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This is the third installment of a Monday series excerpting the chapter on political causes from Thomas Sowell's latest book, "The Housing Boom and Bust."
IBD Exclusive Series:Thomas Sowell on The Politics of the Housing Boom
In 2002, the George W. Bush administration urged Congress to pass the American Dream Downpayment Act, which subsidized the down payments of prospective homebuyers whose incomes were below a certain level.
After passage of that act, the president also urged Congress to pass legislation permitting the Federal Housing Administration to begin making zero-down-payment loans at low interest rates to low-income Americans.
In 2004, Federal Housing Commissioner John Weicher said, "the White House doesn't think those who can afford the monthly payment but have been unable to save for a down payment should be deprived from owning a home."
He added, "We do not anticipate any costs to taxpayers." Who, if not the taxpayers, would pay for these government subsidies — much less the defaults from making riskier loans — was not revealed.
For some homebuyers, the standards were relaxed to the point where there was no down payment at all required, contrary to a long-standing tradition that homebuyers should have some stake in the home, so as to reduce the risk of default on the mortgage. The reduction or elimination of traditional safeguards in mortgage lending entailed a rising riskiness of the mortgages acquired by Fannie Mae and Freddie Mac under the new and lower mortgage loan approval standards.
Under these political pressures, traditional mortgage loans with traditional safeguards began to decline and mortgage loans made under the "innovative" and "flexible" standards urged by government increased.
Traditional 30-year mortgages with a fixed interest rate, which were still 57% of all mortgages in 2001, fell to 33% of all mortgages by the end of 2006. Meanwhile, subprime loans rose from 7% of all mortgage loans to become 19% of such loans over the same span of years. Other nontraditional loans rose from less than 3% of all mortgage loans to nearly 14%.
Between 2005 and 2007, Fannie Mae and Freddie Mac acquired an estimated trillion dollars' worth of subprime and other nontraditional mortgages. This was approximately 40% of the value of all the mortgages they purchased from banks and other lenders during those years.
In other words, these two major institutions of the mortgage markets were acquiring increasingly risky assets.
What was crucial was that the Department of Housing and Urban Development, which was among the federal agencies pushing Fannie Mae and Freddie Mac to make more loans to people who would not normally be approved for loans — the "underserved" population, in the phrase often used — "allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing," according to the Washington Post.
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Posted By: woclue(20) on 11/29/2009 | 12:41 PM ET
Worst part of it all, is that nothing will change other than perhaps the name of the underwriters. Politicians want to get re-elected and making a putting a chicken in every pot at someone elses expenses in the future is what it is all about as by that time they will have full retirement and full medical and travel benefits for the rest of their lives on the taxpayers on going dollar.
Posted By: America is great(355) on 11/28/2009 | 6:21 PM ET
FORGOT TO MENTION MR.GEORGE W BUSH IS IN THIS ALSO AT 100%-NOTHING 0%.
Posted By: America is great(355) on 11/28/2009 | 6:16 PM ET
JUST WHERE IN THE CONSTITUTION IS ANY OF THIS? >WERE< IN A >OVER THROUGHSHEEP< "ARE WE"?... >>ImpeachObamaCampaign.com Read Full Article »
