For excellent reasons, U.S. Sen. Bob Corker of Chattanooga is condemning a new proposal to involve the federal government more deeply in the housing market -- a housing market that federal manipulation helped to bring down in the first place.
The painful history of government-run mortgage giants Fannie Mae and Freddie Mac is as clear an indication as any that Washington needs to get out of -- not get more heavily engaged in -- the housing market.
That history includes federal government pressure on lenders to dole out home loans to borrowers whose income and credit history did not justify the loans. Such policies ignored reality, and many borrowers soon were unable to make their payments, causing a massive spike in foreclosures.
That devastated millions of families financially, and the 33 percent average drop in home prices from 2006 until today has destroyed $7 trillion in household wealth!
But the damage did not stop there. Because government-backed Fannie Mae and Freddie Mac assumed the risk for those bad loans, taxpayers -- most of whom never took out the shaky loans -- were on the hook for the losses. Well over $160 billion from taxpayers has been used to bail out Fannie Mae and Freddie Mac -- so far. Not long ago they requested billions more to cover their losses from just the third quarter of 2011.
But even as the bailouts flowed, the federal government seemed determined to throw good money after bad. With foreclosures rising to alarming levels, Washington tried more interventions to "solve" the troubles created by its earlier meddling.
In parts of 2009 and 2010, Congress offered home buyers tax credits of up to $8,000 in an effort to improve sales and rescue the housing market. The effort failed. Some people did buy houses who otherwise might not have done so. But the credit -- courtesy of other taxpayers -- was enjoyed by large numbers of people who were going to buy anyway. And once the costly subsidy ended, sales plunged again. 2011 was probably the worst year for new-home sales in U.S. history, The Associated Press noted recently.
To add insult to injury, the tax credits put our nation deeper in debt -- and more than half a billion dollars was fraudulently or erroneously paid out to people who didn't even qualify for the credits.
So Corker's deep skepticism toward yet more federal intrusion in the housing market is not only timely but right on target.
The object of his criticism is a proposal by William Dudley, president of the Federal Reserve Bank of New York, to let some homeowners slash the principal that they owe on loans guaranteed by -- you guessed it -- Fannie Mae and Freddie Mac!
Dudley wants many so-called "underwater borrowers" -- who owe more on their homes than the homes are worth -- to be able to reduce the principal on the loans, Bloomberg News reported. He also wants to create still more subsidies for home buyers, further distorting the market.
Corker was understandably disgusted by this plan to repeat failed policies.
"Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom," he recently told a group of Realtors in Nashville. "It is absolutely egregious that the Federal Reserve would insert itself in this manner and ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country."
Instead, Corker sensibly wants to reduce federal involvement in housing finance.
We hope he succeeds. He plainly has the evidence of recent history on his side.