Mr. Shepherd’s solution to our housing problem (“A Fix for the Housing Problem,” Vol. IX, Issue I) is based on an invented financial arrangement, which I doubt could survive the scrutiny of any financial analyst. Before any problem can be solved we must first determine its source.
Prior to 1970, if one wanted a mortgage, they would have to put 20 percent down, and their monthly payment could not exceed 28 percent of their monthly take-home pay. In addition to those two requirements, banks would not mortgage homes in certain neighborhoods, a practice known as redlining. Under these conditions, foreclosures were extremely rare.
Under the Carter administration, the party in power saw a chance to garner votes. They passed the Community Reinvestment Act, which outlawed redlining and provided the pressure mechanism which was used to force the banks to lower their standards and provide mortgages to people who most likely couldn’t afford them. Guess who all those happy new homeowners voted for?
Next, the law of unintended consequences came into play when the banks tried to sell those mortgages. The usual buyers did not want them which caused the banks to turn to the government for help. The politicians, of course, are always ready to cover their tracks, so the invented an entity that would buy the junk. They called it Freddie Mac and stuffed it with taxpayer cash. Fannie Mae came along later, and the rest is history.