In 2008 the world economies encountered the worst financial crisis since the Great Depression. In a supposedly effort to repair the economies, governments transformed them through huge stimulus spending, low interest rate policies and bailouts. These interventions have contributed to the ongoing weakness in economic recovery since.
The main cause of the 2008 meltdown was the subprime mortgage lending practices that led to loans being hustled to millions who could not afford to pay them back. When the housing market slowed leading to depreciated housing values, homeowners could no longer refinance, further eroding housing demand that led to many homeowners owing more on the homes than they were worth. Many walked away from the loans leading to the meltdown, putting at risk nearly most of the world’s largest financial institutions.
Given 2008 is only eight years ago, logic would dictate that we learned a lesson about imprudent financial behavior, at least for a generation. However, once governments intervene, logic and economic reality take a backseat. In fact, we are currently traveling down the same road, again fermented by governmental policies.
News.investors.com reported that the US government is again cajoling financial institutions to give mortgages to those that cannot afford them. Specifically, the Consumer Financial Protection Bureau warned (threatened) lenders that they would be investigated for discriminatory practices if they do not count government assistance payments to lower income individuals as real income. In announcing this policy, Bureau Director Richard Cordray used the following incredible logic:
“The bureau has become aware of one or more institutions excluding or refusing to consider income derived from the Section 8 HCV Homeownership Program during mortgage loan application and underwriting processes.” …. “Consumers should not be put at a disadvantage just because they receive public assistance.”
So, using the government’s logic, individuals who need governmental payment assistance are worthy of obtaining mortgages. Continue reading