There is no doubt that the housing crisis was caused by government policy. Bad actors everywhere? Sure. But at the root of it all the was the government’s desire – by both parties – to increase home ownership in America. And specifically for the poor and minorities.
There is no doubt what really happened. Between 1997 and 2007, HUD’s affordable-housing policies under two administrations built an enormous mortgage bubble—nine times as large as any bubble in modern history—and when this bubble collapsed, it caused a 30%-40% decline in housing prices. This left homeowners who had limited financial resources and no equity in their houses unable to refinance or sell, causing an unprecedented number of mortgage defaults. Shocked by these numbers, investors fled mortgage-backed securities, making them useless for short-term financing by financial institutions like Lehman. The result was a panic and a financial crisis.
As I mentioned, there were guilty actors everywhere. Everyone from the appraiser who fudge the home value to the banker who pressured lending agents to companies that engaged in fraud – guilty all.
But it was the government, through the agencies Freddie and Fannie that drove the whole failure.
HUD was still at it in 2004, stating that “Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market . . . rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create.”
That statement is all you need to understand why, in 2008, 74% of the subprime mortgages outstanding in the U.S. financial system were on the books of government agencies, particularly Fannie and Freddie.