Have We Truly Kicked Our Credit Addiction?

It’s almost enough to make you feel sorry for Fannie and Freddie. They finally get religion, return to their responsible underwriting roots and they start getting beat up for it.

The latest contretemps involves the fees that they’re imposing on borrowers that are towards the lower end of their underwriting criteria. This used to be considered a rational sort of way to manage risk. You know, if someone is on average poses a higher risk of default, it makes some sense to charge that person more for their loan. No rocket science there. It’s kind of the way lenders have been lending money for several centuries.

Now, however, the imposition of these fees is being attacked as detrimental to the efforts to solve the mortgage crisis. It won’t come as a surprise to you that the chief proponents of rolling back these fees just happen to be the same folks who have a vested interest in having mortgage credit flow-the National Association of Home Builders and the National Association of Realtors. Fair enough, they have the right to their opinion in a free society.

All of this is for the time being not much more than a tempest in a teapot. It may not stay that way. There are powerful forces in business and politics that would not be averse to a return to the credit standards of the past few years. The tsunami of easy credit that washed over the economy made a lot of people very wealthy. It also played well into the agendas of many in Washington. In many respects kicking the habit is no easier than it is for any other type of addiction. You feel great when you swear off the offending substance for the first few weeks but the craving lingers, the downside of the abuse fades in your memory but not the high it can deliver.

Liar loans and subprime mortgages may end up just being words that have been banned from the vocabulary. The same products are easy to dress up in new guises and justified by citing noble purposes. The longer times are tough, the greater will be the temptation for backsliding. So, this little dust-up over risk pricing may be nothing, but I’d be willing to bet that it may also be just the first salvo in a bigger battle.

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