Posted on 10/31/2011 8:34:37 AM PDT by SmileRight
What you’re about to read is a real blood-boiler. Mortgage meltdowns and housing bubbles don’t cause themselves, they are caused. The root cause of our current housing mess was massive government intervention that went horribly wrong. In previous columns, we covered the early precipitating causes.
Now, let’s stroll back to the latter half of the 1990s decade. The Clinton Administration had already hot-wired CRA and HUD to extend home ownership to all citizens, regardless of their creditworthiness. Congress and the Federal Reserve then jumped on the bandwagon. This activism caused mortgage standards to be relaxed across the industry.
Clinton juiced-up the CRA again in 1995, to promote securitization of sub-prime mortgage loans. The idea of securitization was...
(Excerpt) Read more at bizpacreview.com ...
The Village Voice wrote comprehensively here describing the Clinton-era dealings.
I agree that is largely the root cause. But I think DannyTN is on to something too. There were many people on the bubble in terms of their ability to repay a mortgage. They took the usual solution by moving WAY out of town.
In our area it was surprising to hear about the boom towns so far our - 40 or 50 mile commutes.
Then, when oil prices spiked and the Demos would not allow President Bush to allow more drilling it became a choice of paying the mortgage or buying gas to get to work.
As I recall, that is what pushed the housing bubble over the edge and started the collapse.
For some reason there is a blind spot on the Free Republic about the true reason for the 2008 economic melt-down. It was The Commodity Futures Modernization Act of 2000 (CFMA) signed into law on December 21, 2000 by President Bill Clinton. This combined with the Gramm-Leach-Bliley Act, recinded the Glass-Steagall Act of 1932. It was this United States federal legislation that officially ensured the deregulation of financial products known as over-the-counter derivatives. President Clinton left office with legislation that virtually left Wall Street investors with a free license to run the derivatives market any way they wanted. It was like opening a five lane freeway with no speed limits. It was these derivatives, especially the credit default swap, which were at the heart of the financial crisis of 2008. The effects of the collapse of the housing market was amplified by the credit default swap market. It is time we put a blue flashing light on Bill Clinton—and Republican Senator Phil Gramm.
Oil Prices have not been a "little hit" it's been a major hit. It's a much worse scenario than in the early 70's when we also took a major hit from oil prices. This would have been a major economic hit even without leverage. Energy prices are one of the 4 or 5 key inputs to the economy.
To suggest that oil price increases would have been an economic cake walk if not for mortgage leverage is not in my opinion credible.
I agree that leverage magnifies the intensity of a recession. But mortgage debt is less of a magnifier than other forms of debt. People have to live somewhere. They are paying rent or they are paying a mortgage. They may be doubling up with multiple families occupying a residence. But they can do that whether they are renting or paying mortgages. So mortgage leverage is not that great of a magnifier.
In the absence of the mortgage leverage, you'd have seen a commercial real estate crisis first with rental units going bust. Granted that commercial real estate may have more equity backing. The problem would show up in Insurance company stability, REITs going bust, etc.. and wouldn't have hit the banks quite as hard, but the net impact to the economy would probably have been pretty much the same.
Next, President Clinton appointed Andrew Cuomo to head up Housing and Urban Development (HUD) and urged his imposition of regulations requiring lending institutions to substantially increase sub-prime lending.
Cuomo created regulations which forced the government sponsored mortgage entities, Fannie Mae and Freddie Mac, to step up loans to minorities under the logic of the affordable housing movement-every American should be a homeowner. It turns out affordable housing did not mean inexpensive homes poor people could afford, but instead, easy credit to buy homes they could not afford.
Clinton's Treasury Secretary, Democrat Robert Rubin, aided by Democrat Lawrence Summers, organized and led the effort to repeal the Depression era Glass Steagall Act, allowing investment banks to use federally insured depositor cash to back millions of mortgages, while easing underwriting standards at the same time. No money down? No problem.
In addition Rubin pushed through the Commodity Futures Modernization Act, which allowed the creation of mortgage back securities, fictitious loans packaged as investments, and sold to pension funds. Democrats in the New York State Insurance Regulatory commission allowed AIG to insure mortgage backed securities with an invention known as the Credit Default Swap.
The Justice Department allowed the laws of the government to be used by the combined legal efforts of both themselves under Reno and Gorelick, and community activist organizations like ACORN to sue lenders for not making sufficient numbers of (risky) loans to the groups that the government defined as needing home ownership.
There was widespread misuse of government funding and corruption of Fannie Mae and Freddie Mac by top Clinton Cronies, Raines, Johnson, Gorelick, and Rubin that essentially enabled government backed organizations to enter the private mortgage market with federal money to compete with and coerce private banking into practices heretofore considered unethical.
Regulatory oversight had changed dramatically to accommodate the Federal home loan mortgage activity designed to enable sub par loans to be made.
In an effort to reverse the activist activities of government backed entities and its own regulatory people, The New York Times reported in September of 2003:
"The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry".
But Democrats defeated this legislation. Rep. Barney Frank and his supporters said this (that is found in the Congressional Record): " 'These two entities - Fannie Mae and Freddie Mac - are not facing any kind of financial crisis,' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee."
The first incentive I remember was if you bought a house - and lived in it for 2 years - you didn't have to pay capital gains on the profit.
Each year it seemed there were more incentives - for banks, lenders, citizens etc. People were using their homes like ATM machines. Who could blame them - a house bought for $80,000 in some neighborhoods were selling for $400,000 a few years later.
Of course there wasn't really money in the house - that was an illusion until the house was sold. But people bought the idea - banks agreed and the housing market kept heating up on endless good news.
The problem: the system worked like a ponzi scheme. The first people in got out with money - lots of it. The last people lost everything. Most of us in Florida could see what was happening - anything could have caused it to burst - the situation was that unstable. So no, it wasn't oil prices .. it was government incentives that caused the mess... oil prices might have helped bring it down - but at the level it was operating, higher coffee prices could have brought it down too.
Parts of Florida and parts of California really did have a speculative real estate bubble that was very much like a ponzi scheme. But the vast majority of the country did not.
The mess in Florida and California was caused by speculation. No different than the great Tulip bubble. They weren't buying to take advantage of the incentives. They were buying because they were betting that the trend in valuations would keep going up and they'd be able to flip the houses in short order and make a mint. In a lot of cases, they weren't even living in the homes.
The great Tulip bubble stated rationally too - then price increases started feeding on each other without regard to actual value. The same happened in Florida.
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