HUD and the FHA and Fannie Mae and Freddie Mac were designed to help keep home prices affordable for middle class and low income home buyers. The banks and the Federal Reserve, though, pumped up the market full of inflated money and used creative loans and securitization deals to make it all look less risky.
This raised prices in virtually every real estate market in the country as cheap money poured into newly developed and older communities. Home values doubled or tripled in some areas in the space of a few years, as there were more loans with no strings attached being offered to potential buyers than there were properties.
So skyrocketing property values and unsustainable home prices were the design of the Federal Reserve and the banks, but other government programs and bureaucracies were supposed to be maintaining low prices and keeping the real estate market open for lower income borrowers. Reasonable prices for a house, though, was not the tactic so much as fraudulent securities and inflation.
The real estate market was pumped up to historic heights and then, nearly all at once, everyone realized the bad loans the banks made were bad no matter what label the rating agencies were paid by the banks originating the bad loans to stick on them. So the run-up in real estate prices had to end as reality set back in.
It was at this point that the government finally began to realize what its true role in the housing market was all along: protecting and maximizing bank profits regardless of home values and whether average or poor Americans could afford the prices of these properties or not. No expense was spared to keep the banks afloat.
Literally trillions of dollars have been transferred to the banks by now, through one bailout plan after another and through various "windows" and "facilities" of the Federal Reserve. Another few tens of billions of dollars have been thrown at government bureaucrats to pretend to fix the housing crisis and make a few foreclosures go away.
Take as one example the Hope for Homeowners Program, which was allocated $300 billion and had one successfully stopped foreclosure to show for it after months of existence. How many other people could have been saved from losing their homes or their jobs if they had not had to contribute $300 billion to assist one other anonymous borrower?
Then the Obama administration came to power and released its Home Affordable Modification Program, which offered to pay banks for each deed in lieu of foreclosure or mortgage loan modification that it approved for homeowners. Banks took this money when it was in their interests, while taking money from other government sources when it was even more profitable to foreclose.
Now the latest program, taking effect April 5, 2010, will actually pay homeowners to sell their homes for less than what they owe the bank and give them extra money to move out. Previously, homeowners and banks could negotiate for such terms to avoid foreclosure on their own through deed in lieu, short sale, and cash for keys deals.
Homeowners can actually go into foreclosure and sell their homes short and walk away with thousands of dollars in welfare "relocation assistance" from the government, while the servicing company and mortgage lenders receive their own corporate welfare after being compelled to accept a short sale offer that has been previously determined.
Why all these complicated plans? By now, the government could have paid off every single mortgage and credit card in the country without creating any more moral hazard on the part of the banks or borrowers than it already has by paying people in foreclosure and lenders.
Oh wait. That's right. The government's role is not about representing people and protecting against fraud. The government's only role now is guaranteeing and increasing bank profits, so naturally it would rather distribute inflated money to the lenders as part of "programs" and "liquidity injections" than just do the simple thing and pay off every loan in the country.
This should be an argument against any kind of government welfare programs, not an endorsement of the government actually paying off people's loans. But it should also certainly not treat multi-trillion dollar financial institutions as privileged welfare recipients. "Too big to fail" has quickly become "too politically connected not to guarantee record success at any cost."