Tuesday, February 15, 2011

Government Backed Home Loans and other 'Great' Investments

The Obama Administration takes a hard right turn?

The President seems to be channeling Adam Smith and Milton Friedman.  Case in point, the White House recently unveiled its plans for a radical shift in the future role it proposes the federal government should play in financing home ownership.  For years, the government has actively encouraged home ownership by backstopping lenders who loan money to home buyers.  Fannie Mae and Freddie Mac are among a group of quasi government agencies that insure lenders against losses should borrowers default on their mortgages.  The White House proposes that the government’s participation in the mortgage market be significantly scaled back.  If these plans are enacted, prospective homeowners who are on the threshold of credit worthiness today will likely not qualify for mortgages in a future.

The debate on this topic was well underway prior to the White House announcement.  Some argue that the government should step in and assist even if it means backstopping higher credit risk borrowers.  Besides, if the government steps in and creates more housing demand, home builders will be busier and will hire more construction workers, appliance and furniture manufacturers will have extra orders because all those new homes will need something to fill up the new empty space, and everybody wins.  One problem.  At some point, too many questionable loans turn into too many defaults and the backstop (that’s you and me) has to step in to cover the losses. 

An overheated housing market fueled by too much debt was at the root of the Great Recession of 2008 - 2010.  The government wasn’t the only one throwing gas on the fire, but now that everything has crashed, it’s pretty clear we don’t need more debt and more shaky borrowers.    

While the original intentions behind all this were probably honorable (home ownership for more Americans) this is another example of the government over-stepping its bounds and doing more harm than good.  The Unrepentant Capitalist subscribes to the old rule that says, if it’s a worthwhile venture, someone in the private sector will step into the fray and make a business out of it.  Our government has a history of stepping into lousy ventures, and trying to make a business out of them.  And the best part—you and I are the investors.  In addition to insuring shaky borrowers, we’ve also investors in a flood insurance program for beach homes, and a $200 million airport in Pennsylvania that handles 20 passengers a day, to name just a few. 

And I thought investing in that alligator petting zoo was a bad idea.

"Billy, let your little sister have a turn."

Good article on government flood insurance at: http://abcnews.go.com/Business/Insurance/story?id=94181)

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