The US Government's Role in Building and Bursting the Housing Bubble

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  • 1. In 1993 the FHA began to increase the percentage of its loans that involved down payments of less than 3 percent. 13% in 1992 28% in 1996 50% in 2000Standards lowered for approving mortgage loans
  • 2. In 1989, only 1 in 230 homebuyers bought a home with a down payment of 3 percent or less. In 2003, that ratio was 1 in 7. By 2007, it was 1 in 3.Buying made easy
  • 3. Tax deductions encourage oversized mortgages In 2009, one in four taxpayers itemized mortgage interest, accounting for about two-thirds of the mortgage interest paid by all borrowers.
  • 4. Government doubles down To expand ownership to homebuyers with shaky credit, government increasingly has backed subprime and nonprime mortgages. By 2008, Fannie and Freddie alone held or insured 13.4 million of them while overall, government and its entities guaranteed more than 20 million.
  • 5. Government investment in 20.4 million subprime and other risky loans is about threetimes the size of the privatemortgage-backed securities market. Inflating the bubble
  • 6. Homeowners take the money and run In 2003, homeowners cashed out equity in their homes to the tune of $400 billion. Equity extraction was worth more than $700 billion in both 2004 and 2005.
  • 7. The average US homeowner hasNot much left to bank less than 7 percent equity in his or her home. As recently as 1990, US home equity was 45 percent.
  • 8. Government ups its skin in the game The Federal Housing Administration has increased its market share of home purchase loans, from 8 percent in 2007 to 43 43% percent in 2010. 8%
  • 9. Debt’s climb as a percent of GDP In 1986, residential mortgage debt accounted for 39 percent of gross domestic product. In 1990, mortgage debt was 50 percent of GDP. In 2007, it was 75 percent. 1986 1999 2007
  • 10. Government is left holding the bagBy 2008, half of all mortgages in America — 28 million — weresubprime or nonprime loans. Seventy-four percent of them were guaranteedby government or government-agencies
  • 11. American Enterprise Institute