How the government is scapegoating the private sector for the housing crash

JPMorgan Hit Hard

The Justice Department will announce the details today concerning a settlement with mortgage giant JP Morgan for $13 billion. Questionable lending practices spurred massive state and federal investigation into the banking megalith after the housing market collapse in 2007.

It is charged that JP Morgan misled borrowers and sold high-risk mortgage securities to government-sponsored enterprises Fannie Mae and Freddie Mac. JP Morgan has become the largest mole for the government to whack in an ongoing game of blame-shifting. But was it really the conduct of companies like JP Morgan that caused the collapse, or were there other factors?

In 1992, affordable housing legislation mandated that government-sponsored entities buying mortgages from lenders were required to make sure 30% of those mortgages were made to low-income borrowers. By 2007 that number had grown to require 55% of purchased mortgages be those issued to low-to moderate income individuals. When the housing market finally crashed, Fannie and Freddie, along with other government entities, controlled or had guaranteed 19.2 million loans—over 70% of outstanding low quality mortgages in the country. [contextly_sidebar id=”c63d8b3187750c322cf209a8fe4c586a”]

The policies created moral hazard.

A demand for high risk, subprime loans was skyrocketed by government policies which guaranteed them. By 2002 government entities owned over $1 trillion in high risk loans. At the time of the collapse, more than half of the mortgages in the US were subprime or other low-quality loans. This was a bubble created by government policy which was bound to eventually fail. As quotas on low-income mortgages increased, the quality and standards of the loans necessarily decreased to make up the difference, all guaranteed by Uncle Sam.

While the conduct of JP Morgan is without question underhanded, they were only taking advantage of a flawed system and profiting from a moral hazard created by government policy. The federal government’s punishing of JP Morgan is an attempt to shift the blame for a collapse created by disastrous policy to the private sector. This is further evident by the government’s insistence that JP Morgan is responsible for failed Washington Mutual’s mortgage liabilities. JP Morgan was encouraged to buy Washington Mutual by the federal government in 2008, which it did. Now JP Morgan claims that legal liability stemming from WaMu’s mortgage bonds should remain with the FDIC. The government, however, seems determined to punish JP Morgan for moves which it encouraged.

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And the government is still trying to keep the housing market from correcting itself. As part of the settlement, JP Morgan will receive credit for bulldozing homes in blighted areas. These are low valued homes, which could possibly provide lower priced housing, even if repair may be needed. The government has been actively paying banks to bulldoze homes in an attempt to keep housing prices from falling. It’s a move reminiscent of FDR’s paying to have crops not planted, or even burned, and excess livestock killed off, during times of hardship and food shortages to prevent the price of agriculture goods from falling.

JP Morgan also faces billions of dollars in potential pay-outs to private entities for questionable practices. It is important to understand that while JP Morgan should be culpable for misleading and unethical conduct, it should not be a scapegoat for nearly two decades of bad policy dictated by Washington that created the problem to begin with.

 

Keith Farrell is a frequent contributor to The Libertarian Republic, and Founder and President of Spirits of ’76 national nonprofit organization. He has a BA from the University of Connecticut in American Studies, with concentration in political science, and Urban and Community Studies. Follow him on Facebook.  

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