Comment posted regarding Origin of the Housing Bubble: “The National Homeownership Strategy”

"I agree with Irvine Renter. The degree of the government emphasis on increasing home ownership may have been ill advised.  But anyone who has read extensively about the housing bubble and crash knows that this "cause" was a drop in the bucket compared to the other complex factors contributing to the CREDIT BUBBLE.  These include the shadow credits market which included all of the mortgage backed securities and the unregulated derivatives that went with them.  Also, the capital that was looking to be invested, which ended up in these markets had a huge influence.  The idea that all of these securities and the demand for them and the bankers wishing to profit on selling them can be blamed on government housing policy is either an absurd oversimplification or more likely just the wish (believe it and it becomes true) of right wingers trying to blame this all on liberal housing policies.

I won't be surprised if this isn't published."


Thank you for reading and I appreciate your feedback.  As a matter of course I post all comments that are reasonable, rationale and clearly articulated.  Not only has your entry been published, (as representative of several which conclude that my analysis is a GOP, right-wing conspiracy) your thoughtful commentary has inspired an entire article.  I note that one of the more entertaining aspects of producing this blog has been my interactions with informed people possessing interesting perspectives.

Let me start by addressing the substance of your economic response.  You are correct.  I agree with you.  The Housing Bubble was fueled by the geometric growth of subprime mortgages, the unsustainable Credit Bubble, the expansion of mortgage backed securities, unregulated derivatives and massive capital flows into housing securities.  In fact, I have written about and attributed appropriate weight to each of these contributors.  Your issue with this particular article appears to be one of perspective.

The “blog format” has inherent communication limitations.  Each article is a focused effort which in most cases doesn’t convey context that would be understood by having read years of postings.  To the extent that this analysis created the impression that I believe The National Homeownership Strategy was the ONLY cause of the bubble, I apologize.  The Housing Bubble was a dynamic entity.  There were hundreds of discrete causes which started the ball rolling, allowed momentum to continue and ultimately created the mania portion of the bubble from 2002-2005.  Researching each of these independent factors is interesting, but the purpose of the National Homeownership Strategy article was to identify the bubble’s origin.

At the risk of offending, I observe that you have done your thoughtful perspective a disservice by dismissing this analysis as a right wing conspiracy theory.  It places you in the company of individuals who, in addition to being far less articulate, seem to subscribe to a faith-based, political theology which is uninterested in economic reality.  I do not know your background or make assumptions about your level of familiarity with the subject matter, but I assure you that I have read extensively about the Housing Bubble and am thoroughly familiar with the complex factors involved.  The Affordable Mortgage Depression framework of economic understanding successfully predicted the collapse of the Housing Bubble in 1995, the looming Depression in 1996 and many of the unexpected events which followed.  I continue to believe that my expectations, born from an understanding of the forces which enabled the Housing Bubble to perpetuate, will play out in the years to come. 

As stated above, our disagreement appears to be one of perspective.

Subprime mortgages, the Credit Bubble, expanding subprime securitizations and unregulated derivative products were all vitally important to the development of the Housing Bubble. 

Each raises an important set of questions though.  Why did they occur?  What caused them?  Did they just happen?  Or can their origins be traced?

It appears you have identified the importance of these factors, but ignore the context of how they came to being and grew to prominence.

Subprime lending existed long before the Housing Bubble, but had never been applied in large scale to mortgages.  The reason is simple; banks don’t make loans to people without credit, capital and cash flow because it is unprofitable.  So why did subprime mortgage lending begin to increase dramatically in 1995?





Securitizations existed for decades before the Housing Bubble and had been used to extraordinary effect in diversifying risk and increasing capital flows into fundamentally sound investments.  But the model had never been successfully applied to subprime mortgages.  There was simply no transaction volume to securitize as subprime mortgages barely existed, combined with the reality that institutional investors had little appetite for CDOs underwritten by loans that were at a high risk of defaulting.  Why did Bear Stearns perform the first publically available subprime securitization in 1997?  Why did this financial engineering mechanism grow rapidly and direct so much capital towards homeownership?

I reject that each “just happened”, especially when the historical record, empirical evidence, economic data and logic points to another explanation. 

Tracing the Origin

Subprime mortgage lending began increasing in 1995 and grew rapidly because the Government was overtly engineering its expansion.  HUD, Fannie and Freddie began directly financing hundreds of billions of dollars of subprime mortgages annually.  Private sector lenders were forced to originate subprime mortgages to be in compliance with the newly revised CRA and newly passed Riegle-Neal Act. 

The Government’s stated goal was to transform 8 million Americans in six years, who lacked adequate credit, capital and cash flow, into homeowners.  Subprime was the primary tool used to achieve the objective.

Subprime securitizations began to grow:

• As a function of rapidly increasing subprime mortgage volumes
• Because the Government was assuming the risk of default through Fannie and Freddie guarantees (making the securities much more attractive to third-party buyers)
• As a result of regulatory revisions which for the first time allowed the public securitization of CRA mortgages

Without The National Homeownership Strategy neither the wide spread use of subprime mortgages nor the securitization of CRA loans would have come to pass.

The Magical, Money-Making Ponzi Scheme

The single most damaging result of the NHS was that housing prices began to rise.  This was the inevitable result of increasing homeownership by 8 million people through expanded access to credit and loosened lending standards.  It was also the event which enabled the Housing Bubble to develop self-sustaining momentum.

Excerpt from The Affordable Mortgage Depression Manifesto republished to this site 11/3/08:

"As home prices began to rise during the mid-1990s, partially as the result of increased demand by the new pool of potential subprime borrowers, lenders observed an interesting phenomenon.  In an environment of rising prices, subprime mortgages were actually profitable for the lender.  If borrowers ran into trouble they could sell their properties for more than enough money to satisfy the requirement of the mortgage.  Even better, the lenders could refinance such mortgages based on rising equity and generate a new source of profitable fees.  Subprime lending, created by government edict and nurtured by Freddie and Fannie, transitioned from a cost of doing business for private lenders into a profitable, if unsustainable, business model”

At the same time Wall Street figured out a similar lesson.  Investment bankers had already discovered how to make pools of assets functionally less risky and more valuable than the sum of their parts through the magic of securitizations.  These financial rocket scientists observed that in a rising house price environment much of the value structure of the securitized subprime debt was of high credit quality. 

The challenge was figuring out a way to lend to low income borrowers with poor credit and no assets.  Such lending was required to meet government mandates and could be profitably mined while housing prices were rising.  Capitalism when presented with an opportunity to generate profit is good at solving such problems, and thus innovatively structured, Affordable Mortgages were created.”

Dismal Reality

Subprime mortgages had historically been unprofitable, not financeable and unsecuritizable.  Given a backdrop of steadily rising and accelerating housing prices supported by extraordinary and continued Government support, subprime became wildly profitable for private sector lenders and investment bankers. 

It was rising home prices that changed the Government directed Homeownership Bubble into a self-sustainable, private sector driven phenomenon.  Those rising prices are directly attributable to The National Homeownership Strategy.  As such, I maintain my stated argument that by directing capital to subprime mortgages, massively expanding credit availability, forcing private lenders to fund ill-advised loans, establishing the necessary conditions for subprime securitizations, and creating an environment defined by rising home prices the NHS was the origin of the Housing Bubble.   

My “Right Winger” Political Ideology

I won’t expound on my political opinions (unless requested), but I assure you that I hold no allegiance to any existing political party.  I was originally a registered Libertarian but currently find myself drawn to aspects of the Tea Party movement to the extent they believe that the Government:

• Is borrowing too much
• Spending too much
• Excerpts too much control over the States, corporations and individuals
• Taxes the economy excessively
• Has gotten to be too large
• Is increasingly pursuing self-perpetuating policies
• Is detrimentally subsidizing consumption and borrowing while discouraging savings
• Is unnecessarily imperiling the nation’s credit rating
• Attempting to re-inflate an economic phenomenon that was unsustainable
• Is consciously debasing the US dollar

My analysis of the Housing Bubble and The Affordable Mortgage Depression is driven only by intellectual curiosity and a devotion to economic reality.