Tag Archives: Housing

Government’s Role In The Housing Bubble And Bust

It’s the classic tribal warfare.  The Republicans wanna blame the Democrats for the boom then bust of the housing bubble.  Specifically they wanna blame Carter for the CRA, then Clinton for accelerating it and finally Barney Frank for enabling Fannie Mae and Freddie Mac.

For their part, the Democrats wanna blame the Republicans for easing regulations and over site of the financial markets.  Most especially with regards to leveraging, allowing banks to act as investment firms and the existence of the derivative market.

I have long been a believer that it was Fannie and Freddie that drove us up to and then over the cliff.  And for a long time have held the Democrats responsible.  I am learning and need to amend my position.

It was government policy that drove us up to and then over the cliff.  Policy that began with the noble intention of  providing affordable housing to more and more people.

However, when government subsidizes, we often always get poor results:

It was perhaps a worthwhile goal, but it caused the financial crisis when it was done by lowering mortgage underwriting standards. In the end, it was a colossal policy error by Congress and two presidential administrations.

Data from the article demonstrates the government’s involvement:

The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

At first, this quota was 30%; that is, of all the loans they bought, 30% had to be made to people at or below the median income in their communities. HUD, however, was given authority to administer these quotas, and between 1992 and 2007, the quotas were raised from 30% to 50% under Clinton in 2000 and to 55% under Bush in 2007.

It is certainly possible to find prime mortgages among borrowers below the median income, but when half or more of the mortgages the GSEs bought had to be made to people below that income level, it was inevitable that underwriting standards had to decline. And they did. By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit. This continued through the 1990s and 2000s until the housing bubble–created by all this government-backed spending–collapsed in 2007. As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages.

In short, the government created the criteria, or the supply, and then the government created the agencies, or the demand.

Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government.

So yes, it was the government POLICY that created this bubble.  But, back to Fan and Fred, did they have a role?

Of the 19.2 million subprime and low quality loans that were on the books of government agencies in 2008, 12 million (about 62%) were held or guaranteed by Fannie and Freddie.

Yes.  And a big one.

However, I’m forced to amend my position.  It was not the SOLE fault of Fan and Fred for the crisis, but they are certainly a major player.

To his credit, and to complete the Liberal tragedy, even Frank himself acknowledges his errors:

I hope by next year we’ll have abolished Fannie and Freddie … it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.


Good News For The Market

This news alone should drive the market 200 points:

Rep. Barney Frank (D-Mass.) will announce Monday that he is not seeking re-election, a spokesman said Monday morning.

Frank, the ranking member of the House Financial Services Committee was the architect with Sen. Chris Dodd (D-Conn.) of the sweeping financial reform bill that bears their names.

If there is any one single individual who is the face of blame for the housing bubble and the resulting recession, it’s Barney Frank.

Very good news that this man is retiring.

Mortgage Refinance Program: Part II

The current economic condition was brought about by housing.   Housing costs and a housing bubble.  The result is that we find an enormous problem with hundreds of thousands of people facing foreclosure. And until that problem is cured, we may never truly begin to see a real path to recovery.

These people are suffering.  They’re going to bed at night with that pit i their stomach wondering how they’re gonna make the next payment.  How they’re gonna avoid having the phone shut off.  How they’re gonna make winter.  There is fear and apprehension and stress.  I get it.  And I don’t wanna diminish it.   But those feelings are never, ever, really gonna go away until they’re addressed.  Not just contained, but addressed.

I went to school in Marshall, MN, home of Schwanna’s Ice Cream and Red Barron pizza.

I met Mr. Schwann by the way.  He dropped out of school in the eighth grade before founding his company.  I tended bar at the hotel he liked to have his Christmas Parties at.  His favorite thing was to tell me to watch how his executives would “run on the bar” in an effort to drink what he was drinking.  The worst was when he landed on CC and water with a rind of lemon.  I never cut so many lemon rinds in my life!

My major was Mathematics.  Not math, but Mathematics.  In calc I found myself in class with a bunch of non-math majors.  And they were struggling.  Some just wanted to pass and get the req out of the way.  Others were earnestly interested in learning calculus.  I gravitated towards those kids.

We would study forever.  I’ve found that math is learned in a series of ramps and plateaus.  That is, forward progress is made steadily until such a time as a specific concept is hit that prevents further and deeper understanding.  And until that plateau is addressed, not contained, further learning can not occur.  The gifted teachers have a grasp of plateau identification and remediation.  Anyway, the same process holds true in other aspects of life.

And home finances are one of them.  Which is my very long way of saying that just giving someone the answers to the calc exam isn’t going to help them understand calculus.  And neither is forgiving mortgages going to help people address their home finance situation:

WASHINGTON — The federal government’s expansion of a mortgage refinancing program could reduce the monthly payments of up to one million homeowners, but analysts said the modest scope of the plan meant it would probably do little to heal the housing market or help the broader economy.

The effort, built on sweeping voluntary agreements with the mortgage industry to let people refinance even if their homes have declined in value, reflects a new White House emphasis on economic measures that do not require Congress to overcome its bitter partisan divisions.

It also maintains a choice President Obama made in the early days of his administration to focus on reducing monthly payments rather than on the amounts that borrowers owe, the latter being what a growing number of liberal and conservative economists consider necessary to resolve the problem.

I resonate with the plight.  I get the desire to help.  But this isn’t helping.  This is enabling.  And until true and serious lessons are learned, nothing will change:

Treasury has publicly estimated that the redefault rate on HAMP permanent mods will be 40% over five year. Now, just one year into permanent mods, we have already reached a 21% redefault rate. There is no indication that the redefault rate is plateauing, and no reason to think that it will.

In other words, the default rate on refinanced mortgages is very high.  If you are failing to meet the payments of your current mortgage, there is little reason to believe that you will suddenly be able to make the payments on a restructured mortgage.

Not only does this program fail to help the problem it sets out to fix, the secondary impact is that it artificially keeps the home market from clearing.  The price of a home remains artificially high.  And this prevents true recovery.

Let the market work.  Accept the pain and allow these homes that are over leveraged to go into foreclosure and the market will heal.  It always does.

Housing Market: Hitting Bottom?

Ever since the Federal government decided that it needed to subsidize home ownership, we’ve been heading for the bubble.crash.  And it hit.  Big.

Now we’re waiting for the bottom so that we can begin to climb our way back to positive ground.

I have seen two pieces of good news:

  1. My neighborhood Realtor has sold 2 properties on the street in the last couple of weeks.  Sellers are internalizing the new prices and buyers are responding by, well, by buying.
  2. This story about a first time home buy in Minneapolis:

Jessica Harrison thought she knew what to expect when she decided to look for a house: a buyer’s market.

And why not? Prices are down sharply since 2009. And with so many foreclosed properties for sale, Harrison was certain she would find a good deal fast.

Instead, the Minneapolis teacher waded through countless homes during what became a two-year search. Most needed too much work. When she found a move-in ready house, she lost out to bids she couldn’t match. Harrison tried to buy a home through a short sale, too, but the deal fell through after six months.

She finally reached a deal on a tidy house in south Minneapolis and expects to close at the end of this month. “There were multiple properties available, but I wanted to get a house that I could move into,” Harrison said. “A lot of the houses needed a lot of work, and I didn’t have the money or resources to do that.”

Home buyers can no longer assume that it’s easy to buy a cheap house in a good location. New local listings are down 17 percent in the Twin Cities over the past year, as would-be sellers are holding on to their homes until the market improves. “[Buyers] have to be patient until the right home comes along,” said Ryan Haagenson, a sales agent with Re/Max Results in Minneapolis. “And ready to pull the trigger when it does.”

Make no mistake: There are still more sellers than buyers. But the decline in listings and the quality of the options are slowing the search for those on the hunt. U.S. home listings in September fell to a four-year low, according to Realtor.com.

For whatever reason, when the supply of homes goes down, the price goes up.

We’re certainly not out of the woods yet, we still have Obama and the Democrats stalling foreclosures and incenting people to buy homes.  But we’re closer than we were last week.

Housing Market: Foreclosures and Defaults

We have a long way to go folks.

If you need further proof, just check out this story:

Strategic default — opting to walk away from a mortgage you can afford — isn’t a new phenomenon in the housing crisis. But with home values continuing to decline, more owners are finding themselves in a position where they may see it as a savvy business decision to destroy their credit rather than wait years for prices to recover.

Likier put almost 20 percent down to purchase a $312,000 townhouse in Westmont in 2006 and lived there until two years ago, when he remarried and bought a home in Chicago Ridge.

He listed the townhouse for $249,000, figuring he would bring $20,000 to the closing table to facilitate a deal. The listing has since dropped to $179,000, which is lower than the unit sold for when it was built in 1999. He stopped paying the mortgage in January and recently was served with foreclosure papers.

And the real killer?

Despite the fact that he and his wife are employed and have an annual household income near $150,000, he’s comfortable with his decision.

Yowza.  A tough decision.  And one I agree with.

See, when working with contracts and finances, the deal is what the deal is.  The bank is no more willing to do the right thing” than you should be.

So this makes sense:

“I did a lot of soul-searching about whether it was morally the right thing to do,” he said. “I felt there was no moral obligation to make a payment. The contract says it’s a financial obligation, not a moral obligation.

“I was in a boat with a slow leak. It was manageable, but I know I was slowly sinking.”

Until we stop that sinking, we’re going to see more and more of this.

Housing Boom and Housing Bust: Federal Loans and Foreclosures

Remember when houses were worth more than they are now?  Remember when the value of a home would go up almost overnight?  You could buy one on Tuesday and sell it for a profit by Friday.

Yeah…good times.

Until the bubble hit.  And then it wasn’t such good times; in fact it was bad times.  Really bad times.

The housing bubble hit all of us in some way or another.  For many of us, our homes are worth less now than they were before; we still haven’t caught up.  And the economy?  Well, we know how THAT has played out.  So, with the the downside of such a bubble being so, well, down, the lessons we learned just a few short years ago should still be fresh.  Should still be pertinent, right?


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The Liberals Of Today Don’t Remember The Lessons Of Yesterday

And it’s not their fault.  See, the Liberals of yesterday have grown up and become the Conservatives of today.

Our problem is that we keep having children who become Liberals for a short time before reaching full adulthood.

Now, to be sure, some of those kids become infatuated with the concept of Liberalism and make it a lifestyle, but by and large….our youth outgrow their Liberal tendencies nicely.

Which leads me to this point.

We know that the housing bubble lead to our current economic malaise.  AND we know what lead to the housing bubble.

The problem?  Yesterdays children don’t.

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Thought On Affordable Housing

I spent an awesome weekend camping with an awesome bunch of guys and their awesome daughters.  6 dads, 6 girls.  Lots of fun; little sleep.

However, we did have the chance to talk loud and sound smart after the little princesses went to bed.  One night, after awhile, the conversation touched, touched I tell you, on politics and specifically the housing crisis.

I need your thoughts.

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Lending Money

There’s all kinds of reasons why people want to borrow money.  Mostly, though, there are two:

  1. They need the money now.  A bill has to be paid or service will be turned off.
  2. They want something now.  A purchase is to be made and saving the money isn’t desirable.

In any case, an individual is taking current value of money in trade for some future value of money.  And current money is more valuable than future money; I’d rather have $20 now than $20  later.  So, to compensate for that, money lenders charge interest.  While I would rather have that 20 bucks now, I might be willing to hold off if I could get 25 bucks next week.

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Mandatory Fun: We Own Hundreds of Thousands of Foreclosed Homes

Look, owning a home is a good thing.  I think everyone should buy a home.

In the same way that I think everyone should pay off credit card bills every month.

In the same way that I think everyone should contribute to their retirement.

That is, I think that you should do all these things IF YOU CAN.

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