The Bottom Line on the Economic Crisis
I’ve been quiet on the current economic crises. Mainly because I wasn’t sure who was to blame. But, after some time looking into the issue and listening to everyone pointing fingures at one side or the other I have come to a couple conclusions.
- There is no single person or party you can blame for the crisis.
- The typical fixes will not get us out of the problem.
A Little History is Needed
There was an article in the New York Times by Steven Holmes on September 30, 1999 titled Fannie Mae Eases Credit To Aid Mortgage Lending. I suggest you read it word for word. Then read it again.
Here are some pertinent exerpts:
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines
18 percent of the loans in the sub-prime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market
‘If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s.
In July, the Department of Housing and Urban Development proposed 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.
Now take a look at what this did to home prices.
The following chart is US House Prices from 1890-2007. The bottom line is actual prices, but more importantly the top (red) line is adjusted for inflation. Look what happened when the Fanny/Freddie policies really kicked in back in 1999…
What’s wrong with this picture?
It appears that supply and demand works and the unintended results of this policy is the real price of homes skyrocketed as a result of more and more people buying homes.
The New York Times said (10/27/2007):
The ownership rate reached a record 69.3 percent of households in 2004, up from 64 percent a decade earlier.
This number contrasts to the 50’s through the 80’s where home ownership ranged from 55% to 60% (see http://www.census.gov/hhes/www/housing/census/historic/owner.html )
What does all this mean?
- It means that artificially inflating the number of people who own homes by subsidising their mortgages hurts the entire home industry.
- It means that if you give mortgages to people who cannot afford them, eventually they will not pay the mortgage.
- It means that if you take the risk out of mortgage lending, lenders will give mortgages to anyone even if they cannot pay the mortgage back. In other words, if Fanny and Freedie will buy junk mortgages from banks, the bank will wright them. This takes all the risk out of mortgage lending. All reward, no risk… a real problem.
So what is the solution?
Well, I’m not really sure. But if over spending (by subsidising the mortgage industry) got us into this mess, how will more spending get us out of it?
More to come….
Tags: mortgage crisis