Is the government greasing the skids for another housing slump?

On the whole, the housing market has regained much of the ground it lost in the 2008 financial crisis. Sales have been healthier each year for the past few years.

But some analysts are concerned many of the factors propelling that growth aren’t healthy at all and could lead to another free-fall in the housing market.

Peter Wallison is one of the experts sounding alarms. He has written a book called Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again. Wallison was a member of the Financial Crisis Inquiry Commission (FCIC) and dissented from the group’s conclusions. He told me why in an interview.

What was the conclusion of the FCIC? The commission was established in 2009 with six Democrats and four Republicans. From the beginning, it was clear to me that the only issue they wanted to discuss, the only information they were looking for, was information that would help them conclude—these are the Democrats on the commission—that it was the private sector that caused the financial crisis because it wasn’t sufficiently regulated and it was subject to too much risk and greed on Wall Street. Those are the central themes that we’ve heard ever since, mostly from the left.

What was your assessment of the problem? What my investigation and the book show is that it was the affordable housing goals that were established for Fannie Mae and Freddie Mac in 1992 that caused them to have to reduce their underwriting standards over succeeding years. By the year 2008, just before the financial crisis, more than half of all mortgages in the United States were subprime or otherwise risky, say with very low down payments. And of that majority of mortgages, which turned out to be about 31 million mortgages, 76 percent were on the books of government agencies. So that, to me, showed the government created the demand for these mortgages.

But doesn’t Wall Street deserve some blame? Didn’t it play a role as well? If the government was holding 76 percent of these risky, subprime mortgages, then the other 24 percent was held by the private sector. But, obviously, one shouldn’t say that a group that holds 24 percent was responsible for the crisis when the government was clearly the dominant player in reducing the quality of these mortgages over the time.

You’re concerned that we’re repeating the very same mistakes that caused the crisis in 2008. If you blame the private sector for the financial crisis and you impose huge regulations on the private sector, as we have with the Dodd-Frank Act, then the government escapes with absolutely no blame, and so people aren’t watching what the government is doing. But now the government is going back to exactly the same policies it was pursuing before, exactly the policies that in the book and since the FCIC report I have contended were the cause of the crisis. The last few weeks, the regulator of Fannie Mae and Freddie Mac—these two companies are now under the control of the government because they became insolvent because of the weak mortgages they had bought—has been telling them to reduce their underwriting standards, to take lower down payments than they were accepting before. The FHA, the Federal Housing Administration, has been told by the Obama administration to reduce its insurance premiums on the risky mortgages that it takes on. All of these are exactly the kind of things that caused the financial crisis by building up low-quality mortgages in our financial system.

There are people who would like to prevent your argument from being heard at all. What have they done? On Amazon, there is the opportunity to place a review of a book, presumably after you have read the book. In my case, a day after the book actually was published, about 50 or so very bad reviews, one-star reviews, were published, and almost all of those made no statement that would indicate the people had actually read [the book]. Things like: This is a lie, don’t waste your money, and this guy has always been saying the same thing. All of those kinds of remarks were put on Amazon, obviously in the hope of suppressing any purchases through Amazon. … The publisher then discovered the person who had been coordinating all of these attacks. … This book, as well as my dissent, was the opposite of what [my opponents’] view of the financial crisis was. Obviously, if I’m correct, then we have to discipline the government. The government is the one we have to prevent from doing things if we want to avoid the next financial crisis. In their view, the government is a benign organization and should not be blamed for the crisis.

Listen to Kent Covington’s interview with Peter Wallison on The World and Everything in It.