The Affordable Mortgage Depression: Recent Comments

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

2010-03-15T16:42:11Z

With respect, massive amounts of federal capital were directed into subprime mortgages.

I quote from "Fannie Mae and Freddie Mac: Past, Present, and Future" produced by HUD:

"In 1995, HUD began issuing affordable housing goals requiring the GSEs to purchase (1) mortgages made to low- and moderate income families, (2) mortgages on properties located in underserved areas, and (3) mortgages made to very low-income families and low-income families in low-income areas."

In 1996 40% of Fannie and Freddie's capital was being allocated to financing low- and moderate-income mortgages.

As to your observation:

"Think about it: how does a policy from the 90s create havoc years later without the new administration and Congress being able to stop it? Don't you think a report from 1995 could have been overridden or a new policy instituted once it became obvious there was a problem?"

When pray tell did "it become obvious there was a problem"? The Chairman of the Federal Reserve didn't acknowledge a problem until late 2007. ("Ignorance is Bliss")

The real estate market is a massive, slow moving entity defined by decade long business trends. It took two years of record homeownership gains to begin home price acceleration. Conversely, it took almost two years for prices to collapse following the peak of the Housing Bubble.

Do you recall the Government attempting to stop the Internet Bubble? They certainly were not going to stop a housing bubble from which they directly benefitted. Homeownership was increasing, unemployment falling, tax receipts surging to all-time highs. Politicians like homeownership gains and economic growth regardless of source (see recent concocted GDP gains). In fact, the Government has been engineering "affordable housing" and mortgage access for 70+ years.

Congress had no interest in stopping the bubble. I can produce hundreds of quotes from congressmen thrilled by the event and mortally opposed to reigning it in.

The Bush Administration was equally enamored of and thrilled by homeownership gains. They enacted equally silly public policy that was largely irrelevant because during the mania the private sector was providing mortgage products far more accommodating than any offered by the Federal Government. Bush did pay lip service to reigning in Freddie and Fannie but was forestalled by Congress. He couldn't have been happier about record low unemployment and distorted consumer spending.

Your argument doesn't resonate because politicians had no interest in slowing, much less stopping, the Housing Bubble.

The perceived economic benefits of homeownership have been reiterated by a dozen Presidential Administrations in the last century. The National Homeownership Strategy skillfully articulates these perspectives in specific detail.

The problem being that the pillar upon which the free-lunch of homeownership was based is the assumption that housing prices could not decline nationally. During the Housing Bubble no influential politician, policy maker or Federal Reserve banker articulated the possibility that housing prices could fall. This belief is also well documented. And why not? Prices hadn't declined in 70 years since the aftermath of The Great Depression.

Without risk of declining prices the Government's policies were riskless and beneficiary. Unfortunately these policy makers were wrong and their assumption created a dynamic which ensured that housing prices would eventually collapse.

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

2010-03-15T16:17:17Z

Response to Comment

Comment on Housing Sales “Unexpectedly” Collapse Providing Institutional Economists an Education in Economics and Common Sense

2010-03-14T05:33:45Z

"...This is apparently the curse of academic prognosticators who rely on backward looking econometric tools to formulate future expectations. Anytime the trend-line changes direction “economists’ expectations” will invariably be wrong. This phenomenon is fascinating because the incentives which drive the change of direction are well understood and largely common sense..."

http://en.wikipedia.org/wiki/Lucas_critique

http://en.wikipedia.org/wiki/Rational_Expectations

http://en.wikipedia.org/wiki/Policy_Ineffectiveness_Proposition

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

2010-03-14T01:59:55Z

I have heard allusions to this policy and it being at the root of the housing bubble but you provide specifics from the actual government policy as laid out and implemented. This is the piece that has been missing to clarify how this policy lead to all of the excesses, from Wall Street and all kinds of finance businesses, to the buyers, sellers, appraisers, etc. Wonderful contribution to the overall picture that for me, at least, was not available until I read this. Kudos and thank you!

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

2010-03-13T19:36:50Z

"Clearly written Government mandates directed massive amounts of Federal capital into increasing subprime lending."

No, it didn't.

First, Government capital does not go into the mortgage market -- at least it wasn't during the bubble. Government insurance programs facilitate private money going into mortgages, but Federal money doesn't go there. During the housing bubble, the only government insurance program that could have insured bubble loans was the FHA, and their market share dropped to less than 2%. The GSEs, which have subsequently fallen under government conservatorship, were not insuring loans with explicit government backing during the bubble -- and even then, the GSEs did not lead the charge, they were overtaken by private capital sources and then foolishly tried to catch up in 2005-2006 which bankrupted them and prompted a government takeover.

The report you cite certainly did represent the desires of our Federal Government to increase home ownership -- a goal I find of dubious value -- but pie-in-the-sky reports are what the government does. Bullshit for political pandering is a government staple. What the report does not provide, and where your argument falls apart, is that the government provided no mechanism for this to occur. At the time, the GSEs were independent entities, and they often failed to meet government mandates. The flow of capital that inflated the bubble was private money.

Look, I share your revulsion of government props in the housing market, and I would be happy to see the GSEs and other government mortgage programs disappear. However, they did not inflate the housing bubble.

Most of the attempts to link happenings in the 90s to a housing bubble in the 00s is political nonsense primarily put forth by Republicans hoping to deflect blame for a catastrophe that occurred under their watch. Kernels of truth are present, but the cause and effect you believe is solid is pretty weak.

Think about it: how does a policy from the 90s create havoc years later without the new administration and Congress being able to stop it? Don't you think a report from 1995 could have been overridden or a new policy instituted once it became obvious there was a problem?

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

2010-03-13T15:19:21Z

As with most such "causation vs. correlation" arguments ... the "truth" lies somewhere in between. In this case no doubt the Clinton NHS paved the way for the "housing bubble." But the initiative for the NHS came from the private sector. The lobyists for the banking institutions (arguably the most powerful of all) together with those of the other related "free-market" adherents (builders, mortgage lenders, Realtors, etc.) that stood to gain from this market stimulating (distorting) initiative ... did their usual lobbying "thing" and the public sector (Congress, the White House, the bureaucracy, etc.) responded as it most always does. The challenge for our
so-called "free-market" system continues to be ... should we really try to practice what we preach ... or just preach what we practice? From my experience I would say the private sector (and that includes "main street" as well as "Wall Street") made the public sector what it is today! Good thought provoking article.

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

2010-03-13T08:23:17Z

I agree with Irvine Renter. The degree of the gov't 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.

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

2010-03-13T08:21:05Z

Why not mention Clinton and the 1999 repeal of the Glass Stegal act also.

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

2010-03-12T17:59:45Z

The housing bubble was not a national problem. It was located primarily in 4 states; Arizona, California, Florida, and Nevada. The article takes aim at overarching Federal policies, yet the most of the nation achieved higher levels of home ownership without a collapse of pricing. For the other 46 states, housing price decreases were along the lines that one sees as normal.

The collapse never happened in many areas. Upstate NY has seen price appreciations in the past few years. The article paints the nation's housing issues with too broad a brush in an attempt to find a bogeyman.

In my opinion, there were organized efforts in the 4 states mentioned above that were criminal in order to prices up. The greedy got theirs while the getting was good and now taxpayers bail out the carnage left in their wake.

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

2010-03-12T17:50:42Z

Thanks for reading and I appreciate your comment but I do not understand your logic. I may not have been clear enough regarding how overtly the Government stated its intention to manufacture a housing bubble.

I am not observing a correlation between The National Homeownership Strategy and the Housing Bubble. I am highlighting the Government’s clearly articulated intent in 1994/95 to create a homeownership bubble and their written arguments as to why this would be a wonderful thing for the economy.

You cite the growth of subprime as a cause of the bubble. What do you think “caused” subprime to grow so dramatically. Clearly written Government mandates directed massive amounts of Federal capital into increasing subprime lending. Parallel legislative and regulatory reforms required the expansion of subprime within the private sector. This is not conjecture, but based on historical documentation.

“The National Homeownership Strategy: Partners in the American Dream” is effectively a how-to book for creating a housing bubble.

“This report identifies specific actions that the federal government, its partners in state and local government, the private, nonprofit community, and private industry will take to lower barriers that prevent American families from becoming homeowners. Working together, we can add as many as eight million new families to America’s homeownership rolls by the year 2000.” - Bill Clinton, May 2, 1995

The intent of the NHS was to make homeowners out of 8 million individuals who could not afford to purchase a house and service a mortgage. Mission accomplished.