Published on: Wednesday, June 23, 2010

By Gretchen Hamel

Who is to blame for our recent economic crisis? Greedy bankers, lax regulators, irresponsible borrowers and misguided policymakers usually top the list.

There’s something unseemly about this high stakes blame game, but it’s critical to identify at least the policies that precipitated recent troubles so we can avoid those mistakes again. Unfortunately, many to want to forgo that analysis and continue to offer up warmed-over versions of the policies that contributed to the problems in the first place.

A massive tax and spend package passed by the House of Representatives just before Memorial Day included $1 billion for the National Housing Trust, which assists individuals in financing homes they otherwise could not afford.

The Federal Housing Administration is also pushing new efforts to assist those with “underwater” mortgages, enabling home borrowers to refinance into FHA-backed loans, and providing banks incentives to reduce the borrowers’ principle.

Many Americans object to the inherent unfairness of these efforts: The federal government is bailing out Americans who bought homes they couldn’t afford. Those who opted for affordable homes, or kept renting, seem big losers in this equation.

Furthermore, these new efforts are just the latest in a long line of programs seeking to prevent people from losing their homes. Most have been a dismal failure. An earlier version of the FHA’s refinance program was expected to help 400,000 mortgage holders, but to date, only has helped 35. And the foreclosure rate continues to climb.

More fundamentally, the public should question why policymakers continue with strategies that contributed to the initial crisis. After all, regardless of who you blame for the economic meltdown, the housing market was indisputably central to it.

For decades, the government-sponsored entities Fannie Mae and Freddie Mac encouraged banks to offer mortgages to high-risk borrowers. Millions bought homes with little, or even no down payment—even though no-down payment mortgages are between two and three times as likely as others to end in foreclosure.

Cheap, readily available mortgages pushed housing values higher. Many owners took equity out to finance other spending. When housing values declined, millions found their homes worth less than what they owed.

The equity that had once been a reservoir for other purchases dried up, and consumer spending sunk, with effects that rippled throughout the economy. Individuals weren’t alone in betting heavily on high housing values; the entire financial industry was exposed.

Mortgage-backed securities were ubiquitous in financial institutions. As individuals began defaulting and the assets backing millions of loans declined, investment houses and other banks found themselves cash strapped and unable to comply with government regulations meant to ensure their solvency.

We all know what happened next: the government spent hundreds of billions of taxpayer dollars to prop up specific banks and other “too big to fail” entities. Through the “stimulus” spending, the government also sought to directly support home owners, to prevent default and boost home values.

Perhaps some of these efforts were necessary to avert economic collapse. Yet Americans should question if the government efforts to artificially inflate home values is really good policy today.

Inevitably, the breaking of the housing bubble was going to be painful. Yet allowing this process to occur naturally, letting housing values find a bottom, so people can begin confidently purchasing and reinvesting in the housing market, surely is preferably to the protracted, seemingly ad-hoc process we have today.

Grownups recoil from unnecessary finger pointing. Yet we need sober analysis of what went wrong in our housing policy so that we can prevent future economic disaster.

Gretchen Hamel is the executive director of Public Notice, a independent, bipartisan, non-profit organization dedicated to providing facts and insights on the effect public policy has on Americans’ financial well being. For more information, visit www.thepublicnotice.org.