THE HOUSING CRISIS SUMMED UP
I know this is a bit of old news, but it is still relevant. And I continue to get e-mails asking me what I think about how it happened. I've listened to various pundits and talk show hosts. I've done my own research and I've asked the opinions of a few people I know in the industry. The following is the best I can describe what happened and why. This is a very basic explanation, but enough to give you an idea of the events that led up to the meltdown. If you need a more detailed explanation.....just do a little research. There is tons of information on the web.
It all began back during the Carter administration with the Community Re-investment Act. The government decided it was going to tell the banks who they had to loan money to in order to try revive the decaying cities. The original intent was to get more low income people to become home owners. A lofty goal, but perhaps not a wise one. (And by the way, this is not really a discussion of whether the government should be doing any of this anyway, because most of you know my thoughts on that. If it's not in the Constitution, the federal government should not be doing it. Fact is they did it and that is what I am discussing here.) Throughout the late 70's, the 80's and the early 90's, there was not a whole lot of damage nor a whole lot of good done by the CRA. It did however lay the foundation for what would happen in the mid to late 90's and 2000's.
Under Clinton the CRA was expanded. The government really got more involved and regulated the banks into making loans to people who did not qualify for loans. They were required to make risky loans their normal standards would stop them from making. Again, the goal was to get more people to own homes. The problem is, many of these people couldn't afford to own homes so in the end it really wasn't such a good deal for them. Yes, they were technically home owners for a short time, but in the end many of them ended up in bankruptcy and foreclosures. If you ask me, I'd rather rent until I could actually afford a home rather than own a home and be forced into bankruptcy....but hey that's me.
These practices went on for years. The default rate shot up as everyone knew it would, but politics being politics, the politicians were more concerned with being re-elected so the regulations on the banking and lending institutions stayed in place. The politicians could claim that under their watch, there were more home owners.
As time went on, the government decided in order to keep the practice going, it was going to have the quasi-federal agencies Fannie Mae and Freddie Mac guarantee the loans that the banks and other lending institutions were making. This opened a whole new can of worms and is really where the crisis was formed.
With the government in effect guaranteeing these loans, the banks and mortgage companies felt the practice of making these risky loans was no longer so much of a risk for them as the loans were now essentially backed by the federal government. They were free to make loans to people that couldn't afford them with very little risk to their own balance sheets. If the people couldn't afford to make their mortgage payments, the banks could just sell those mortgages to Fannie Mae and Freddie Mac. And that's exactly what they did in huge numbers. But wait that's only part of it.
With more people "qualifying" for mortgages, there were was a larger pool of home buyers. What happens when demand outpaces supply? You got it, the price goes up. So now instead of 2,000,000 people looking to buy a home out of 2,500,000 homes on the market, there were 3,000,000 people looking to buy those same 2,500,000 homes. (These numbers aren't the actual numbers.....simply numbers to explain what was happening.) The law of supply and demand kicks in and those 2,500,000 homes go up in price. So now instead of a home selling for $250,000.00, it goes on the market for $300,000.00. And as the cycle continues with more and more people getting these loans, that $300,000.00 house now becomes a $375,000.00 home. So now you have people who originally may have bought a $250,000.00 buying homes that cost $375,000.00. This process continued and spiraled out of control. Can anyone say housing bubble?
So now there are more and more people buying homes they really can't afford and they are paying much more for them. The banks and lending institutions are making these loans knowing they can just "bundle" all these risky mortgages and sell them to Fannie Mae and Freddie Mac. Sooner or later Fannie Mae and Freddie Mac would hit the toppling point where these bad loans were hitting unprecedented default rates and these two agencies simply could no longer stay afloat. It was a recipe for disaster.
In comes the federal government once again to "save" everyone with a bailout. They came in to save everyone from a problem they created. If they had kept their noses out of the banks' business, this crisis simply would never have happened. The banks would have continued to makes loans based upon standards that would minimize their risk and maximize their profits. People who could afford to get loans would get them and those not ready to buy homes financially, would be denied the loans....saving them from future misery.
Now I just want to discuss the blame on this issue. I have heard a lot of excuses and explanations from a lot of liberals and even from some conservatives. Many people blamed the lending institutions for being greedy. They claim they caused the entire crisis. I, myself, blamed the people for taking out loans they knew they couldn't afford. And to a high degree, I still stand by that. I also blamed the government for getting involved in the first place. And I still stand by that as well. However, I do now also place some of the blame on the lenders. To me, the fault begins with the government mandating that the lenders make these loans by threat of fines if they do not. The main blame falls on the people that took out mortgages to buy bigger homes than they could afford. The government may have forced the banks to make these loans, but no one forced people to take mortgages for more money than they could afford. So the bulk of the blame falls on these people. As I said, I do now place a little of the blame on the lenders as well. Yes they were mandated to make these loans by the government, BUT they took advantage of the fact that Fannie Mae and Freddie Mac would buy all these bad loans from them. They came up with loan programs that only exacerbated the problems. Again, though, the really culprit is the borrowers who took loans for more money than they could afford. I don't care what the banks told them. I don't care what programs the banks offered. In the end, it was these people that signed the loans and they were not forced or mandated to do so. I, myself, bought a home while a lot of this was going on. I was approved for a lot more money than the mortgage I decided I was comfortable with. I took at as my personal responsibility to take out a mortgage for an amount I felt reasonably comfortable I could repay, regardless of what the banks told me I could afford.
The one other complaint I heard was that the banks were racist and that's why the government had to get involved. These same people would yell up and down how greedy these banks were. So I had a simple response to that. The main purpose of a business is to make a profit. Call that greed, call it whatever you like, but that's fact. Now if a business is greedy, it wants to make as much money as it possibly can right? Well then it wouldn't matter if they were making money from white, black, brown, yellow or red people. They would make loans that would profit their business. The CRA had nothing to do with racism as "greedy" banks were making loans to "qualified" minorities as well as "qualified" white people. That was their business and that's how they made money. These same banks were also denying loans to "unqualified" minorities as well as unqualified white people. In other words, race didn't matter.
The lesson is that when the government gets involved in issues it has no authority under the Constitution to get involved in, bad things happen. This whole crisis would have been averted and the federal government wouldn't be once again engaging in unconstitutional activities by now bailing out these institutions and agencies.
-Trent
