Making Homes Temporarily Affordable To People Who Can't Afford Them
Aaron Gee writes on American Thinker:
Imagine that you are in the business of lending money. At one time, the business model was simple; money was lent to people who had a high probability of repaying it. The rules were then changed by federal government in the interest of "fairness," with laws passed such as the Community Reinvestment Act (CRA) and federal agencies like Housing & Urban Development (HUD) activated. To stay in business, you must follow the government's dictates.Then the government changes the rules again by changing the percentage of loans that go to certain types of borrowers in the interest of "fairness." Just asking you to increase loans to people with poor credit ratings isn't enough. Community activist groups like ACORN threaten to sue you under the CRA if you don't make enough loans, or if you don't loan to the "right" people, or if you make it too hard to get a loan.
Fast-forward ten years.
Now the DOJ is suing you for making too many loans, to the "wrong" people, and you are being accused of making loans too easy to get. What used to be called "making the American dream a reality" is now called "predatory lending practices." Yesterday's good corporate citizen is today's corporate boogeyman. This is the schizophrenic environment home mortgage providers have to try to navigate while attempting to pay their employees, shareholders, and taxes, and all that while trying to stay in business.
The massive housing bubble is a legislative creation that would not have been as big or economically damaging if it hadn't been for government intrusion. If it hadn't been for the government trying to make homes affordable, millions more Americans would have jobs today. Government's attempt to socially engineer the housing market coupled with a luddite energy policy has cost our nation its prosperity.
...The next time you hear about "evil banks," do mention the politicians who made homes affordable by making a nation poor.
This is another example of what happens when the government involves itself in the private market.
If Fannie and Freddie weren't around many of these lenders wouldn't have made these loans because they knew no one would buy them.
Jim P. at November 20, 2011 7:06 AM
On the other hand, the "me first" generation might have had a clue that they couldn't afford a house under the terms offered. They just would not look.
You can't cheat an honest man, right?
I think if I was a banker looking at loaning somebody money, I'd ask to use their bathroom, then see if there were any homeopathic products in there. One package of "Head-On" and I'm outa there, because if you can't grasp the concept of cause-and-effect, you damned well ain't gonna grasp the idea, "loan".
But there's a better concept to grasp.
Money is not that gray-green paper in your wallet. It's a unit of measure. It's used to measure the level of concern in existence for a particular idea.
As such, it's ridiculously effective at allocating resources. There are a dozen varieties of damned near everything in the grocery store, and the market perception of cost/quality drives the sale/distribution of each.
Advertising is the factor everybody recognizes in influencing the market external to consumer use and word-of-mouth. It's why people buy an Escalade for $50K, and then wonder why they can't afford to send their kid to college. Suppressed: you spent $50K when you signed the contract for the fanciest Yukon, and it's gone now.
Stealth advertising happens a couple of ways - one is that the public sees market presence of something and jumps on the bandwagon. Another is present in the Big Box stores like Sam's Club, Costco, WalMart, Best Buy, where the consumer is surrounded by plenty and fools herself into thinking she can afford more than is the case. Hey, you can go speak to a guy in Kroger or Safeway and get great prices on bulk items - he's already set up to ship tons per day.
Then both of these situations get busted by somebody who, as a class, has never had a real job and who somehow has not learned about markets. Oh, wait. Votes are more important than real competence and guiding the economy for long-term success, silly me. So, some idiot in office decides to apply "fairness".
What a dumbass idea. "Fairness", like "security", does not exist in nature, and in fact you can't make it happen in real life. Not beyond setting up a set of rules that apply to everybody the same way.
Let me say that again: Not beyond setting up a set of rules that apply to everybody the same way.
Like, "Leave this property or get Maced". Ah. Thread overlap.
Radwaste at November 20, 2011 8:24 AM
Amy, nice straightforward way of putting the main cause of the housing bubble into perspective.
Joe J at November 20, 2011 8:45 AM
How Heidi and her bar caused the 2008 global economic crash
http://www.torontosun.com/2011/11/18/subprime-crisis-explained
Interesting take on the situation, although it glosses over any blame to the buyers.
Steamer at November 20, 2011 8:53 AM
The housing bubble had nothing to do with a 1977 civil rights law and everything to do with banks selling mortgage backed securities.
JoJo at November 20, 2011 10:37 AM
Those who wish to place the blame for the housing bubble and subsequent meltdown on U.S. government policies need to also account for the simultaneous bubble and meltdown in many other countries. Fannie and Freddie and (to a lesser degree) the CRA played a role, it's true. But the bigger picture is the problems of securitization obscuring poor loan quality, the failure of the models for creating tranches, the high demand for AAA paper, and the willingness of everyone to disregard the fundamentals as long as the gravy train kept rolling.
Christopher at November 20, 2011 11:36 AM
That is simplistic. Institutional and foriegn investors were not just buying T-Bills. They were also buying other debt Backed Securities; such as Mortgage Backed Securities. They were expecting a 3% (or whatever) return on investment. Meanwhile the credit agencies were putting lipstick on a pig.
So you have all these individuals who stop paying their mortgage on the first of each month for whatever reason. That means Lehman Brothers doesn't have the cash to service their debt load. Everyone who is expecting to get their money back is waiting on Lehman Brothers so they can service debt.
All of this is predicated on each individual being responsible and paying their bills. When the interest rate went up they were screwed.
Jim P. at November 20, 2011 12:15 PM
That is simplistic.
It's not simplistic. There was a housing bubble in many other countries (especially in Europe) at the same time as the big housing bubble in the U.S. Those who want to lay the blame largely on our government need to explain how our policies caused a bubble over there.
Christopher at November 20, 2011 3:30 PM
Well, Christopher, it is simplistic. The housing bubble in Aust (where I am) is largely created by local policies - in the main, zoning and planning controls limiting land supply. As evidenced by the fact that there hasn't been a major (or any, really) correction yet. Arguably, it's not even a bubble, because given the artificial, government imposed restrictions on supply the prices are entirely rational.
But we have nothing like the CRA, and nothing like the FMs, so we didn't get a huge rise in the number of defaulters. We came through the GFC with barely a scratch, mostly because our banks have a strong domestic focus and were far less exposed to problems with US securities than (say) the UK. But even there, although they had bank problems, there wasn't much impact on the housing market that I'm aware. And yes, mortgages are securitised here. It's just that the loans written for those securities are much more likely to be paid.
Face it - your policies forced your banks to take on a lot of shit, and they went looking for ways to offload it. No one wanted to rock the boat, so ratings agencies, regulators, everyone all went along. There's a lot of blame to spread round, but legislators who wanted to alter reality need to take the lion's share.
Ltw at November 20, 2011 5:24 PM
Prediction: The next subprime bubble will be in auto loans. There's lots of incentive for the government to lean on lenders to make easy credit available for customers of the government-owned auto companies. Heck, the government even has its own captive lender in GMAC.
Cousin Dave at November 20, 2011 5:56 PM
Thank you Ltw.
I did a quick google, but couldn't find a good analysis on Europe's housing bubble. I don't think there has been been a comprehensive analysis of the interaction of the Euro, the individual countries and the Europact laws and individual country laws.
Jim P. at November 20, 2011 6:45 PM
There's a lot of blame to spread round, but legislators who wanted to alter reality need to take the lion's share.
Nope. That's just not correct. Most of the loans that created the subprime mess were originated by institutions not subject to the CRA provisions that people rightly complain about. Fannie was late to the subprime game (which it partly why its portfolio of subprime loans was so terrible). I'm not defending these institutions; they were part of the problem. But as is so clearly detailed in The Big Short, there was a massive industry that was gleefully, willingly driving our economy off the cliff. No government forcing necessary.
Christopher at November 20, 2011 7:21 PM
Check out the big picture blog by Barry Ritholtz. He disagrees with gov't policies being a cause of the meltdown, and he's written extensively about it: http://www.ritholtz.com/blog/2011/11/dissecting-the-big-lie-about-the-economic-crisis/
Donkeyrock at November 20, 2011 7:37 PM
Another piece by Ritholtz:
Charts for the “Facts of the Economic Crisis” Column
http://www.ritholtz.com/blog/2011/11/charts-facts-economic-crisis/
Donkeyrock at November 20, 2011 7:39 PM
I'm surprised to hear about a "housing bubble" in Europe. As far as I knew, all of them lived in apartments. There's millions of 'em. You can see 'em in Google Earth.
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Clark Howard reports there is a further bit of nastiness to homebuying in the USA. Those who weathered the first "pop" of the bubble, and took the subsequent Federal tax credit of $8000 on their new home, are now finding that the IRS has no idea which of the three "flavors" of tax credit you took.
So. Some people are getting "tax due" notices, some who are paying installments on a deferral plan are getting their payments back with a "WTF?" from the Service... general chaos.
These are the people you want running health care, right?
Radwaste at November 20, 2011 8:13 PM
You're welcome Jim P., although I must admit I don't know much about housing markets in the eurozone. Aust and to a lesser extent UK yes.
Christopher, you asked for an explanation of why housing bubbles arose in other markets, and I gave you one. Now you tell me - if it was the industry at fault and not government policy, why did our banking system survive just fine? Why weren't they going hog-wild as well? They're approximately as free to write whatever loans they like as your banks are. I mean, these guys all operate internationally these days. If there was huge personal gain in return for writing bad loans, I'm sure they would have done it.
I'm sure a lot of institutions weren't formally operating under the CRA. But this is where "chilling effect" comes into play. They saw what happened to others, didn't want demonstrations outside their HQ or more regulation, and so did what was obviously required of them. And of course the game was all about "hot potato" so they passed on the crap to Fannie Mae. I don't blame them.
I don't care whether Fannie Mae and Freddie Mac were late to the crisis or not. They exist. And once a quasi-government entity like that exists, it has to look like a success. Which means doing stupid things past the point of no return, because admitting failure is the cardinal sin of politics. As soon as they were set up, it was almost a guarantee they would get drawn in and end up holding the baby.
Ltw at November 20, 2011 9:15 PM
I don't care whether Fannie Mae and Freddie Mac were late to the crisis or not. They exist.
And in one sentence, you make it clear you don't understand this stuff at all.
Christopher at November 20, 2011 10:01 PM
Um. That's two sentences you quoted, and not the important part, but never mind. Did you feel like answering my question btw? It's easy to find, you just look for the question mark.
Ltw at November 20, 2011 10:46 PM
Your bubble has not yet burst, properties are still overvalued:
http://theconversation.edu.au/are-economists-ignoring-australias-property-bubble-3268
Even still, this may not be enough of a blow to take down your economy; that would depend a lot on leverage and derivatives exposure. US and Euro banks were heavily leveraged, and exposed to potential liabilities that were many times the value of the underlying loans. When those loans went bad, it wasn't just the loan vaue, but the loan value & lots of CDOs that were bets on those loans. Companies like AIG were on the hook for enormous sums of money due due their credit default swaps. If Australia doesn't have similar exposure across the financial system, you can probably survive the collapse of a real estate bubble without the same sort of crisis we experienced here. The U.S. and European economies have survived asset bubbles reasonably intact in the past; this one was different for a variety of reasons, but the high degree of leverage and the exposure of so many systemically important institutions were key.
Christopher at November 21, 2011 9:25 AM
Related.
http://xkcd.com/980/huge/#x=-11796&y=-7160&z=5
Christopher at November 21, 2011 11:06 AM
This article is correct as far as I'm concerned. I would really like to write about my personal experience and post it right here too.
Hee Jhanson at November 27, 2011 4:44 PM
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