My Mortgage, My Government

After I wrote a Foolish article earlier this week in which I discussed the spotty nature of the regulation of mortgage lending in the U.S., I received a letter from a longtime mortgage-lending executive.

My friend's letter began with "I sat in a meeting with our representative from Fannie Mae (NYSE:FNM) two years ago, when I ran a large mortgage division selling direct to them. At that time they told our mortgage company that the loans we produced were too good and that our pricing was going to increase because we were not helping them meet their federal mandate to loan to more low-income individuals ..."

And he continued: "It seems that the industry is reaping what it has sown. The government is trying to make home ownership an entitlement. To do so, lenders are pressured to make Alt-A loans, even when they may not be in the best interests of the borrower. Many times people came back to me months after closing looking for a loan for a plumbing problem or a failed water heater."

This thoughtful note appears to indicate that the nation's current subprime and Alt-A mortgage difficulties can be at least partially laid at the feet of government involvement in the mortgage underwriting process. At the same time, numerous mortgage executives, including Angelo Mozilo, the CEO of Countrywide (NYSE:CFC), the nation's largest mortgage lender, have noted that, absent the subprime phenomenon, large numbers of borrowers would be unable to obtain mortgage financing.

That contention, it seems to me, supports my friend's notion that the government -- along with many in the mortgage industry -- is "trying to make home ownership an entitlement." As far as I know, I'd have difficulty qualifying for a loan on a Gulfstream jet airplane, but I haven't yet looked to either Washington, D.C., or the State of Florida to make up for my shortfall.

At the same time, it's becoming increasingly apparent that a growing number of states -- including Ohio, Maryland, Rhode Island, Massachusetts, and Virginia -- are establishing the wherewithal to aid subprime mortgage holders in refinancing their obligations at fixed rates. That charitable approach, while perhaps helping to shore up the housing market and the affected borrowers in the short run, seems to run the risk of exacerbating the current problem in the longer term.

Meanwhile, new home sales continue to slide, and the builders for now are taking it on their financial chins. Lennar (NYSE:LEN) this week reported that its quarterly earnings had plummeted, and it was less sanguine than before about the likely pace of a recovery. Similarly, KB Home (NYSE:KBH) and D.R. Horton (NYSE:DHI), among others, have reported soft results, along with uncertainty about the ultimate length of housing's slide. Perhaps it's time for a government program, federal or state, to cushion the blows for those investors who have lost money investing in the homebuilders.

The message here, it seems to me -- as my letter-writing friend has helped me to understand -- is that government programs have helped to create the current housing and mortgage difficulties. It'd be desirable if governments, state and federal, wouldn't rush in too hastily, medicine bag in hand, to prescribe a cure.

For related Foolishness:

• Subprime Symptoms Starting to Spread?
• Cleaning Up in Subprime Loan World?
• Is It Time to Buy Subprime?

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Fool contributor David Lee Smith does not own shares in any of the companies mentioned. He welcomes your questions or comments. The Fool has a disclosure policy.