Monday, June 15, 2015

The 2008 Housing Bust Explained and the Huge Role Played by Government ... The Dangerous Illusion of Government 'Help and Knowledge' ... Facts Are Stubborn Things

On June 12 Keenan posted comments concerning the government created Consumer Financial Protection Bureau (CFPB).

This relatively new government agency was created pursuant to legislation known as Dodd-Frank which resulted from the politically correct but factually wrongheaded conclusion that the nation's biggest banks had caused the financial debacle in 2008. They were wrong about that.

An interesting and astounding aspect of government is that when its policies fail, more failed government regulations and laws are the result of those prior failures. Accordingly, following on the heels of the disastrous 'Affordable Housing Goals' of the 1990s, that's how this CFPB creature and Dodd-Frank came about in 2010. One bad law begets another.

Peter Wallison's 2010 book "Hidden In Plain Sight" describes in detail the dominant role of government in creating the 2008 financial fiasco from which we're still recovering. In a succinct but telling chart on page 231, Wallison highlights the situation thusly --- in 1980 only 1 of 400 home mortgages had a combined down payment of 3% or less. That became 1 of 4 by 2005 and 1 of 2.5 by 2007. Government decided to make homes 'affordable' by establishing 'Affordable Housing Goals' which resulted in 'reduced underwriting standards' for home buyers during both the Clinton and Bush administrations.

How's that for an example of government in action and non-partisanship from the Clinton and Bush 'royal' families? And then the Obama administration came to the rescue again with Dodd-Frank in 2010? Aren't We the People lucky?

And since government sponsored mortgage enabling brokerage entities such as Fannie Mae and Freddie Mac account for ~75% of U.S. mortgages, this was easy for the government to accomplish. According to the new government rules on home buying, virtually everyone could and should become a home owner. Thus, banks were 'encouraged' by government to ease up on such things as down payments, credit histories and the ability of borrowers to handle debt servicing payments after the mortgage was granted.

Down payments of 3% replaced the historical standard of 20%. Predictably, the low income earners and middle class buyers were hurt the most. Accordingly, instead of a $20,000 down payment to buy a $100,000 home, a buyer could either choose to finance that same home purchase with $3,000 down or buy a ~$700,000 home with the same $20,000 down payment. That created more demand, higher prices and a smile on the faces of builders, realtors and mortgage brokers. The party was on the government, and it was required that all interested parties participate fully. So they did, and the rest is history --- sad history but nevertheless real history.Yet the history isn't being told by our trusted elected officials. Nor will it be.

In any event, all this government 'help and encouragement' made for both a huge increase in home prices and demand by newly 'eligible' home buyers. In fact, home prices doubled between 1997 and 2007. Then the crash occurred and foreclosures followed. People were hurt and the government passed new legislation purporting to rein in the banks and related financial institutions.

But the government was the primary cause of the housing crash and the foreclosures that resulted. Not the banks.

And now we're getting ready for Act II as the credit conditions are becoming easier again in an attempt to get housing starts up.

In the 1980s President Reagan warned us about believing the dangerous phrase of 'We're from the government and we're here to help.' It's too bad we didn't listen to him then, and it's even worse that we're not listening now. But don't expect the politicians to come clean anytime soon, if ever. They are too busy 'helping' us -- and getting and then staying in office by being elected and then reelected, of course.

I read once that the greatest enemy of knowledge is not ignorance --- it's the illusion of knowledge. How true that is about We the People and our misplaced reliance on the help of our elected government gurus.

So now do you believe that we're being better protected from a future financial debacle by our government 'helpers?' I hope not, because I sure don't.

That's my take.

Thanks. Bob.

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