Why is he getting another chance?

by Russ Roberts on October 12, 2010

in Curious Task, Housing

The headline from the article in today’s Washington Post:

After mortgage meltdown, Barney Frank gets another chance to remake housing finance

The obvious question is why. Why should the man who helped destroy the housing market help to remake it? Why should anyone try to remake it? To quote Hayek, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Most of the article goes about explaining why Frank needs to learn from Hayek:

The country’s stock of low-income homes had remained flat for more than a decade when Frank and his allies in the House spotted an opportunity in the early 1990s. They concluded that Fannie Mae and Freddie Mac, created by lawmakers to promote housing and based in Congress’s back yard, were not doing enough for the poor – even less, in fact, than some Wall Street banks.

Fannie and Freddie were in the business of buying and guaranteeing mortgage loans from private lenders, which in turn could take the money and make even more loans to prospective homebuyers or developers looking to build apartment buildings.

Democrats, led by one of Frank’s closest allies, Rep. Henry B. Gonzalez (D-Tex.), wanted to require the two companies to spend a specific percentage of their funds on affordable housing. Under the proposed legislation, the companies were to buy home loans made to lower- and middle-class people and loans going to fund development of affordable rental housing.

This represented a rich new vein of money.

And this:

By late 2003, the firms had taken on more than $4 trillion in debt, rivaling that of the entire federal government. Yet Frank, who had by then become the top Democrat on the influential House Financial Services Committee, still wasn’t focused on the risks. He had his sights set on what else they could do to promote for affordable housing, particularly low-cost rental housing.

At a hearing called by Republicans, who controlled the committee, Frank made clear that he was reluctant to tighten oversight because it could limit the ability of Fannie and Freddie to help people get a roof over their heads.

The companies, he urged colleagues, “are two of the very important tools that we have” and had to do what “the market in and of itself will not do. “They were “not endangering the fiscal health of this country,” he continued.

But he recognized that it was a gamble.

“I want to roll the dice a little bit more in this situation towards subsidized housing,” Frank said.

And this:

Fannie and Freddie proceeded to load up on securities backed by risky mortgages, such as subprime loans and no-document loans. The firms asserted that they were aggressively fulfilling their affordable housing mission, and some risky mortgages were indeed going to borrowers who couldn’t otherwise afford a home.

But many of the loans were going to people who could have afforded traditional mortgages, and the companies were bulking up on the risky loans purely in pursuit of even larger profits.

When the housing market crashed, the unprecedented surge in mortgage defaults blew a hole in the firms’ finances.

My favorite part of the story, though, is this graph and Frank’s explanation, that the Post ran with the graph:

In Barney Frank’s 30 years in Congress, he has advocated for spending on housing for the very poor. But the number of poor needing help obtaining affordable housing has only gone up. He says it would have been worse without him.

Yes. It could have been worse. But I’m drawn to the possibility that Frank actually made the problem ¬†worse by driving up the price of housing via all the government programs and subsidies he championed.

Frank is not the only cause of the problem, just one of the least repentant. You can add President Bush and Clinton and other enablers. But no one should believe that Barney Frank or Barney Frank aided by colleagues and their staff in the Congress can remake the mortgage finance market without a lot of unintended (and destructive) consequences.

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