The Washington Times has a scary editorial today, discussing the Obama administration's ongoing push towards subprime mortgage loans:

Signed into law in July, the Dodd-Frank Act pulled Fannie Mae andFreddie Mac lending institutions out of the subprime loan business. Those government-sponsored monstrosities were fingered as prime culprits in the financial collapse, so the Obama administration has enlisted the FHA to perform the same functions. Peter Wallison and Edward Pinto of the American Enterprise Institute have raised the alarm, writing, "As in the period leading up to the 2008 financial crisis, these loans will again contribute to a housing bubble, which will feed on government funding and grow to enormous size."


Participating lenders are caught between the Scylla of penalty for denying loans to marginal borrowers and the Charybdis of sanction for having too many defaults on their books. It will only get worse: The FHA has announced it intends to pump up its loan volume to $1.34 trillion by 2013 and make nearly half of its loans subprime by 2017. Thus, the stage is set for a second housing-market crash.

The FHA is a mortgage insurance provider protecting lenders against losses when homeowners default on their mortgage loans. This increases lenders willingness to bear risks, because they benefit when loans are successfully repaid while they are simultaneously insured against default. When lending standards are too low, excessive risk-taking occurs when lenders see only upsides to making more loans, even when the ability of subprime clients to repay their loans is questionable.

This is exactly what happened in the preceding housing boom and bust. The government encouraged increased homeownership among subprime borrowers by lowering credit requirements and slashing down payments for government sponsored enterprises that insured subprime loans against defaults. The economic reality of the lack of sufficient income and the higher default risk associated with subprime lenders was neglected in order to gain the favor of minority and other low-income borrowers, come election time. The result: the U.S. economy was dragged into a recession under the supposedly noble premise of encouraging broader homeownership among those who in a free market society would not have been able to afford it(read here about foreclosures). We don't want to repeat that cycle.

To make matters even worse, the Fed's recent decision to continue its trend of lax monetary policy by buying $600 billion in U.S. Treasury bonds is further putting us on course towards the next housing bubble, while at the same time increasing inflation. From Rich Karlgaard at Forbes:

In a misguided attempt to prop up house prices and prevent the next wave of bank failures, the Fed is destroying the value of the working poor's cash.

The 112th Congress ought to put the country back on a path to financial stability. Lax monetary policy, coupled with easy lending standards that encourage subprime loans, which are backed implicitly by a government bail-out, are a recipe for financial and economic disaster. We saw how these policies played out in the recent financial crisis. Let's not do this again.