Although the problems will continue to haunt us for years we are slowly moving past the mortgage crisis and I thought it might be time for us to again try to look back and figure out exactly what happened. During the peak of the crisis it was popular to try and blame everything on the other party while excusing your own. This is understandable politics and is a pattern as old as time.
But the truth is that everyone was right and everyone was wrong when it came to assigning blame. Partisans were right that the other side was to blame for the crisis but wrong to excuse their own. The fact is that all sides of the partisan fence share blame for the mess and often for the most idealistic of reasons. Reasons that spent decades in piling up to the final mess we had in the latter part of the last decade.
As I have previously discussed, some the problems with the home loan process began in the interests of fairness. For many years, there was a fairly-strict policy when it came to home loans. First you had to have a decent amount for a down payment, at least 10% and preferably 20% of the sale price. Then you had to provide detailed proof of your income to show that you could reasonably afford the payments. If you couldn’t do that, then you didn’t get the loan.
I have a friend who has been in the mortgage industry off-and-on for the past forty years. He tells me that in the ‘old days’ they had to put together detailed packages to be sent to Fannie Mae/Freddie Mac for approval and, usually, they got some of them back with the word NO written on them. If you couldn’t satisfy the terms of the loan, then you just didn’t get it and you continued to rent.
<A brief comment here just to put my words in perspective. I am a middle-class professional with an advanced degree and I work very hard but I do not own a home because I simply cannot afford it. I could have tried with one of the fake loans but I didn’t. I don’t mention this to brag in any way but to point out I am not a homeowner denying others the right to join me>.
This policy began to change in the late 80s and early 90s when members of Congress started to complain that they were being told by their constituents that they couldn’t get home loans. This problem tended to concentrate in areas where the people made less money, this tended to concentrate in major urban areas and, as we know, many of these areas were heavily minority. As a result, members of the Congressional Black Caucus began to complain about racism in the process (I’m not sure how they answered the fact that white people in the Ozarks didn’t get loans either) and this was a hard argument for people to fight.
So they started to pass rules saying a certain percentage of loans had to come from urban areas, which then forced Fannie Mae and Freddie Mac to take on loans they would not otherwise have accepted.
While these policies were first started by Democrats, they were strongly-supported by Republicans and by both the Clinton and Bush administrations.
At the same time we saw deregulation enter into the market, which meant that banks and financial institutions were able to take on investments that they probably shouldn’t have. It’s popular to have people blame the Republicans for this (indeed we’ve seen a lot of media hype about the repeal of the Glass-Steagall Act and how it led to the mess on Wall Street).
It is true that the original proposals came from Republicans, but it is also true that the final bill passed the Senate by a margin of 90-8 and the House by a margin of 343-86. It was then signed by President Clinton. Had the Democrats wanted to stop the bill, they had the votes to filibuster; had President Clinton wanted to stop the bill, he had the veto and enough Democrats to sustain it.
But both sides eagerly supported deregulation. Just as with the changes to the loan requirements, I think this was done with the best of intentions but things went too far and had unanticipated results.
Then of course we had the banks and investment firms buying into these loans. I think this may be the place where the most blame can be fixed. It wasn’t done through a desire to get people into homes nor was it done out of belief that it would help business (as with deregulation). It was a fairly-risky step by the boards of directors of these institutions.
On the other hand, we had seen a rise in housing values for decades so it was not like they were putting money into penny stocks. Still, this is one place where things could have been done more responsibly.
Then, of course, we had the collapse in the mortgage industry and the resulting foreclosures. This problem stemmed from several causes and, living in Northern California, I had a front row seat to the whole mess.
The first step here was a spike in home prices caused largely by people moving from the high-priced Bay Area over to the cheaper Central Valley region. This meant that most of the people living here could not afford to buy houses with traditional mortgages. Stacking this up against the above-discussed desire to put everyone in a home something had to be changed.
So we saw the advent of 100% financing, teaser rates, sub-prime loans and so on. In many cases, you did have predatory lenders conning buyers by promising them the moon.These slime balls looked at a pile of money and grabbed all they could without any regard for the consequences, in part because they knew they had the power and influence to be bailed out if things fell apart.
But at the same time, I don’t care how financially-uneducated you are, if someone offers to sell you a $500,000 house for $ 1,000 a month over 30 years it does not take much math to figure out that something is fishy.
Of course, as long as the housing prices continued to go up, then people would be able to refinance and get out of the bad loans. But nothing lasts forever and, as we saw, a once a housing glut started to develop, it was inevitable that prices would start to drop. But in the Central Valley, we had an additional problem.
Because most people had purchased new homes with no money down, they had no stake in the property. In addition, many of them were urban transplants who felt (and I’ve had people say this to my face) that living in the Central Valley was ‘beneath them’. So you had huge numbers of people simply give up and not fight to save the house.
Again, I think that this is one area where some blame is to be assigned. People knew they were getting into risky loans and, in the case of the transplants, they didn’t make any effort to save the house. However I understand that money only goes so far and I wouldn’t fight to save a home in a place I didn’t like.
So the result was a collapse in the housing market, which trapped more people in bad loans, which led to more defaults, and so the cycle ran. The bad loans led to economic collapse for those who had invested in the properties and here we are.
But, as you can see, from my admittedly-armchair economist analysis, the road to the current situation was a long one which has stretched through two decades, two administrations, and the efforts of members of both parties. It has also involved bankers, corporate executives and everyone else down to ordinary homeowners who took a risk and lost.
All of these people deserve some blame, but most of them acted with the best of intentions. Despite what a partisan might suggest, no Democrat and no Republican wants to see the economy fail. Neither side wants to let his ‘evil corporate bosses’ get away with robbery. You didn’t have one side pushing for deregulation and one fighting it, both went into it together.
At the same time, while corporate bosses made major mistakes, in many cases they did so with the best of intentions. The gang at Fanny Mae and Freddie Mac did make huge errors but they were also forced to make some bad choices by the well-intended laws.
Homeowners didn’t buy into houses with the desire to abandon them and they have suffered badly with the loss of their investment. However, they also did know there was a risk and sometimes, when you roll the dice, you get double ones.