(By David Galland, Managing Editor - Casey Research) I have often said that humans are like rats in that they are extremely ingenious when it comes to looking after their personal interests. Lock a rat in a metal box and it will almost be able to figure a way out. Almost. A human would actually have a shot at it.
In the debate about what went wrong with the economy and how to fix things, the topic of loose credit standards usually arises early in the discussion. And correctly so. Due to loose credit standards, people without the financial resources to own a home were practically carried across the threshold by predatory lenders.
Well, at least that’s how the outraged political class and their adoring punditry see things.
According to that section of the jeering crowd, these lenders were so avaricious, greedy, and downright dastardly that they would actually hand the keys to a $500,000 house to an individual with not just poor but pitiful credit and with little or no money down. Bastards!
Of course, as a former banker (shudder), I have a somewhat different perspective.
Because no matter how devious or dastardly a lending institution might be, it wouldn’t even contemplate making such loans if it didn’t have a fairly well-reasoned plan in mind to actually get paid back… with interest.
Enter the government in the form of the Federal Housing Administration (FHA) and the quasi-state-owned (and now absolutely state-owned) Fannie Mae and Freddie Mac. Absent their guarantees, the private sector would never, but never, have made the loans just described. That’s because…
(a) loan officers actually take professional pride and go to great lengths in assuring that the money they loan out comes back. In fact, failing to get loans paid back with even a sniff of regularity is quick cause for a pink slip followed by a solemn escort to the front door for the approving loan officer. And…
(b) foreclosing and all the attendant activities are difficult, time consuming, and costly. To wit, trying to get juice out of a rock gets you little more than dust.
As a result, within the acceptable tolerance range for any human endeavor, banks are historically careful in setting lending standards.
But add into the equation a rate-slashing Fed looking to stimulate things a bit, side by side with a bloated Uncle Sam looking to engage in some social engineering by putting people without the credit or means into a house, and the picture quickly changes. The FHA, the world’s largest government insurer of mortgages, whose “loans require small down payments” and provide “more flexibility . . .
