Obama Pushing Banks To Make Subprime Loans Again

“Obama administration pushes banks to make home loans to people with weaker credit,” reads the Washington Post headline.

Because it worked out so well the last time we did that.

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.

According to the article, banks are getting “assurances” that they won’t face consequences for making risky loans, but how did that work out last time? The federal government was all about making subprime loans, using Fanny Mae and Freddie Mac among other economic and regulatory carrots/sticks to push banks into making risky loans. But when the house of cards collapsed? All the politicians could talk about was “Wall Street Greed.”

In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Here’s a simple truth about the banking industry: They make money when they lend money. They don’t really make a lot of money by providing you with services like checking accounts and savings accounts. Where they make the big bucks is charging interest on loans, especially mortgage loans.

So, the truth is, banks like making loans because the more loans they make the more money they make. But only if they’re loaning to people who are likely to pay the money back. So banks – who, we can all agree, love profits – make loans to as many people as they can who they feel will probably make good on repayment.

When the government gets involved to lure or push banks into making loans to people they wouldn’t normally lend to, by definition those are people with a lower probability of paying the loans back.

That, again, is how we got into the subprime lending crisis of a few years ago. It’s not “Wall Street greed.” It’s political pressure pushing banks to irresponsible lending practices.