Home ownership has been the elusive holy grail of politicians for many years. Increase home ownership, and everyone will be happy and vote for you, or so they believe. However, we are just now recovering from the 2005 collapse of our housing market. A little history is necessary to understand this.
During the Carter adminstration, the Community Reinvestment Act (CRA) was passed and became effective on October 12, 1977. At the time it was enacted, the home ownership rate for the country was 64.8 percent. In part, the CRA was to increase home ownership by removing discrimination in housing loans and prohibiting the practice of redlining. In addition, federal oversight for the lending institutions was increased. All very admirable goals.
By 1980, home ownership had increased about 1 percent to 65.8 percent. However, in the early 1980s, the U.S. economy experienced two short duration recessions. Home ownership rates declined to 63.5 percent by 1985, a little over one percent lower than when the CRA was initiated. By 1995, the home ownership rate had finally increased to 63.8 percent, essentially flat for 10 years.
Although the CRA had been modified legislatively before, it was the modifications made by the Clinton administration which became effective in 1995 that caused a significant increase in home ownership rates. Lending institutions were subjected to more scrutiny than in the past and were “encouraged” to increase their loan approval rate in particular for low credit people. This was followed by a 10 year boom in home ownership and accompanying increases in home values. Many of the new owners were people with questionable financial capability at best. By 2005 the home ownership had peaked at 69.2 percent.
The traditional 30 year mortgage with 30 percent down was supplemented by alternate lending practices. These included the NINJA loan (no income, no job, no assets), the interest only loan, mortgages that covered 100 percent of the loan, and many variations of sub-prime loans. People stretched their finances to the maximum and many started to buy homes they really could not afford, but no one seemed to care. If the owner defaulted, the house would still be worth more than the mortgage, so the lending institutions were still ahead as the homes were always increasing in value.
Although the loans were initiated by lending institutions, the federal government backed the loans against default. This was done through the government sponsored enterprises (GSE) institutions such as Fannie Mae and Freddie Mac. The mortgages were then bundled and sold as investment securities to individuals and various institutional investment funds.
Housing prices started to decline in 2005. The real effect of the housing bubble collapse fell on three basic groups: individual investors, institutions and the federal government. All were left with losses. Fannie Mae and Freddie Mac were placed in conservatorship by the federal government, with their losses totaling about $187.5 Billion. It is estimated that financial institutions suffered looses in excess of $2 Trillion.
The individual owners were hit the hardest. Many people just walked away from their loans and defaulted. And for those who put their life savings into a new higher priced home, as the value of the home fell, they suddenly owed more than the value of the home, and were underwater. Any equity that they had accumulated was erased, along with their life savings.
The home ownership rate for the last quarter of 2013, the latest available, was 65.2 percent, just 0.4 above the rate when the CRA was initiated in October 1977. In other words, the gains over the last 37 years have been wiped out, all due to misguided political beliefs of people who thought they could increase home ownership by artificial means.
The question that must be asked now is, have we learned anything? George Santayana (1863-1952), a philosopher, is credited with the saying: “Those who cannot remember the past are condemned to repeat it.”
President Obama, who believes that government is the solution to problems, has a long established track record of picking appointees that are ideological clones of his own beliefs. On January 6, 2014, President Obama’s pick for Director of the Federal Housing Finance Agency (FHFA), Congressman Mel Watt (D-NC12), was sworn in.
Stand by, the fun is about to begin……….again !!!
- Bob Hancock