Mel Watts, the recently confirmed director of the Federal Housing Finance Administration, last week announced new policies for Fannie Mae and Freddie Mac. He wants to continue to allow these government backed financiers to back mortgages even as large as $625,500 and to “encourage credit access.” This policy reverses the efforts by his predecessor at the FHFA to shrink the footprint of Freddie Mac and Fannie Mae by tightening credit standards and reducing the amount of mortgages they could guarantee.
As I have noted before, the Clinton Administration set the stage for the mortgage crisis by encouraging government backed mortgages with lax standards into order to engage in redistribution at the potential and, as it turned out, actual expense to taxpayers. Watts is going down the same road. Sadly, any administration is likely to succumb to the temptation so long as Fannie Mae and Freddie Mac are in existence.
Watts’ polices reflect four dangers of government involvement in the mortgage market.