The document summarizes the evolution of home ownership and mortgage finance in the United States, leading up to the financial crisis of 2008. It describes how government intervention during the Great Depression made home ownership more accessible through longer-term, fixed rate mortgages. It then discusses how further government actions and policies in subsequent decades continued expanding home ownership but also contributed to riskier lending practices and eventual housing bubble. The crisis began with the collapse of the subprime mortgage market in 2007 and led to the failures of major financial firms like Lehman Brothers and government bailouts of Fannie Mae, Freddie Mac, and AIG in 2008.
Alternative Currencies: The Solution to the Economic Crisis?Brian McConnell
"What is now being called the 'Great Recession' shows no sign of ending either in the U.S. or elsewhere in the world. What then should be done? In many locations people are increasingly turning to creation of alternative currencies. But can these really be effective?
This and many other questions will be addressed by Richard C. Cook, author and retired U.S. Treasury analyst."
As a resident of Roanoke and director of the Peace Spiritual Center, Richard brings a wealth of information and an open-eyed critique of the most discussed solutions as well as examples from both ancient and recent history.
Alternative Currencies: The Solution to the Economic Crisis?Brian McConnell
"What is now being called the 'Great Recession' shows no sign of ending either in the U.S. or elsewhere in the world. What then should be done? In many locations people are increasingly turning to creation of alternative currencies. But can these really be effective?
This and many other questions will be addressed by Richard C. Cook, author and retired U.S. Treasury analyst."
As a resident of Roanoke and director of the Peace Spiritual Center, Richard brings a wealth of information and an open-eyed critique of the most discussed solutions as well as examples from both ancient and recent history.
TIME Magazine names 25 People To Blame For The Financial CrisisWayne Caswell
Homeowners of Texas (HOT) compiled the following TIME articles to provide insight into causes of the financial crisis. The authors did an outstanding job, but we contend they put too much blame on Wall Street and mortgage-backed derivatives. Some of the nation’s largest homebuilders were culprits too.
With a lack of accountability and minimal risk of lawsuits, the builders’ strong profit incentives prompted them to cut corners with substandard materials and workmanship, cover-up known defects and code violations, artificially inflate property appraisals, make risky loans, and then resell the loans to unsuspecting investors who did not understand the risks. That’s why we say companies building substandard homes share blame with those making subprime loans.
Four Trillion Dollar plus solutions to our Economic Problems, tried and proven.
- Sovereign Money
- Georgism
- Public Banking
- Ending Government Financial Asset Hoarding (GFAH)
Based on my new book: America is Not Broke! Available on Amazon: http://amzn.to/1Ihcc54
AMERICA IS NOT BROKE! Four Multi-Trillion Dollar Paths to A Thriving America The unsustainability of the American economy is as familiar as the newscycle. There is no money for social programs, no money to run the government, no money to cut taxes, and above all, we have to cut, cut, cut. But, what if it's not true? Instead of familiar complaints about the national debt, leading to just slicing a shrinking economic pie differently, or worse, to Austerity Economics, the reality is that we already have all the wealth we could ever need. The tried and proven proposals in America Is Not Broke would guarantee America's prosperity, fairness, democracy, and economic and ecological sustainability. Four multi-trillion dollar reforms: Sovereign Money, Georgism, Public Banking, and Ending Government Financial Asset Hoarding, plus a few other major reforms, show how we can have it all, if we only learn where to look.
Even if enough time has passed since a foreclosure, many lenders are loath to make loans to borrowers with any blemish on their credit history. The average credit score on purchase mortgage loans sold to Fannie Mae last year was close to 745. In a more typical housing market, like that prior to the housing bubble, the average score was closer to 715. This 30-point difference represents several
million potential homebuyers.
US Economic Outlook 2008-11+ (Updated 28 May 08); Discussion of Money, Federal Reserve, Dollar as World's Reserve Currency, Inflation, Deflation, Oil, OPEC, Debt, Saving Rate, Housing Bubble and Future Outlook for US Economy
US Economic Outlook 2008-11+ ; Discussion of Money, Federal Reserve, Dollar as World's Reserve Currency, Inflation, Deflation, Oil, OPEC, Debt, Saving Rate, Housing Bubble and Future Outlook for US Economy
This complete deck can be used to present to your team. It has PPT slides on various topics highlighting all the core areas of your business needs. This complete deck focuses on Financial Crisis PowerPoint Presentation Slides and has professionally designed templates with suitable visuals and appropriate content. This deck consists of total of twenty eight slides. All the slides are completely customizable for your convenience. You can change the colour, text and font size of these templates. You can add or delete the content if needed. Get access to this professionally designed complete presentation by clicking the download button below. https://bit.ly/3fyIZc7
TIME Magazine names 25 People To Blame For The Financial CrisisWayne Caswell
Homeowners of Texas (HOT) compiled the following TIME articles to provide insight into causes of the financial crisis. The authors did an outstanding job, but we contend they put too much blame on Wall Street and mortgage-backed derivatives. Some of the nation’s largest homebuilders were culprits too.
With a lack of accountability and minimal risk of lawsuits, the builders’ strong profit incentives prompted them to cut corners with substandard materials and workmanship, cover-up known defects and code violations, artificially inflate property appraisals, make risky loans, and then resell the loans to unsuspecting investors who did not understand the risks. That’s why we say companies building substandard homes share blame with those making subprime loans.
Four Trillion Dollar plus solutions to our Economic Problems, tried and proven.
- Sovereign Money
- Georgism
- Public Banking
- Ending Government Financial Asset Hoarding (GFAH)
Based on my new book: America is Not Broke! Available on Amazon: http://amzn.to/1Ihcc54
AMERICA IS NOT BROKE! Four Multi-Trillion Dollar Paths to A Thriving America The unsustainability of the American economy is as familiar as the newscycle. There is no money for social programs, no money to run the government, no money to cut taxes, and above all, we have to cut, cut, cut. But, what if it's not true? Instead of familiar complaints about the national debt, leading to just slicing a shrinking economic pie differently, or worse, to Austerity Economics, the reality is that we already have all the wealth we could ever need. The tried and proven proposals in America Is Not Broke would guarantee America's prosperity, fairness, democracy, and economic and ecological sustainability. Four multi-trillion dollar reforms: Sovereign Money, Georgism, Public Banking, and Ending Government Financial Asset Hoarding, plus a few other major reforms, show how we can have it all, if we only learn where to look.
Even if enough time has passed since a foreclosure, many lenders are loath to make loans to borrowers with any blemish on their credit history. The average credit score on purchase mortgage loans sold to Fannie Mae last year was close to 745. In a more typical housing market, like that prior to the housing bubble, the average score was closer to 715. This 30-point difference represents several
million potential homebuyers.
US Economic Outlook 2008-11+ (Updated 28 May 08); Discussion of Money, Federal Reserve, Dollar as World's Reserve Currency, Inflation, Deflation, Oil, OPEC, Debt, Saving Rate, Housing Bubble and Future Outlook for US Economy
US Economic Outlook 2008-11+ ; Discussion of Money, Federal Reserve, Dollar as World's Reserve Currency, Inflation, Deflation, Oil, OPEC, Debt, Saving Rate, Housing Bubble and Future Outlook for US Economy
This complete deck can be used to present to your team. It has PPT slides on various topics highlighting all the core areas of your business needs. This complete deck focuses on Financial Crisis PowerPoint Presentation Slides and has professionally designed templates with suitable visuals and appropriate content. This deck consists of total of twenty eight slides. All the slides are completely customizable for your convenience. You can change the colour, text and font size of these templates. You can add or delete the content if needed. Get access to this professionally designed complete presentation by clicking the download button below. https://bit.ly/3fyIZc7
Get detailed knowledge about types of web hosting and which one is useful to satisfy your requirement. - See more at: http://visual.ly/type-web-hosting#sthash.h57wLieF.dpuf
This post is about the showing the directions to take in learning how to build iOS apps much faster. A short cut. Based from a guy who got lost lots of times!
Webinar: Bring Your Data to Life with Power BI-2016-01-28TechSoup
Power BI, a free Microsoft program, enables anyone to get rapid actionable insights from any data, any way, anywhere. Within minutes you’ll see and experience your data in new ways that you never imagined were possible. Using natural language and simple drag-and-drop ease, you can proactively monitor key metrics, spot real-time trends and get critical alerts from personalized dashboards.
This paper is a summary of press clippings gleaned from Internet during the period April to July 2008. This exercise was performed to provide a quick summary of the US credit crisis at that particular point in time / 2nd quarter 2008. The paper was presented to a non native English speaking European audience consisting primarily of insolvency judges July 3rd 2008 in Paris.
1. Home Ownership:
The American Dream or a Pipe Dream?
Brett Musser
April 19th
, 2013
Fin6296-Capitalism
Executive Summary
2. Residential real estate is America’s most important financial asset. Until the 1930s
ownership of real estate was reserved for the very wealthy. Since that time home ownership has
increased substantially throughout the country because of financial innovation and government
intervention. As increases in home ownership became harder and harder to sustain the federal
government and private financial institutions found creative ways to underwrite mortgages for
those who were still left out. This lack of discipline at the very core of the mortgage finance
system lead to an eventual housing bust that had huge consequences for the entire world.
Most people had thought of real estate as a collection of local markets, but in fact the
whole world was in some way connected to the US housing market. This was made possible by
financial innovations such as securitization and other derivative products. Investors from all over
the world were now funding US mortgages in the secondary market. Default risks were spread
across the financial system more and more while the quality of the mortgages that supported
these new financial products were rapidly declining. This was a recipe for disaster. And we
weren’t disappointed. The financial house of cards that US housing was built on, collapsed in
September 2008 with the fall of Lehman Brothers.
Unfortunately not a lot has changed in our mortgage finance system. Dodd-Frank
addresses some issues but misses a huge opportunity to learn from the mistakes of the past.
Moving forward the federal government needs to reduce its influence on the mortgage market,
households need to be financially responsible and literate, and financial firms need to win back
the confidence of government and the public at large.
Home Ownership: The American Dream or a Pipe Dream?
3. Residential Real Estate is America’s largest asset class by market capitalization and by
far its most important asset class. Real estate is not only important to the financial wellbeing of
almost every American but is also a huge part of the economy, typically contributing a fifth of
GDP. Even though the majority of Americans have a substantial portion of their wealth tied to
the value of their home, it’s not just a financial holding that they are looking to capitalize on. A
home is many things to many people. A home provides shelter, a private place for comfort and
refuge, a gathering place for family, and a symbol of social status. Its location determines the
schools you go to, the activities you partake in, and the people you interact with. Home
ownership has not only been a personal goal for many but society as a whole and in particular
government, has made a substantial effort to encourage and facilitate home ownership. In my
essay I will illustrate the progression of housing finance in the US, show the link between the
real estate bubble and the financial meltdown of 2008, and touch on the policy responses to the
crisis of 2008 as well as the current status of the mortgage finance system. To finish I will give
my thoughts on what caused the crisis and what steps should be taken to learn from our mistakes.
Evolution of Mortgage Finance in the US
Up until the Great Depression the housing finance system in the United States was in
large part a result of market forces. Mortgages up till this time were expensive, hard to get, had
short maturities(ranging from 2-11 years), and had the financial characteristics of a typical
corporate bond(balloon payment at maturity). The difficulty of qualifying for a mortgage made
home ownership nearly impossible for those who were not affluent and made renting the
dominant form of tenure throughout the country. Most financial institutions wouldn’t cover the
full value of the property, rarely loaning out more than 60% of the value of the home. This
forced home buyers to put up a lot of their own equity or seek another lender to make up the
4. difference. The Great Depression changed this system forever. After the stock market crash of
1929, real estate prices plummeted and homeowners couldn’t refinance because many were
unemployed and the credit markets had severely dried up. Foreclosures skyrocketed because of
the growing unemployment throughout the country and the unemployed borrower’s inability to
refinance. No financial intermediary in their right mind would approve a refinancing to an
unemployed homeowner.
To alleviate this problem, in 1933, the Roosevelt Administration created the Home
Ownership Loan Corporation to help those who were in default. These HOLC loans were
refinancing loans insured by the government, had maturities of at least 15 years, and were self-
amortizing. This was the administration’s first serious attempt at intervening in the housing
market. The next year in 1934, President Roosevelt set up the Federal Housing Administration
which basically insured loans made by private lenders as long as the loans met certain criteria.
These loans usually had to have longer maturities and had to be self-amortized. This
fundamentally altered the housing finance system, raising LTV (Loan to Value) levels
substantially, and facilitating the rise of the 30 year self-amortized mortgage which till this day is
the industry standard. By insuring the mortgages, the federal government shifted the costs of
default away from the private lender to the government. This in turn lowered interest rates on
FHA insured mortgages causing a huge increase in demand for mortgages. Although this was an
unprecedented move by the federal government, the Roosevelt Administration wasn’t done. The
depression continued to ail the country, and the federal government was still trying to re-energize
the home mortgage market and make it more accessible to more people. So in 1938 as a part of
the New Deal, the Federal National Mortgage Corporation colloquially known as “Fannie Mae”
was created. This entity was founded to fund FHA insured mortgages by buying mortgages from
5. the mortgage originators. This increased liquidity in the mortgage market and helped mortgage
originators produce more loans. Buying the loans from the originators gave the originating
financial institutions more available funds to loan out. In essence the federal government was
increasing the supply of capital available for residential mortgages. This brought many people
into the market who had been previously shut out.
In a little under a decade there had been a complete transformation of the housing finance
system. It went from a market based structure dependent on local markets to a federally backed
system. The United States federal government had now become a huge player in the housing
market with the creation of the FHA and Fannie Mae. This transformation helped millions of
Americans obtain a mortgage that historically would not have been available to them. From the
1950s until this very day the 30 year self-amortized, FHA insured loan was now the industry
standard as result of the housing finance reforms during the Great Depression. This system
stayed for the most part in tact with not a lot of changes until the late 60s where there was a
slight change. In 1968 President Johnson privatized Fannie Mae, but this can be misleading.
Although Fannie Mae was now a privately held company most felt that it was still implicitly
backed by the federal government. It also received special treatment from the federal government
that no other for-profit corporation received. This exceptional treatment included: a special line
of credit from the Treasury, exemption from most local and state taxes, and exemption from
securities registration requirements. Another game changer occurred in 1970 when Congress
created the Federal Home Loan Mortgage Corporation known as Freddie Mac. This entity was
set up to provide competition to the newly privatized Fannie Mae and to expand the newly
formed secondary mortgage market even further which will be important to our story later on.
Freddie Mac was also granted the same privileges as Fannie Mae to put it on an equal footing.
6. During this time there was also a shift in how funding for mortgages were provided.
Since the 1940s thrifts dominated the mortgage market, supplying the majority of capital. After
the creation of Fannie Mae and Freddie Mac, funding slowly came more and more from the
secondary market with the creation of mortgage pass through securities. Freddie Mac issued the
first mortgage pass through in 1971. In 1981 Fannie Mae created the first mortgage backed
security, and in 1983 Freddie Mac issued the first collateralized mortgage obligation (CMO).
Slowly but surely the funding for mortgages was coming more and more from the secondary
market. Instead of drawing most of the funds from local depositors, now investors around the
world were helping fund mortgages in the US. By the early 1980s these GSEs were buying FHA
insured mortgages and then selling securities backed by those mortgages in the secondary
market. The US housing market was becoming more and more linked to the global financial
system.
Another development during the 70s was rising community activism on the behalf of
lower income Americans and minorities to democratize mortgage credit in their favor.
“Democratization” is a euphemism for not only dramatically lowering lending standards but
enforcing and incentivizing those lowered standards. Throughout the 1970s there were outcries
of institutional racism and general unfairness throughout the country, regarding the lending
practices of banks. Activist groups called upon the federal government to intervene and fix the
perceived inequities of lending institutions. The government responded in 1977 with the
Community Reinvestment Act. This law was passed to encourage lenders to meet the financial
needs of everyone in their communities, especially moderate to low income borrowers and
minorities. The CRA authorized community groups and local governments the right to challenge
proposed M&A transactions between financial institutions on the grounds of inadequate
7. compliance with the CRA. From the late 70s through 2002 lenders had pledged more than a
trillion dollars to low and moderate income communities through CRA challenges or to prevent
them from occurring in the first place. With the combination of increased community activism in
the realm of home ownership, the decline of thrift institutions due to the S&L crisis, and the rise
of the secondary mortgage market we are lead in to the nineties with a new administration with
big goals for home ownership. The Clinton Administration takes the expansion of home
ownership seriously and uses every available tool to meet its goals. Another giant shift is about
to occur.
Throughout his presidency Bill Clinton tried to make home ownership a civil rights issue.
Every major player related to homeownership in his cabinet was on board. Leading the charge
was his HUD secretary Henry Ciscneros who spearheaded the National Homeownership Strategy
which tried to drastically increase homeownership rates among the poor and minorities. The
strategy worked, increases in homeownership amongst certain groups were substantial. How was
this possible? The administration did two things: it lowered lending standards for the GSEs and
aggressively used the CRA to pressure banks to lend so that the administration could reach its
goals. From their inceptions, Fannie Mae and Freddie Mac were very conservative financial
institutions, only buying FHA insured loans that had a substantial amount of money down, from
borrowers that had solid credit histories. This started to change in the 90s. Because of the Clinton
administration’s wish to extend credit to those who traditionally could not obtain it, subprime
borrowing went through the roof. From 1993 to 2000 subprime lending had increased
twentyfold, due to discrimination lawsuits filed against lending institutions, quid pro quo, and
using Fannie and Freddie to buy these subprime mortgages and securitize them so more of them
could be made. This shifted the risk of default from the mortgage originators onto the
8. government and the global financial markets. The originators didn’t have as much skin in the
game and could be much more aggressive in their lending practices because they effectively had
no risk. During this time the importance of the secondary market for mortgages had been
increasing considerably, which was heavily influenced by the GSEs who for the most part
controlled lending standards. And since these lending standards were liberalized extensively, the
riskiness of these financial instruments increased while simultaneously making more of them.
Does the phrase “toxic assets” come to mind? Housing policy didn’t change much at all from
President Clinton to President Bush, but rather President Bush encouraged home ownership just
as every other President did before him. Some reforms of Fannie and Freddie were proposed but
nothing was aggressively pursued. The mortgage finance system stayed intact for almost all of
President Bush’s tenure until the world financial system came to a screeching halt in September
2008.
The Financial Crisis of 2008
Starting in the 2000s many other private financial institutions got in to the mortgage
securitization game following Fannie and Freddie’s lead. Fannie and Freddie were no longer the
most dominant players in the mortgage securitization market. The whole world was now all in on
US real estate. Real Estate prices in the US had never gone down nationally at the same time for
over 70 years, the US government was backing the entire housing system, credit was easy to
obtain, and real estate was currently booming. This was a, can’t miss opportunity for investors all
over the world. Everyone was making money. Borrowers could borrow cheaply and more of
them could qualify than ever before. Home building companies were flourishing, mortgage
originators couldn’t process applications fast enough, home owners could borrow heavily against
their new found equity, real estate speculators made boat loads of money off of flipping houses,
9. large financial institutions were mixing financial innovation with the new supply of investment
products to meet investor needs, and the US government was meeting housing goals. Everything
was great… until it wasn’t.
By early 2007 the house of cards that had been slowly built to support the so called
“American Dream” started to unravel. In the first quarter of 2007 there was a series of
bankruptcies of mortgage lenders, primarily from those who were heavily involved in the
subprime mortgage market. A few months later in July 2007 two hedge funds, at the respected
investment bank Bear Stearns, that specialized in subprime mortgage debt reported losses of 90%
and filed for bankruptcy. The records show that they only invested in Triple A securities, the
safest rating a security could possibly receive. Something was wrong. Later that year Bear would
report their first quarterly loss in their 84 year history. This was a big deal to say the least. Also
from October-November 2007 a large number of banks announce huge mortgage related asset
write downs. These include UBS, Citi, Merrill Lynch, Country Wide, Barclays, Bank of
America, and not surprisingly Fannie and Freddie. As the housing market started to slow and
delinquencies were reaching all-time highs the financial system was starting to breakdown.
On March 16, 2008 JP Morgan announces that it will buy Bear Stearns for $2 a share,
almost a tenth of its market price in a deal orchestrated by the Federal Reserve and the Treasury.
This shocked many throughout the financial system. Bear’s fall from grace was mostly due to
mortgage related losses. Exactly three months later Lehman Brothers, another storied investment
bank, reports its first quarterly loss since going public. This was just a precursor of things to
come.
10. Throughout the summer of 2008 there were more and more mortgage asset right downs
throughout the financial system wiping out bank capital, bringing many large financial
institutions closer to insolvency. Meanwhile a regional bank based in California known as
IndyMac becomes insolvent, making it the second largest bank failure in US history. Insolvency
was due to the collapse of its subprime mortgage assets. There seems to be pattern here. Then on
September 7th the US government effectively took over Fannie Mae and Freddie Mac, putting
them in conservatorship. This confirmed everyone’s long held belief that these institutions were
never fully private and were implicitly backed by the federal government.
Then on a fateful September 15th the financial panic of 2008 officially started with the
collapse of Lehman Brothers. This was the largest bankruptcy in US history and sent markets
around the world into a state of turmoil. Stock markets crashed, credit markets were freezing,
fear and uncertainty had taken over. The US government tried to broker a deal for someone to
buy Lehman before it became bankrupt but there were no takers in time, other than Barclays but
their bid was denied by the British government. The only option the US had was to bail Lehman
out and it refused to do so because of the fear of moral hazard creeping into the system. Mayhem
commenced. The very next day the US felt obligated to lend AIG 85 billion to keep them and the
global financial system afloat. In short, AIG had sold insurance on a large percentage of the
market for mortgage backed securities. The financial instrument they used was the widely
publicized and demonized CDS or credit default swap. They dominated this market and were
making huge profits off its premiums. AIG was all in on US real estate and in essence was
betting that real estate prices would never fall. Once real estate started to collapse and securities
backed by mortgages started to go sour, those that bought “insurance” with AIG were expecting
pay outs. AIG did not have enough capital to cover all of its obligations. It was overwhelmed. In
11. addition their credit rating was downgraded, forcing them to post additional collateral on these
products. This put additional strain on the firm and drove it close to bankruptcy. If AIG went
down then a lot of other large financial institutions would have also been brought to their knees
because many of them were dependent on these “insurance policies” to stay alive. And these
firms were deeply connected to many other firms. They were all dependent on the health of the
other, a perfect example of systemic risk. The feds were petrified of a potential interruption of
credit markets, which would lead to a global financial collapse and later a world in complete
economic depression.
By the end of September Washington Mutual went bankrupt making it the largest bank
failure in US history. Markets were in a complete tailspin and US government was in panic. In
October Congress responded with a 700 billion dollar bailout called TARP which allowed the
feds to buy mortgage assets from banks, which would in turn recapitalize the banking system and
keep it somewhat alive. This was controversial to say the least. Throughout 2009 governments
and central banks throughout the world, including the US, took drastic measures to avoid a
global great depression through bailouts, aggressive monetary and fiscal stimulus, and a
rewriting of financial regulation.
The Federal Reserve in particular has been the most active government institution during
the crisis and post crisis. It has used an unprecedented amount tools and programs to help the
financial system recover and keep the economy as healthy as possible. From 2007 until
December 2008 the Fed continuously cut the federal funds rate from 5.25% in 2007 until it hit
the bottom of 0-.25% in December 2008 where it stands till this very day. It also created a
variety of lending facilities that enabled it to lend directly to financial institutions throughout the
credit crunch of ’08 and ’09. Its most aggressive measures have been its “quantitative easing”
12. programs which were historic in their duration and size. There have been 3 such programs and
we are currently living under the third. The quantitative easing programs involve buying
mortgage backed securities from GSE’s and other financial institutions as well as treasuries with
longer maturities. The goal is to increase the money supply, while flattening the yield curve to
incentivize more investment throughout the economy. This in theory should bring down
unemployment and boost economic growth. Since the Federal Reserve can’t lower the federal
funds rate any further this is their only option to bring down interest rates. The jury is still out
whether or not these programs have been successful. The critics have been loud and plentiful.
The Current State of US Housing
Real Estate prices have for the most part recovered throughout the country, but the
mortgage finance system itself has not changed much. Other than the fact that credit is more
difficult to obtain than pre crisis, the same institutions and the same financial products still
dominate the system. What is worrisome to some is that the US housing is even more dependent
on the federal government than pre-crisis. Right now about 90% of single family mortgages and
65% of the rental market is supported by the federal government. This means that the US
government is indirectly in the business of allocating housing credit. Many think this is a red flag
and the federal government should look to wind down its influence on mortgage finance.
Although there have been no fundamental shifts in mortgage finance there have been
some minor regulatory changes that have come out of the newest financial reform bill, known as
Dodd-Frank. The bill establishes national underwriting standards for residential mortgages, such
as requiring creditors to verify the borrowers’ ability to pay. I guess this is a novel concept for
Congress. It also addresses subprime lending, by requiring those who apply for these “high cost”
13. mortgages to obtain pre-loan counseling from a certified counselor and it requires creditors to
meet certain appraisal standards before issuing a high cost loan. Other than these small and in my
opinion insignificant changes not much has been done. The bill does recommend that Fannie and
Freddie go through huge structural changes, but provides no answer or blueprint on what to do or
how to do it. The bill misses a huge opportunity to reform these institutions. Reforming these
entities would have been the most appropriate and important regulatory response to the housing
crisis. Some of the things that happened during the housing boom and bust were outside the
government’s control, but Fannie and Freddie do not fall into this category.
My Diagnosis and Prescription
There were many forces at play that culminated in the panic of 2008. Something as
consequential as a global financial meltdown cannot be boiled down into one neat little story
with only one culprit. The truth is everyone was a part of it. Some more than others, but
everyone contributed in a small way.
The root of the crisis was the collapse of the US housing market. There were many
players that contributed to the collapse but the main ones being Congress, the Federal Reserve,
private banks, and the American people themselves. After the dot com bubble in 2000 the
Federal Reserve conducted expansionary monetary policy to facilitate an economic recovery
after a slight recession. This created an expansion of credit early in the decade that was directed
into the housing market via US housing policy. Throughout the 1990s and into the 2000s
Congress incentivized subprime lending through its influence of Fannie and Freddie and then
allowed them to export these ‘toxic assets’ throughout the world through securitization. Financial
institutions jumped on this opportunity to make easy money with financial innovation, US
14. government backing, borderline fraud, and in some cases outright fraud. Financial innovation
seems to have intensified the crisis by making the financial system more integrated and allowing
multiple bets to be made on underlying assets, intensifying losses throughout the system.
Complex financial instruments mixed with unprecedented levels of leverage from not only firms
but households made the collapse even worse. Products such as ‘credit default swaps’ made the
crisis worse but they are mistakenly associated as causes of the crisis. This is not the case. The
system was supported by bad finance at its core. The house that the mortgage finance system was
built on had a weak foundation. It was bound to collapse. These complex products serve their
purpose and our integral to our modern financial markets. They have been demonized because of
their complexity and opaqueness. People are generally afraid of what they do not understand.
Finally we have the American people. Fraud was not limited to financial institutions. Fraudulent
behavior was not uncommon amongst borrowers in the height of the bubble. Greed was rampant
on both sides of the transaction. Creditors were trying to make a quick buck and so were
borrowers. Speculative debt had taken over the system and the housing market became
dominated by housing speculators treating real estate as purely a financial asset, never having the
thought that prices might actually go down. All of this culminated into the worse financial
meltdown since the Great Depression.
What do we as a country do, moving forward? First off, it starts at the level of the
individual with personal responsibility. We need to develop a culture of prudent, savers. The
average American’s consumption to savings ratios have been unhealthy for years and needs to be
brought back to normal. Americans also need to educate themselves on basic finance. This is an
extremely important part of everyone’s life yet many are ignorant of basic financial principles,
institutions, and processes. This is a problem local school boards and community colleges could
15. address by implementing mandatory financial education into their curriculum. Secondly, the
federal government needs to decrease its footprint on housing. We need to reprivatize the system
and decentralize it. Make sure private companies bear financial risk and have skin in the game.
We cannot continue a system where profits are private and losses are public. This is grossly
unfair and detrimental to the health of our society. This is not to say that government should have
no influence over housing but too much intervention can not only be counterproductive but
harmful i.e. 2008. There is a fine line between being a good parent and being too intrusive in
your child’s life. The federal government has been and still is too intrusive. Congress needs to
scale back Fannie and Freddie as soon as possible and then must decide whether or not they want
to fully privatize them, keep them fully public, or eliminate them all together. I think all three are
viable options as long as their influence over the mortgage market is scaled back considerably.
Also, on the regulatory front the feds have done the right thing by pushing for more stringent
capital requirements for financial institutions. This may slow economic activity but it will help
mitigate downside risk when banks go through hard times. Banks did not have sufficient capital
to weather the perfect storm that was 2008. Higher capital requirements would make our
financial system less volatile, making the booms smaller but the busts more manageable. Lastly
private institutions must be held accountable for fraudulent activity and for their own self-
interest make sure they develop cultures that are conducive to ethical decision making. We need
our financial institutions to work and work well. They are an essential part of our economic
system, and we need to be able to trust them. The public has lost confidence in the financial
community and they need to do everything they can to regain that confidence. If not, our
economy will not be as dynamic or vibrant as it has been in years past.
16. To conclude, I want to answer the question of the essay. Is home ownership the American
Dream or a Pipe Dream? It’s a pipe dream. There is no material American Dream and there
shouldn’t be. The American Dream is abstract, open ended, and more meaningful. There are an
infinite number of American dreams. Everyone has unique preferences, talents, aspirations,
desires, and circumstances. Everyone is free to pursue their own dream. That is the American
Dream.
17. Works Cited
1. Schweizer,Peter. Architectsof Ruin.New York:HarperCollins,2009.Print.
2. Schwartz,Alex F. Housing Policy in the United States:An Introduction.NewYork:Routledge,
2006. Print.
3. Sorkin,Andrew."JPMorganActs to BuyAilingBearStearnsat Huge Discount."Nytimes.com.
N.p.,16 Mar. 2008. Web.
4. Richardson, Ph.D.,Nela.“QualifiedMortgagesandGSE’s”.BloombergGovernment.26
March 2013.
5. HousingCommission.“HousingAmerica’sFuture:NewDirectionsforNational Policy”.
BipartisanPolicyCenter.February2013.
6. Departmentof the Treasuryand Departmentof HousingandUrban Development.
“ReformingAmerica’sHousingFinance Market:A ReporttoCongress.”February2011.