| damndl0ser said:
This simply is not true. The reason we have this housing bubble "bust" was because the banks were giving high risk loans to people that they knew couldn't pay back the loans. Then they would sell these loans to a 3rd party in bundles as high risk. And so the bank had nothing really to lose because they sold these loans already. This encouraged the bank to take even more high risk loans because it was making the banks plenty of money. So the cycle repeated until it finally burst.
Everyone should own a home. That doesn't mean it should be a McMansion, or one thats out of your price range. Simply put thats why these people lost everything. They were living above their means by using credit cards to pay for everything. Then after they had no more credit on their cards, the lost everything.
|
"There is very little doubt that the underlying cause of the current credit crisis was a housing bubble. But the collapse of the bubble would not have led to a worldwide recession and credit crisis if almost 40% of all U.S. mortgages--25 million loans--were not of the low quality known as subprime or Alt-A.
"..."
"The low interest rates of the early 2000s may explain the growth of the housing bubble, but they don't explain the poor quality of these mortgages. For that we have to look to the government's distortion of the mortgage finance system through the Community Reinvestment Act and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
"In a recent meeting with the Council on Foreign Relations, Barney Frank--the chair of the House Financial Services Committee and a longtime supporter of Fannie and Freddie--admitted that it had been a mistake to force homeownership on people who could not afford it. Renting, he said, would have been preferable. Now he tells us.
"Long-term pressure from Frank and his colleagues to expand home ownership connects government housing policies to both the housing bubble and the poor quality of the mortgages on which it is based. In 1992, Congress gave a new affordable housing "mission" to Fannie and Freddie, and authorized the Department of Housing and Urban Development to define its scope through regulations.
"Shortly thereafter, Fannie Mae, under Chairman Jim Johnson, made its first "trillion-dollar commitment" to increase financing for affordable housing. What this meant for the quality of the mortgages that Fannie--and later Freddie--would buy has not become clear until now.
"On a parallel track was the Community Reinvestment Act. New CRA regulations in 1995 required banks to demonstrate that they were making mortgage loans to underserved communities, which inevitably included borrowers whose credit standing did not qualify them for a conventional mortgage loan.
"To meet this new requirement, insured banks--like the GSEs--had to reduce the quality of the mortgages they would make or acquire. As the enforcers of CRA, the regulators themselves were co-opted into this process, approving lending practices that they would otherwise have scorned. The erosion of traditional mortgage standards had begun.
"Shortly after these new mandates went into effect, the nation's homeownership rate--which had remained at about 64% since 1982--began to rise, increasing 3.3% from 64.2% in 1994 to 67.5% in 2000 under President Clinton, and an additional 1.7% during the Bush administration, before declining in 2007 to 67.8%. There is no reasonable explanation for this sudden spurt, other than a major change in the standards for granting a mortgage or a large increase in the amount of low-cost funding available for mortgages. The data suggest that it was both.
"..."
"From 1994 to 2003, Fannie and Freddie's purchases of mortgages, as a percentage of all mortgage originations, increased from 37% to an all-time high of 57%, effectively cornering the conventional conforming market. With leverage ratios that averaged 75-to-1, and funds raised with implicit government backing, the GSEs were pouring money into the housing market. This in itself would have driven the housing bubble.
"But it also appears that, perhaps as early as 1993, Fannie Mae began to offer easy financing terms and lowered its loan standards in order to meet congressionally mandated affordable housing goals and fulfill the company's trillion-dollar commitment. For example, in each of the years 2000 and 2001, the first years for which data are available, 18% of Fannie's originations--totaling $157 billion--were loans with FICO scores of less than 660 (the federal regulators' cut-off point for defining subprime loans). There is no equivalent data available for Freddie, but it is likely that its purchases were proportionately the same, amounting to an estimated $120 billion.
"These sums would have swamped originations by the traditional subprime lenders, which probably totaled $119 billion in these two years. Data for Alt-A loans before 2005 are unavailable, but the fact that that Fannie and Freddie now hold 60% of all outstanding Alt-A loans provides a strong indication of the purchases they were making for many earlier years.
"...
"This set off a frenzy of subprime and Alt-A mortgage origination, in which--as incredible as it seems--Fannie and Freddie were competing with Wall Street and one another for low-quality loans. Even when they were not the purchasers, the GSEs were Wall Street's biggest customers, often buying the AAA tranches of subprime and Alt-A pools that Wall Street put together. By 2007 they held $227 billion (one in six loans) in these nonprime pools, and approximately $1.6 trillion in low-quality loans altogether.
"From 2005 through 2007, the GSEs purchased over $1 trillion in subprime and Alt-A loans, driving up the housing bubble and driving down mortgage quality. During these years, HUD's regulations required that 55% of all GSE purchases be affordable, including 25% made to low- and very low-income borrowers. Housing bubbles are nothing new. We and other countries have had them before. The reason that the most recent bubble created a worldwide financial crisis is that it was inflated with low-quality loans required by government mandate. The fact that the same government must now come to the rescue is no reason for gratitude.
http://www.forbes.com/2009/02/13/housing-bubble-subprime-opinions-contributors_0216_peter_wallison_edward_pinto.html
The low quality loans that were issued were heavily driven by the government's desire to promote home ownership. If it wasn't for government intervention these loans would have NEVER been issued
