Saturday, January 24, 2009

A Humble Reflection on the Irony of Social Engineering in the U.S. Stimulus Package

Okay, everyone. Put your hands out for the hand-outs.

Montgomery County has been awarded a little more than $2 million of the $400 billion Neighborhood Stabilization Program passed by Congress that will allow the county to purchase foreclosed homes for use as rentals for people who make less than 50 percent of the area median income — less than $50,000 for a family of four in Montgomery. The county housing department has applied for an additional $7 million from the state's share of the federal money.

And here's the irony. The credit crunch started with the mortgage crisis. The well-intentioned but horribly misguided social engineering project of Congress to promote home ownership for low income Americans led to the pressuring of banks to issue high risk mortgages to people with few means to repay them. These were the "sub-prime mortgages" we heard so much about. They were effectively variable rate "interest only" mortgages, by which monthly payments did not have to include any of the principle.

These mortgages were subsequently resold to other banks in the U.S. -- and worldwide -- by the federal loan guarantors at the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), thus exposing international capital markets to the fallout from the American social engineering folly.

When interest rates rose, low income borrowers could no longer afford the payments (of just interest, not principle). So the defaults came quickly -- and predictably. Foreclosures began to rise alarmingly and exponentially. The crunch was on.

And now, it appears that federal bail-out money, in the form of a bloated economic stimulus package, is being allocated to convert urban and suburban homes once mortgaged by low-income people into leased properties that these same low-income people can now rent.

Pretty neat little circle. But it didn't have to be this way.

No comments: