoever that people who are in these situations face a longer, more difficult path to prosperity than those who are not. Nor do I doubt that some — though surely not all of them — find themselves in these situations through little or no fault of their own. I’m thinking in particular of people who lost their jobs in the recession, were unable for months or years to find another one due to the tepid recovery we’ve experienced, and had to rely on — and eventually ruin — their credit to stay afloat in the meantime. Others, of course, ended up in dire straits because of decisions they made. Either way, these are problems with broad economic consequences that shouldn’t be ignored or taken lightly.
That said, jeopardizing the housing market and home values for all Americans is an especially dangerous way to address these problems. It’s treating a symptom of the underlying problem. And it’s all the more egregious because it repeats so many of the mistakes we’ve been lamenting — and paying for — the past five or six years. Not to mention that existing FHA-backed loans are already believed to be under-capitalized and run the risk of a taxpayer bailout that could rival those of GM and Chrysler.
– By Kyle Wingfield