Tuesday, November 16, 2010

Govt Responsible for Housing Bubble

I am not an economist but believe that I have my share of common sense. When the Democrats in power decided that everyone should be able to own their own home and pushed to provide financing to those that could ill afford it, I could see the possibility that there might be an increase in mortgage defaults. When the Democrats decided that Fannie and Freddie should buy these sub prime loans from the banks, it appeared to me that the banks might loosen the requirements, float more loans and the taxpayers might be in trouble.

What happens when the demand for houses increases faster than the supply, my golly, the prices go up. What happens when banks find out they are in trouble and stop lending, by golly, the prices of houses plummet. At the end, what happens when your sub-prime rates balloon to normal rates and you cannot afford the monthly payments, you default.

Blame it on the banks and Wall Street all you want, but it is the clueless liberal politicians that do not understand and who are at fault. Put the Government back to where our founding fathers intended it to be and watch a "free" economy take off.

Brookings Institution scholars Martin Neil Baily and Douglas J. Elliott have argued that the quarter-century of record prosperity from 1982 to 2007 caused all of the financial players to become less risk-averse, and hence less prudent.

Perhaps, but Wallison has set forth in the AEI October-November 2010 issue of Financial Services Outlook a much stronger and empirically based explanation for the financial meltdown.

Wallison argues that the housing bubble, driven by U.S. government policy to increase homeownership, is the primary cause of the financial crisis. He notes: "The most recent bubble involved increases in real [not nominal] home prices of 80 percent over 10 years, while the earlier ones involved increases of about 10 percent before they deflated."

Starting in the late 1990s, the government, as a social policy to boost homeownership, required Fannie Mae and Freddie Mac to acquire increasing numbers of "affordable" housing loans. (An "affordable loan" is made to people who normally would not qualify.) By 2007, 55 percent of all loans made by Fannie and Freddie had to be "affordable."

By June 2008, there were 27 million subprime housing loans outstanding (19.2 million of them directly owed by government or government-sponsored agencies), with an unpaid principal amount of $4.6 trillion.

By the middle of this year, foreclosure starts jumped to a record 5 percent, four times higher than any previous housing bubble.

Wallison concludes his argument: "What we know is that almost 50 percent of all mortgages outstanding in the United States in 2008 were subprime or otherwise deficient and high-risk loans. The fact that two-thirds of these mortgages were on the balance sheets of government agencies, or firms required to buy them by government regulations, is irrefutable evidence that the government's housing policies were responsible for most of the weak mortgages that became delinquent and defaulted in unprecedented numbers when the housing bubble collapsed."

The tragedy is that the financial crisis continues because Congress misdiagnosed the problem and came up with a 2,000-page "solution" that will only make matters worse.

Despite the well-known problems with Fannie and Freddie, they were ignored in the Dodd-Frank Act. Why? Because many members of Congress had conflicts of interest in that Fannie and Freddie were very large contributors to the political campaigns of numerous members.

More direct conflicts of interest, by Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd and House Financial Services Committee Chairman Barney Frank, were well publicized, forcing Dodd to retire and causing Frank to loan personal money to his own re-election campaign.

The numbers show that government policies (including actions by the Fed), not greedy bankers, caused the financial meltdown.

Read full NewsMax article here.

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