Sunday, February 24, 2008

Whose Mortgage Crisis is it?

"Activists" are blaming the big bad bankers;
"The people who bought here thought they were living the American dream, but they could never afford the loans they were given," said Livia Villareal, counseling services director at the Greater Southwest Development Corp., a local non-profit."
I seem to recall a few years ago these same "activists" (or their cousins) were calling on lenders to make credit available to non-traditional borrowers. People who had been locked out of home ownership due to "economic" discrimination and "red-lining".

In 2003 during American Homeownership Month George W. Bush proclaimed,
Although a record number of Americans own their own homes, we continue to see a gap between the homeowner-ship rates of minorities and nonminorities. By a significant margin, minority families are less likely to own their own homes. Therefore, I have called upon the entire housing industry to join with my Administration to expand minority homeownership across the Nation. Our goal is to help at least 5.5 million minority families become homeowners by the end of this decade, and our Blueprint for the American Dream Partnership is taking bold steps to make this a reality.
The Current Home mortgage "crisis" was predictable and inevitable. I turned down a mortgage that was "too good to be true', because the eventual escalation of the payment was unsustainable.

Just to prove it's not a Republican Plot, here's a statement from Bill Clinton's White House Aug 1, 2000
Incentives for home ownership

There is no more crucial building block for a strong community and a promising future than a solid home.“ The Clinton Administration is dedicated to making the dream of homeownership a reality for all Americans. In 1995, the Administration, in partnership with 50 key public and private sector organizations, formed a National Homeownership Strategy with the goal of helping more Americans become homeowners.

Accomplishments include:
  • Lowering Interest Rates by Paying Off the National Debt.
  • Record Levels of Homeownership Assistance via 1.3 million loans from the Federal Housing Administration.
  • Helping Renters Buy Their First Home via homeownership vouchers for 50,000 families.
  • Providing Incentives to Save for a Home via Individual Development Accounts, providing incentives through federal matching funds for low-income families to save for a first home, higher education, or to start a new business.
None of the official sources mention the pressure put on lenders to offer credit to "non-traditional" borrowers, or to eliminate "red lining". Both of which could be easily taken as code words for reducing underwriting requirements.

These were not the primary means the mortgage market was subverted. The primary driver was the acquiescence of Ginnie Mae and Freddie Mac indicating to the markets that writing new risky types of mortgages was backed by the US Government. The Lenders, insulated from the risk of default and benefiting from the transaction fees, forged ahead.

In effect risk and reward became disconnected.

There were ways to increase homeownership by offering less risky, nontraditional mortgages, like shared equity mortgages or other suggestions put forward by Bernard Condon of Forbes Magazine.

We seem to have discarded the lessons of the past for the allure of something for nothing. Many of the people who are now in dire straits bought too much house for their income by any traditional standard. This artificial demand caused the housing bubble, artificially high housing prices and rampant speculation.

The borrowers are not entirely to blame, in many ways they are victims. They had many helpers. The Real Estate Industry chasing ever bigger commissions, the Loan Origination Industry chasing transaction fees and the equities markets looking at short term gains over long term stability. Still if something is too good to be true, it usually is.

The difference between the lenders and the borrowers, is the borrowers were not as well equipped to evaluate the risk as the lenders. But the lenders had a backstop, Fannie Mae, Gennie Mae, the VHA and the VA who were all willing to let the train roll on in the name of increasing homeownership, however transitory. Everyone hoped that the reckoning they all knew was coming would happen to the next guy.

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