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Friday, March 16, 2007

Dan Gross: The New Deal Lives

From Dan Gross, "another New Deal-era agency still showing some utility":

The New Deal Lives, by Dan Gross: As attacks on the New Deal continue to mount (I saw a copy of Amity Shlaes' forthcoming anti-New Deal volume in the office the other day), it's worth recalling just how important and durable the financial infrastructure laid down during the New Deal has proven to be. After all, the SEC, the FDIC, Fannie Mae, etc., were -- and are the platforms on which the vast financial services and real estate sectors were reconstructed and rebuilt. (For a fuller exposition of this argument, see Chapter Four of the forthcoming book by your humble scribe.)

Kemba J. Dunham reports in the Wall Street Journal on another New Deal-era agency still showing some utility:

Rising problems for lenders and borrowers in the subprime-mortgage market may bolster efforts to revitalize the Federal Housing Administration, the New Deal-era agency that helps low and middle-income homebuyers qualify for low-interest mortgages.

But backers of an FHA overhaul may have to overcome a perception that the government is taking on too much financial risk -- and bailing out lenders -- by stepping in to help consumers hurt in the subprime market, which offers loans to borrowers with weak credit.

For decades, the FHA was a major backer of mortgage funding for borrowers with poor credit. But the FHA's share of the market has dropped sharply in the past decade as hordes of aggressive subprime lenders wooed away borrowers with an array of seemingly attractive options, including no-money-down mortgages and interest-only payments. The subprime players also offered faster approvals, instant home appraisals, less paperwork and fewer hassles, winning over consumers even though subprime mortgage rates were generally higher than rates for FHA-insured mortgages. . . .

For years, consumer activists and FHA officials have been pushing the government to revitalize and streamline the FHA program to make it an attractive alternative to subprime lenders. Now that foreclosures are surging and more consumers complain of being victimized by subprime lenders, it is likely that modernizing the FHA could move up on Congress' agenda.

Yesterday, a coalition of community groups called on the Bush Administration and Congress to permit the FHA to refinance the loans of defaulting subprime borrowers who are in danger of losing their homes. John Taylor, president of the National Community Reinvestment Coalition, said the federally backed agency wouldn't necessarily buy the defaulted loans, but would act as guarantor or servicer of the loan. The NCRC is an advocacy group that promotes fair-lending practices.

The majority of loans would remain in private hands, but lenders would be more confident they own "a loan that's being paid on instead of one they have to foreclose on," said Mr. Taylor. While some funds will need to be created to support the new role for FHA, he said, "that's more cost effective than allowing this disaster to occur, dragging down neighborhoods."

See also: Foreclosure vs. Renegotation in Non-Standard Home Mortagages from Brad DeLong.

    Posted by on Friday, March 16, 2007 at 04:30 PM in Economics, Financial System, Social Insurance | Permalink  TrackBack (0)  Comments (34)

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