Housing policy could use some of Dr. Gruber’s candor

1. Peter J. Wallison

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It is wryly amusing to see and hear all the verbal tennis about Dr. Jonathan Gruber and dishonesty in the framing of Obamacare. In reality, the government spends a lot of its time trying to hide the real costs of what it is doing from the people who will ultimately pay them. This is particularly true in housing policy. Since 1992, when the affordable housing goals for Fannie Mae and Freddie Mac were adopted by Congress, the true costs of lending to subprime borrowers were cross-subsidized by the profits Fannie and Freddie made on loans to prime borrowers. Prime borrowers paid for those additional costs, although they didn’t know it. They weren’t stupid, as Gruber suggests, only ill-informed. That’s what Congress wanted, and that’s what it got.



The same thing is true of the Community Reinvestment Act, which was amended in 1995 to impose an informal quota of low-income loans on insured banks and S&Ls. The idea only made sense if there was active discrimination by banks against African-Americans. Because banks want to make profitable loans, the idea that they discriminate against African-American or other borrowers is inherently faulty—as studies before and after 1995 have shown. But under the CRA, banks are required to make mortgage and other loans that they would not ordinarily make because these loans are too risky. So they make these loans as a cost of doing business and charge more to other borrowers who do not present these risks.
The so-called Johnson-Crapo Act, adopted by the Senate Banking Committee earlier this year, was loaded up with ways that risky mortgage lending would be paid for by prime borrowers. (see, Phil Gramm and Peter Wallison, “Worse than Fannie and Freddie,” WSJ April 17, 2014) That’s the way the realtors, community activists and other members of the Government Mortgage Complex like it. Overall, more mortgages are made, more houses sold and more profits end up in the pockets of the GMC or as slush funds for groups promoting such lending practices.
Perhaps the furor over Dr. Gruber’s candid remarks will make Congress and the administration—and, more important, the American people—sensitive to this issue.