Wall Street did it. Those rotten bankers are at fault. That’s the story we’ve repeatedly heard since 2008, when the bottom started falling out of the housing market. Of course, that’s what all the politicians in Washington wanted us to believe – and since they have the megaphones and no one wants to side with those evil bankers, they’ve been pretty successful. The truth is that the Feds are at the center of this disaster and they are doing their best to perpetuate it.
This is not the first time in recent history that the Feds have destroyed a market at an enormous cost to the taxpayers. You need only go back to the late 1980’s, when the first President Bush’s administration cost us untold billions. Remember junk bonds? After Michael Milken was chased by the Feds, they ordered Savings and Loans to divest themselves of their junk bond portfolios. As principal holders of these assets, they flooded the market, driving prices down and wiping out large portions of the Savings and Loan industry. The feds picked up the tab for the defaulted companies, while a few well-positioned investors made billions. You could not have picked a better plan to decimate the value of financial institutions at taxpayer expense.
This time it’s the home loan market, and it goes back to 1999 during the Clinton Administration. Andrew Cuomo, the Secretary of Housing and Urban Development (HUD), wanted to expand homeownership among the lower-middle class and to inject about $1 trillion into the housing market. Of course, the only way to get the loans into the hands of these individuals was to lower the lending standards.
Bankers and Wall Street types rarely overlook an opportunity to make some extra Franklins. The Feds said they wanted these loans and they were going to underwrite them, so why not make them happy and rake in some fees? Why wouldn’t they write loans to the new standards when Fannie Mae and Freddie Mac were going to assume all the risk? Not a chance they would pass on that. Gradually, the market for these lightly documented loans expanded, and eventually everyone was getting into this easy money game. In 2005 and 2006, you could go to a nail salon and hear discussions about wheeling and dealing in income property – and that was from the manicurists!
Builders kept on building because people kept on buying. More permits were issued and more towers were built along the South Florida coast. The units were selling, so they kept on building until the merry-go-round stopped. The market was predicated on prices continuing to rise, but then people started to realize the obvious: even the heartiest trees don’t grow to the sky. It was a pyramid scheme where the last player got stuck.
Ultimately the market reversed, and housing prices have dropped for the last four years. We have been waiting for the Feds to come up with a plan – a smart plan to end this downward spiral. They came up with politically oriented ideas, like putting foreclosures on hold. Fat lot of good that did-- it just forestalled the inevitable. Some lucky people were able to live in their houses an extra six months for free, and guess who got stuck with that tab?
So here is the Feds’ master plan: Let’s make it almost impossible to get a home loan. What a brilliant scheme – stifle the buying market while it is being flooded with more product. The idea was to not only strengthen lending standards, but make them tougher than anyone can remember! Not only are higher down payments required, but borrowers now have to complete an endless cycle of ridiculous paperwork just to apply for a loan. Remember that the Feds – through Fannie Mae and Freddie Mac – are buying 90% of the loans, so they set the rules.
Last year, I helped several clients who wanted to refinance their homes with low-interest fixed-rate loans. Every one of them called me in hysterics, frustrated and exhausted from the endless requests for documents. One client spent 5 months (yes, that is right) providing paperwork to refinance the same home he has lived in for over 20 years – and he is a W-2 wage earner! Just think if he were self-employed; he might have jumped off his roof instead! If you have anything unconventional in your credit history, you might as well wait out the insanity.
So let’s summarize, in simple terms, what the Feds have done. First, offer financing for outrageously low rates to unqualified borrowers with little or no documentation. Then, when the market turns, smash the hopes of a qualified person getting a loan. The market gets flooded, prices plummet, and more and more people end up with houses worth less than their loan balance, motivating them to walk away from their home, and thereby placing more product on the market. Quite a brilliant plan, don’t you think?
That is our national leadership at work. And you wonder why some people want government out of our lives.