How the *&%#$! did the mortgage crisis begin?
By Guest Author | September 24th, 2008 | Category: Real Estate News |
Here we go again!
Here we go again!
Are you confused yet?
Last week I wrote how we have to make sure that congress does not overreact. Well, by their own admission they have. In the last housing legislation, as of October 1, 2008, congress had raised the required down payment for an FHA mortgage from 3% to 3.5%. It has now been pushed off until January 1, 2009!
Read Also: The Repercussions of New Legislation
Cause & Effect
Has congress come realize that more regulation, intended to solve a market problem, might just have a long-term negative effect on economic growth? Let’s look at our current housing fiasco.
Read Also: Making sense of the New Economic Recovery Act of 2008 for Western New Yorkers
With the latest financial bailout being discussed in congress, everyone is talking about new regulations. We need to look closer at the root cause of the problem. As you will see, it all started with President Clinton’s policies to socially engineer our housing market. It was the new regulations and directives imposed on the free market by HUD, not lack of regulation, which began the melt down of our housing crisis.
Read Also:Â How FHA Guideline Changes May Affect You!
A Brief History Lesson
In 1995, Henry Cisneros, President Clinton’s director of HUD, began to move Fannie Mae and Freddie Mac towards a requirement that 42% of their mortgages serve low and moderate-income families. Fannie and Freddie do not actually provide mortgages directly to buyers. They buy them from banks and mortgage companies so these companies can continue to sell more mortgages to new customers. In addition, Fannie and Freddie also purchase pools of mortgages from various investment companies.
In 2000, Andrew Cuomo, President Clinton’s new director of HUD, pushed the envelope even further and required Fannie and Freddie to achieve a higher goal of 50%. The administration saw these flexible loan terms as a means to increase minority home ownership. However, Franklin Raines the CEO for Fannie Mae, warned that these new rules would move Fannie and Freddie into an ever increasing riskier environment, with potentially dangerous outcomes.
Private Sector steps up to the plate
So with mandates from HUD, the private sector had to respond. Various products such as sub-prime, adjustable rate and no documentation loans were introduced in order to achieve the mandate from HUD. These flexible loan terms put a huge new supply of new buyers into the housing market. Which in turn caused the supply of homes to decrease and ultimately driving home prices through the roof!
We all know what happened soon after and we are now in the process of cleaning up the mess left behind by social engineering and good intentions. Our economy is based on free markets we need to allow the markets to correct themselves. Right now in California, one of the hardest hit areas of depreciating home values is now seeing a 20% growth in first time home buyers, because prices are stabilizing and homes are more affordable. In addition, these buyers are securing their mortgages through sound financial underwriting decisions imposed by the market. Not by self imposed government directives and regulations.
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Though I believe regulation to promote a fair and balanced market are OK, the ones that brought this crisis on were less regulations and more the government instituting and promoting an agenda without thinking of the consequences. Sure, home ownership is a good thing, but that doesn’t mean that we should make sure everyone has a home first and figure out how to afford it second. On the contrary, we should institute regulations that make sure everyone is paid fairly and the environment is considered by all companies for all products. Government involvement can be good to give the market a push in the right direction (for instance, rebates on green energy) but should not be blindly done to attempt to reach a goal.
The free market should not be allowed to roam free but we shouldn’t look to government for solutions to all our ails. There is a good balance with a small government that encourages innovation and protects those who most need protection.
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