Home Mortgage Crisis 2011

Bruce Bialosky, in his February 21, 2011 article, discusses the ways in which the home mortgage crisis has changed recently. However, he also discusses some of its history. It goes back to 1999, during the Clinton Administration. Andrew Cuomo, the Secretary of Housing and Urban Development (HUD), wanted to expand homeownership among the lower-middle class and to inject about $1 trillion into the housing market. Of course, the only way to get the loans into the hands of these individuals was to lower the lending standards.

Bankers and Wall Street types rarely overlook an opportunity to make some extra Franklins. The Feds said they wanted these loans and they were going to underwrite them, so why not make them happy and rake in some fees? Why wouldn’t they write loans to the new standards when Fannie Mae and Freddie Mac were going to assume all the risk? Not a chance they would pass on that. Gradually, the market for these lightly documented loans expanded, and eventually everyone was getting into this easy money game.

Builders kept on building because people kept on buying. More permits were issued and more towers were built along the South Florida coast. The units were selling, so they kept on building until the merry-go-round stopped. The market was predicated on prices continuing to rise, but then people started to realize the obvious: even the heartiest trees don’t grow to the sky. It was a pyramid scheme where the last player got stuck.

Ultimately the market reversed, and housing prices have dropped for the last four years. We have been waiting for the Feds to come up with a plan – a smart plan to end this downward spiral. They came up with politically oriented ideas, like putting foreclosures on hold, a plan that forestalled the inevitable. Some people stayed in their homes an extra six months, and the taxpayer picked up the tab for the bank.

So here is the Feds’ master plan: Let’s make it almost impossible to get a home loan. So, we are now going to stifle the buying market while it is being flooded with more product. The idea was to not only strengthen lending standards, but make them tougher than anyone can remember! Not only are higher down payments required, but borrowers now have to complete an endless cycle of ridiculous paperwork just to apply for a loan. Remember that the Feds – through Fannie Mae and Freddie Mac – are buying 90% of the loans, so they set the rules.

One helpful book on this topic is Thomas Sowell, The Housing Boom and Bust.