Put the Blame of the Housing Collapse Where It Belongs

8/13/2019 Put the Blame of the Housing Collapse Where It Belongs

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Put the Blame of the Housing Collapse Where it

Belongs

Government meddling in the free markets isusually where all trouble starts. The Federal

Housing Administration, created in 1934, were

given power to insure mortgages up to 100%. It

required a 20% down payment and operated

just fine for 25 years with hardly any

bankruptcies because borrowers had skin in the

game. In 1957 the good old boys in Congress

slacked up the standards to jump start the

growth in housing. Down payments were

deflated down to 3% from 1957 to 1961.

Housing Boom Resulted

As prophesied this resulted in a FHA boom in

insured mortgages and a bubble burst in the

later 60s. This pattern keeps reoccurring and

no one seems to remember the earlier

mistakes. Keeping the Feds out of the game of


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housing would be a good start. The Feds

loosen up mortgage standards, a bubble occurs,

and then theres a crash. The governmentdeflects its involvement by using discretionary

lying, obfuscation, and new sets of laws for the

banking industry like it was their fault. Other

than the taxpayers, who eventually wind up

paying for these debacles, most of the peoplesqueezed are those who bought in the bubble

years. Then, after it was too late, when the

bubble popped, they came to discover they

could not afford their homes anymore.


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Financial Crisis of 2008

This happened again leading up to the financial

crisis of 2008. This time the federalgovernments policies were so pervasive and

pursued with such enthusiasm by two different

administrations that they caused a collapse that

was heard worldwide. The mindless wonders in

Congress planted the seeds of the fiasco to

come in 1992 with the enactment of what was

called affordable housing goals for Fannie

Mae and Freddie Mac. These two entities,

before 1992, dominated the housing financial

market, especially after the Federal Savings and

Loan industry collapsed in the late 1980s,

engineered again by the geniuses in charge

who of course deflected all blame away from

them.Fannie and Freddies Role


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Their role was to conduct secondary market

operations creating a liquid market in

operations. They could not make loans butcould buy mortgages from banks and other

lenders. Their purchase provided cash for

lenders thus encouraging home ownership by

making more funds available for more

mortgages. Fannie and Freddie beingshareholder owned were chartered by

Congress and granted numerous government

benefits. These particular privileges gave the

impression they were government backed and

would be rescued if they ever went belly up.

This of course, as we will learn later, was the

wrong assumption.


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$2.25 Billion Line of Credit

With $2.25 billion line of credit at the Treasury

it was easy to see how market participants

believed Fannie & Freddie were government

backed. With borrowing rates only a little


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higher than the Treasury itself Fannie & Freddie

were able to drive all competition out of the

secondary market for middle class mortgages.They controlled 70% of the $11 trillion housing

finance market. From this dominant position

they were able to set the underwriting

standards for the market as a whole. Very few

mortgage lenders would make middle classmortgages that could to be sold to Fannie &

Freddie.

Foundational Elements

What kept delinquencies and defaults low wasthe required 10% to 20% down payment, good

credit history for borrowers, and low debt to

income ratios after the mortgage was closed.

These were the foundational elements of what

was called a prime loan that kept a stablemortgage market through the 1970s and most

of the 80s under a default of less than 1%.


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Despite these strict standards home ownership

from 1964 through 1994 remained at 64%.

Government Backing Was Their Undoing

Community activists put pressure on the Feds

arguing Fannie & Freddie underwriting

standards kept many low and moderate income

families from buying homes. The initial quota

was 30% and HUD was given authority to

increase the quota as Congress cleared the way

for more ambitious requirements reducing

down payments below 5%. HUD raised the

targeted quota to 42% in 1996, 50% in 2000,and 56% in 2008. By 2000 Fannie & Freddie

were accepting loans with zero money down

and lowering the credit standards so more

would sign up in order to meet the quota.


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The ResultFlash Forward to 2008

As a result of the gradual deterioration in loan

quality over the preceding 16 years, by 2008,

just before the housing bubble pop, 56% of all

mortgages in the United States32 million

loanswere subprime loans or otherwise what

is called low quality loans. Of the 32 million

76% were on the books of government

agencies that were controlled by government

policies. This shows absolute proof where the

demand for these mortgages originated!


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have created uncertainty and sapped the

appetite for risk taking that had once made the

U.S. financial system the largest and mostsuccessful in the world. The smothering rules &

regs of the DoddFrank Act is depressing

economic growth and lending no support for

the housing industry, thus a stagnant market

creating a drag on the GDP. A return to sanitywith credible loan standards would help buckle

down the housing market and perhaps return it

to solvency.

The answer is a thorough reorientation of the

U.S. housing finance system away from the kind

of federal government control that makes it

hostage to narrow political imperatives like

political activists. By cow towing to these

political interests it holds the whole GDPhostage to selfish interests. When the Congress

is always worried about re-election and further

feathering their nest it is time to look at term


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limits as an answer to this good old boy system.

By taking it out of the hands of Congress and

letting the voters decide on term limits is theway to go if we want true representation. If it

is good enough for the President it is good

enough for the Congress.

Documents

Put the Blame of the Housing Collapse Where It Belongs