WASHINGTON, November 30, 2013 — If some government loan programs have been successful, most have caused more problems than they have solved. Recent history shows the problem is worsening.
Consider the financial crisis. Popular belief is that Wall Street’s greed was at the root of the 2008 financial crisis, but government intervention in the housing market coupled with a government-backed mortgage loan policy were at the heart of the crisis that lead to the deep recession and the anemic recovery.
In the 1990’s, sociologists convinced both Democrats and Republicans that many social problems like teenage pregnancies, high crime rates, high rates of high school dropouts and drug abuse are minimized in areas where people own homes rather than rent. Data showed that 62 percent to 64 percent of households owned homes while the remaining up to 38 percent rented. In response, the federal government set a target to increase home ownership to 70 percent of households.
This meant that 8 percent of households — about 10 million — should be converted from renters to owners. Why weren’t they owners already? They had no money for the down payments and they had insufficient income to make monthly mortgage payments. So the federal government instructed Fannie Mae and Freddie Mac, which own more than half of new mortgages, to purchase mortgages from originating banks that required no down payment and had adjustable rates. This allowed buyers to afford the monthly payments, at least in the beginning.
Problems came when the rates adjusted upward, the default rate increased dramatically, and the economy was dragged into recession. At the same time, the huge increase in housing demand from these 10 million households drove housing prices sky high.
Wall Street packaged and re-sold these Fannie and Freddie purchased loans to investors as mortgage-backed securities, even though they believed the risk was high. They did this not only because of their desire to earn fees, but also because they were encouraged to do so by the federal government.
By 2007, the home ownership rate had just about reached the goal of 70 percent. But when most of these new “sub-prime” loans defaulted, investors were left with about $2 trillion of worthless securities. The financial crisis resulted, but it started with the federal government’s loan program. The entire financial crisis and the resulting recession might have been avoided had government policies not promoted the creation of sub-prime mortgages.
Today the home ownership rate is falling and is now below 65 percent.
A similar situation is occurring in higher education. The annual cost of college for tuition, room, board and fees is rapidly rising. There are several reasons for this, but the main culprit is the government student loan program. In an effort to make sure that no student is denied college because of the inability to pay, the federal government has created loan programs that will cover the entire cost of college, no matter how high that cost is. Colleges are thus encouraged to raise tuition and fees at a rate that greatly exceeds inflation.
According to the Consumer Financial Protection Bureau, total student debt now exceeds $1 trillion. The average student graduates with about $27,000 in debt, with 10 percent of graduates having debt that exceeds $40,000. This means that students will pay an average of $320 per month for the first ten years after graduation. This places yet another burden on new graduates who are having a hard time finding a good job because of the continuing poor performance of the economy.
Student debt could be the next big financial crisis. When the mortgage crisis hit, the result was that housing prices were adjusted downward significantly with some markets seeing as much as a 50 percent decrease in price. If the student debt issue does cause a crisis, it is nearly impossible for colleges to adjust their prices downward, so what happens is really anybodies guess. What isn’t a guess is that taxpayers will eventually have to foot the bill.
The intentions of government are always good. Expand home ownership and access to college education — what could be better intended and more American than that? The roat to hell is paved with good intentions, and no good deed goes unpunished. Well-intended programs are marred by negative outcomes like the creation of junk sub-prime mortgages and the crushing burden of debt placed on millions of new college graduates every year.Government sponsored student loans for higher education will likely cause another crisis.
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