The Housing Crisis Revisited

I decided to write this new post to my blog because I am beyond fed up listening to the mainstream media place the blame for the current housing crisis firmly on the shoulders of President Bush. While I concede that he is part of the problem, let me give you a little history lesson.

In 1999 the Clinton Administration began pressuring Fannie Mae to expand mortgage loans among low and moderate income people. Fannie Mae also felt pressure from stock holders to maintain its phenomenal growth. There was an article written in The New York Times in September 1999 about this that states that "Fannie Mae does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make loans to people with less-than-stellar credit ratings." For your viewing pleasure click here to read the article written by The New York Times entitled "Fannie Mae Eases Credit To Aid Mortgage Lending," which details the actions.

The Clinton Administration, just like every administration, simply wanted to expand the homeownership rate in America. But they added a twist. They chose to target low to moderate-income borrowers. The administration wanted to increase homeownership rates for a variety of reasons, not the least of which was to expand the economy. A strong housing market affects every sector of the economy. When people own homes they tend to fix them up so companies like Home Depot, Lowes and Dixieline benefit. When people have equity, like the last bull housing market provided, they tend to remodel so contractors and the like benefit. Those same homeowners like to drive new cars and in many cases cars they could not otherwise afford to own, except through equity lines of credit and cashout refinances. They also enjoy their hobbies such as going to the river and going to the desert as well as family vacations to exotic places. In order to fully enjoy the experience they need toy haulers for their dune buggies, quads, motorcycles, jet skiis, boats, etc...

There are other businesses that benefit as well like the restaurant industry and the retail industry. I am the first to admit that when times were "roaring" along I was eating out quite a bit with the family. I was also indulging myself with a big screen TV, vacation place in Cabo, and slew of other goodies I didn't really need. But I digress.

The action encouraged by the Clinton Administration extended mortgages to individuals whose incomes, credit ratings and savings were not good enough to qualify for conventional loans. They go on to say that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites. The proposed goal was that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers.

I'm not entirely convinced that this should be a goal. We shouldn't be focusing on increasing homeownership rates among any particular class. It seems to me we should be focusing on making loans to those that qualify and have good credit. If that excludes a few people from the homeownership pool then so be it. If an aspiring homeowners' credit rating prevents them from buying a home right now, then they have something to work toward. If they cannot afford to buy a home due to income then they have something to work toward.

The article goes on to warn that "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a governement rescue similar to that of the savings and loan industry in the 1980s."

I am not advocating that this is the Clinton Administration's fault. Only that they opened the door rather wide. Bush played a role in the debacle as well. He was asleep at the wheel, perfectly content to watch homeownership rates rise, without regard for what the consequences of what such loose policy could lead to. Certainly Franklin Raines, Chris Dodd, Barney Frank, et al, have dirty hands as well. There were signs as well as warnings from many high ranking people and they were ignored because times were good. But, as the saying goes, all good things must come to an end.

There are MANY to blame for the housing crisis, not the least of which is the American public. As convenient as it is to blame the government, Wall Street, the lenders, the loan officers, the Realtors, etc... The American public has to shoulder its share of the responsibility as well. People wanted to own a home so much that they took on payments they couldn't afford, even if they could initially, and loans they didn't understand. We wanted to believe that we could borrow $500,000 for only $1,268 per month so much that we didn't ask any questions. I know you've heard the saying "If it sounds too good to be true then it probably is." When and why did we forget that? Just sharing a few thoughts.