Loosening lending standards, which caused the crisis, will not solve it

April 4, 2013, Fairfax, VA—Americans for Limited Government President Bill Wilson today issued the following statement blasting a push by the Obama Administration and the Federal Reserve to once again loosen mortgage lending standards to increase the pool of eligible homebuyers:

“To suggest that lowering credit standards is the solution to the financial crisis is to ignore the past 20 years of history. The fact is, borrowers can already get loans from Fannie and Freddie for as little as 3 percent down, and from the Federal Housing Administration for as low as 3.5 percent down. Prices have not been this low since 2003. And interest rates have never been this low.

“The problem in the housing market is not a lack of lending capacity, which is virtually limitless as banks are sitting on $1.6 trillion of excess reserves. It’s that even with it as easy as it is to get a loan, demand is still very low in the weak economy, and therefore it’s not easy enough for the central planners, so the push becomes to lower credit standards.

“The same thing happened after the 1991 recession when credit slowed down. By 1992, Congress had agreed to institute and expand the GSE ‘affordable’ housing goals, which required an increasing percent of government-backed mortgages to be of lower quality, which contributed substantially to the housing bubble. Since the economy is addicted to credit expansion, in order to grow, the incentive is for lending standards to become progressively weaker over time. By 2007, when the bubble popped, those goals had expanded from 30 percent of Fannie and Freddie’s portfolios to 55 percent.

“This is what happens every time the government wants to facilitate credit expansion to bolster asset prices. After the stock of available borrowers based on current credit standards is exhausted, the only recourse left to policy makers is to weaken credit standards. When this leads to asset bubbles and credit collapses, as it already has, then the American people are told that the banks that made the loans must be made whole through bailouts whether from Congress or the Federal Reserve. We’ve seen this movie before. It is a fraud and it will only lead to a repeat of the 2008 meltdown.”

Interview Availability: Please contact Adam Bitely at (703) 383-0880 ext. 126 or at media@algnews.org to arrange an interview with ALG President Bill Wilson.