Stop Picking at the Housing Carcass
The housing crisis has defied both expectations and easy solutions, making a mockery of optimistic forecasts for years now. Yet the latest news on the housing front shows how little attention that the federal government and big banks are paying to the real problem behind the housing crisis: depressed home prices that have paralyzed homeowners and lenders alike.
An unnecessary distraction
Last week, the Federal Housing Finance Agency sued 17 banks, alleging that they sold almost $200 billion in high-risk mortgage loans to Fannie Mae and Freddie Mac without full disclosure. With $57.4 billion in bonds at issue, Bank of America (NYS: BAC) faces the biggest potential liability, while JPMorgan Chase (NYS: JPM) has $33 billion in loans under review.
There's no denying that banks deserve some of the blame for bad loans. Controversies like the robo-signing scandal and other improper documentation for mortgages highlight just how messed up bank procedures were during the housing boom.
But for the FHFA -- and by extension, the federal government in general -- to lay all the blame for Fannie's and Freddie's excesses on big banks is both disingenuous and shortsighted. In particular, it fails to recognize just how much the government agencies profited from the housing boom -- at least until the house of cards came blowing down.
The big moneymaker
As a team of Fool writers noted just after Fannie and Freddie collapsed, blame for the mortgage meltdown goes well beyond the immediate lenders. The mere existence of the government agencies served the overwhelming public policy goal of encouraging homeownership beyond what a free-market economy would have allowed. It made the mortgage-loan market a political football, where legislators could subsidize loans to stimulate growth or pull back funds to restrain growth. And with executives at the agencies given the task of maximizing profits as if they were normal private corporations, the boom left more than enough money for everyone to reap big rewards.
Now, of course, that money has dried up. Yet those who argue that the government should hold banks accountable for their transgressions must realize that taking money with one hand while giving it back with the other makes no sense at all.
Do we want another banking crisis?
At least most of the U.S. banks included in the lawsuit have started making profits again. But what really adds insult to injury is suing Deutsche Bank (NYS: DB) , Credit Suisse (NYS: CS) , and Royal Bank of Scotland's (NYS: RBS) RBS Securities unit. After all, these institutions are much closer to the current turmoil in Europe, where the entire banking system is going through its own repeat performance of the 2008 financial crisis. Sending blame overseas for our mortgage mess takes real guts, given the huge bite it took out of the global economy -- and even if foreign banks did benefit from the housing boom, suing them now as they're getting attacked on several fronts seems like it's almost encouraging a systemic failure on a global scale.
The most unfortunate part of the lawsuit, however, is how it shows that the government is more concerned with some misguided search for vengeance rather than actually trying to solve the problem going forward. In particular, it takes attention away from a possible proposal to allow homeowners with Fannie- and Freddie-backed mortgages to refinance them at lower interest rates. Certainly, shareholders in mortgage REITsAnnaly Capital (NYS: NLY) and American Capital Agency (NAS: AGNC) are taking that trial balloon seriously because of the huge impact it could have on their business models. But a broader debate has to take a back seat to attacks on the same banks that millions of homeowners are counting on to extend them credit in the hopes of jump-starting a true recovery.
Get back on track
The mortgage crisis was an unconscionable lapse of judgment on behalf of the banking industry, regulators, lawmakers, and a host of other responsible parties. But the time for playing the blame game is past. We'd all be better served to set suits aside and get on with the business of getting millions of suffering homeowners back above water. Only once that basic problem gets solved can we truly hope to put the mortgage meltdown behind us once and for all.
To make the most of your home, check out the helpful tips in the Fool's Home Center. From buying or refinancing to insurance and maintenance, we've got you covered.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitterhere.
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