Real Estate Blog - There Are Many Reasons For The Housing Collapse - Here's A Congressional Report On The History Of One

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There Are Many Reasons For The Housing Collapse - Here's A Congressional Report On The History Of One

Few will doubt that the housing collapse has many partners, but one of the recurring themes is the role of Fannie Mae and Freddie Mac in our current financial crisis.

The Congress has issued a report, "The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008."

A couple of the conclusions which are detailed in the report are:

Political pressure on Fannie Mae and Freddie Mac led to the erosion of responsible lending practices.
Housing prices outpaced income due mainly to lower downpayment requirements.
Fannie Mae and Freddie Mac were leaders in risky mortgage lending practices.
The role of government intervention was significant in causing the financial collapse.

One of the architects, who helped create the problem, Fannie CEO, Franklin Raines, earned over $90 million dollars in compensation in six years.

The report is only 26 pages long and won't make the summer best seller list for reading on the beach.

I suspect it won't get much play because the largely historical report was put out by Republican members of the House Oversight Committee. That being said, I did read the report and it is a bipartisan, historical representation of the role of GSE's in the collapse.

Every Congressional representative should read the report to understand how undue political pressure can have unintended, disasterous consequences. We certainly don't want to see ourselves in another housing mess after we somehow manage to climb out of this one.

Richard Iarossi, REALTOR®
Long and Foster® Real Estate, Inc.
Crofton, MD 21114
410-451-6255 Office
443-995-9595 Cell
Web: http://www.RichSellsHomes.com
eMail: Rich@RichSellsHomes.com

Annapolis MD Real Estate Specialist
Bowie MD Real Estate Specialist
Crofton MD Real Estate Specialist

Posted by Richard Iarossi, Crofton MD Real Estate, Annapolis MD Real Estate on 07/10/2009 11:09 AM

Comments (54)

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Originally posted at: mdrealestateblog.com: There Are Many Reasons For The Housing Collapse - Here's A Congressional Report On The History Of One

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54 Comments on There Are Many Reasons For The Housing Collapse - Here's A Congressional Report On The History Of One

JUL

Rich, of the 4 sentences there, 3 can be directly attributed to the Clinton Adminstration to allow housing for all... while a good theory it didn't work when the reality of giving people something they can not pay for set in.

A mortgage gotten with 0%down, a buydown on the first 3 years of interest by the builders and a low to no tax basis on an empty lot that now holds a home of value, those were a recipe for disaster. (we saw plenty of builders opening big subdivisions with enticements for anyone who wanted a home could have one.. just no way to pay for it when the magic went away 2-3 years later, those same subdivisions now are full of foreclosures).

The four bullet points say it all. In summary, political pressure to lend money to unqualified buyers.

Gail, Certainly, some of the blame rests on members of the Clinton administration, but the Bush administration continued the policies as well.

Margaret, The country lost all it's collective common sense as it relates to prudent lending practices. Our government was complicit.

Rich...

I agree with Margaret ...it was a formula for political expediency now and disaster later!

The bullet points can't be denied, and there is enough culpability on a whole bunch of people to go around. This is an instance of being a Monday morning quarterback just has no value. We're still in the game and we need to be working to get it fixed.

Richard, They didn't understand it then, and they still don't understand it now. Sad, we elected them.

Ed, I don't want to dwell on the past but I do think it's important to know what really happened, in a bipartisan way, so it doesn't happen again.

Richard - when this report was first released it appears that it was quickly retracted for a short period, unfortunately for them, and fortunate for us, a few quick and nimble people saw it and brought it to light.

Liberal "good intentions" created a monster with which we ALL must deal for many years to come.

And yet here Obama is trying to drive more first time home buyers with low down payments into homeownership with the use of an $8,000 first time home buyer tax credit.

According to the MBA, this is what the seasonally adjusted 4th quarter delinquency rate looks like for loans:

6.06% for prime loans

24.95% for subprime loans

8.21% for VA loans

13.84% for FHA loans

I agree that the government had a significant role in the meltdown, but I think it's a little too simple to just blame Government. The guys on Wall St. were not turning away when these loan vehicles came their way. In fact they created a whole new investment vehicle, the credit default swap. And houses like Shearson Lehman were even betting against the housing market by shorting stocks involved in the financial/housing market. Thank you for the informative post and best of luck to you.

Ah yes the government did such a fine job helping out the housing industry that they decided to get involved in Banking, Car companies and now they want to dabble in health care - think it's time we fire them all and press the rest button.

As for them reading it - I don't think that's going to happen. But thanks for the info I'll read it over the weekend

I don't know all the in's and out's of the mess, but I heard it even dated as far back as the Carter administration. Is that possible?

Richard, great post! The real problem is that many of the same lawmakers who set this bust into motion are STILL in power!

I came across a definitive post on this, it's titled: Housing Bust – Who Really Lit The Fuse & How To Cure It!

Finance is a gun. Politics in knowing when to pull the trigger.

The trigger was pulled alright. Problem was that the risk associated was sliced, diced, transferred, insured, re-insured, laid off, offset, hedged, and swapped to the point where people though that the risk disappeared.

The music stopped. No chairs.

This event will undoubtedly go down in history books for our children and grandchildren. It's very important to know what happened and to make sure that history doesn't repeat itself. Thanks for the information Richard.

Rich - Thanks for this post. Sadly enough, I think I may be in the minority and will take the time to read this report. It sounds like although it may be dry, it will be a good education in what went wrong.

Rich, it's true that there are a number of reasons for the collapse, but I feel that these points are the major reason that it became just a widespread disaster. Thanks for the post.

This is excellent! I don't want to hijack your post, but I posted this the other day:

http://activerain.com/blogsview/1146709/call-to-action-now-s-the-time-to-write-contact-y-our-leaders-in-washington-today-

It has the emails of all the reps on the House Financial Services Committee, and your attachment (the report) would make for EXCELLENT back up!!

I'm going to email all on the list and send the attachment you provided.

I encourage ALL A/R'ers to do the same!!

Here's a website that has all the COMPLETE contact info (email and fax) for our Beloved US of A (We the People)

http://www.conservativeusa.org/mega-cong.htm

Thank you for the excellent, informative post and report, Richard. The report details are literally frightening, and it explains so much of what was going on 'behind the scenes'. Too many hands in other people's pockets, I would say; the lack of accountability and responsibility has had such a devastating impact on us all.

It is sad what owing favors has cost the regular citizens of this country. It seems like our elected officials never learn or smarten up. There is no reason for the CEO to have made $90 million running a quasi govt agency.

The Community Reinvestment Act started under Carter was a nice feel good theory but a little too Utopian for all practicality.

Even NAR and we realtors had a hand in this mess. If you took a poll today I bet 50% of the real estate agents would be for no money down loans again.

Excellent post, Richard. You've done a good job of pointing out ONE of the key/root causes of the current crisis. You also reminded me of a Stephen Covey quote I heard recently:

"You can choose your actions but you can't choose the consequences."

At least one Congressman saw the problem with the GSEs way back in 2002. He introduced the Free Housing Market Enhancement Act which would restore a free market in housing by repealing special privileges for housing related GSEs.

"Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges of Fannie, Freddie, and HLBB have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans."

I think it's great that we understand some of the causes for the housing bubble so that we can take the correct action to find a solution.

Rich,

Great post and congrats on the feature. What the article doesn't mention is the issue of the number of phantom buyers (people buying mulitple properties through flipping who never closed on anything) and the ARMs - which Fredie and Fannie did not touch. :)

Steve

It couldn't have been a more perfect storm. But, just today, I learned from an agent at a closing table that her daughter had been not only qualified for a mortgage but purchase a home on the basis of income from a part-time job! Not a part-time consultant or a government post with a salary of 90 million over the course of a couple of years...just a regular minimum wage job. Hmmm.....

It would be fun for a lot more people to connect the dots... who the players are, and where they are now.

BTW, the Wall Street types that dreamed up all of this slicing and dicing stuff did it because they were looking for ways to mitigate the risk and do something with all of the money flowing through the system... it had to have somewhere to go.

The total amount of Subprime mortgages was estimated at about 300 billion, The total amount of credit default swaps is unknown but there are guestimates in the 10's of trillions of dollars. It seems to me that Wall St and the Banksters have the greater amount of culpability here.

Hi Richard -- I think the government has a short-term memory and doesn't learn from its mistakes (as a whole) as the S&L crisis was very obvious in hindsight as well.

JUL

Bob - I too have heard tidbits about how far back it reaches and yes it may go way back, but I read an article a number of months ago (I believe Vanity Fair) that dug deep into the Fannie Mae mess.....let's just say that Senors Clinton and Dubya were both pretty equal in blame. I don't think either intended to mess things up, however certain actions caused that. To be fair, I should say their administrations; not sure how much they individually impacted/influenced Fannie. I'd like to dig it up and read again because I'm a little foggy on the details. (old age!)

Richard - Good post, thank you!

Richard, Congratulations on the Feature! ;-) I certainly hope that the government doesn't have a short memory and learns from its past mistakes...

Your building consultant for life in Nashville, TN

Sometimes is hard to comprehend that doing the right things pays at the end.. this is the prime example. . of the opposite

Great post.

Indeed, unintended consequences from well-meaning but ignorant politicians.

And David,

Thanks for the great Steven Covey quote: "You can choose your actions but you can't choose the consequences."

ToulaRosebrock,com

Hi Rich:

Congrats on the feature...

Great post...those are the four main reasons.

Richard, I like your bullet points. Look at who made millions of dollars from the Fannie Mae mess? Millions?

As Lenn likes to say...Follow the money.

contrat's on the feature.

Great article! Thanks for posting this, to bring clarity to our current market.

Yet we still hear fellow agents bemoaning the fact they cannot get 100% financing for their clients, or the fact the appraiser cannot "hit the number" or that their client with a 550 credit score cannot get a loan. This week alone, I had to hear one agent complaining that her 550 credit score buyer was having a hard time finding a loan. No kidding!

Preach it, sistah! I've "unqualified" many a consumer brought to me by overly enthusiastic real estate agents who pushed, pulled, pressured, cajoled and finally stormed out in exasperation when their "customer" couldn't qualify for a loan.

Hi Richard, really nice blog. You have pointed out some key points here. I think some restructuring is absolutely necessary. Thank you for sharing.

Hello Richard:

Of the four points you mention you are only correct on the first one. The lower downpayment requirement is NOT the reason that influence prices. The fact that lenders did not require an income to debt ration is the main reason why so many poeple could buy a house they could not afford.( read stated income) Thrid, Fannie and Freddie do not make loans. Banks do, so they should not hide behind the GSE's practises (of buying back loans) to make good business decisions for their investors. Forth, the pushing of SOME politicians casued the start of the boom and collaps, one big guy was a republican by the way.(Dick Armey), so maybe we can leave party politics out of this?

You also forget to mention the millions of dollars that the banks CEO's made, and the walls treet financial compnaies on this borrowing spree, as well as the loan brokers. Plenty to go around I would say.

Antoine

When 1 lender lowers the bar their competition 'must' do the same or loose market share. Noone cared about quality because they dumped and repackadged the junk loans while calling them aaa. Outside of any obvious fraud, the real money was to be made selling these worthless notes[ while buying insurance that they will fail] The foolish homeowner who got in over his head is still responcible for his own actions, and in most cases is still copable for the loans. However, the geniuses from wall street still fair much better than those of us who are not members of their club. It is always about the money, sad but true.

As with many of these types of "exposes" I have read, it has a political slant. The bottom line is if not for Wall Street and their insatiable appetite for these loans along with real estate speculators (flippers, etc) this problem would have been a typical housing slow down with a manageable level of foreclosures and short sales. If you look at where the real "bubbles" are: California, Florida, Nevada these were 2nd homes bought by folks taking out helocs, flippers, and investment purchases for the most part that went bad. Those who bought with less than 20% down pay dearly via PMI to protect the lenders from the overleveraging. FHA, VA loans also include fees to make up for the lack of downpayment. As for CRA loans, everyone who knows anything knows these loans perform very, very well and the program is almost single handedly responsible for the condition that many of our urban centers are today (thriving) contrasted with the wretched conditions they were in back in the 70's. Anyone visit Harlem lately? Perfect borrowers could not get a loan to buy in these cities until CRA. If you look at any financial meltdown, this housing one, the dot.com bubble, the S&Ls, the story is always the same, some folks figure out a way to make money by moving paper around instead of working for it, and they find loopholes in the system of regulations (changing "insurance" to "credit default swap" is my all-time fav). And it's always the folks at the bottom who pay the price and the geniuses who thought it up make gazillions. Sure a few go to Jail, but not nearly enough. And politicians of both parties (who by the way are not financial people for the most part) let it go on.

Antoine - it appears you missed two important points Richard made:

1) This was about only ONE of many causes of the current crisis. He mentioned that both in the title of the blog as well as at the beginning of the first sentence.

2) It's not Richard who's points are right or wrong - it's the Congressional Committee on Oversight and Government Reform which wrote the report. Now if you were disputing whether or not those points were in the report, all you'd have to do is read the relatively short report to see.

Richard,

Speaking of reading "at the Beach", I'm NOT taking this report to the beach! You did a great job of summarizing it for me!

Thanks,

Kathy Opatka, on the Ocean City Beach

Those that matter will not read it Barney Frank and Chris Dodd (A Friend of Angelo) will just continue to point the finger at Bush and blame capitalism.

And the people that have helped to create this mess and dig us in deeper are sitting on their yachts without a care in the world....

Don't we have that now? Undue political pressure?

Hi Richard,

Thank you for a great post. With unemployment rising, look for the next wave of foreclosures in the commerical sector. If the Cap and Trade bill passes, more printing of of worthless money will take place.

Jerry Gray CRB,CRS /Prudential Carolinas Realty / Winston Salem, NC

JUL

That's a very interesting study. Factually accurate but incomplete. Of interest to me has always been the exemption of Fannie and Freddie under the Sarbanes Oxley Act. Had that exclusion not been included in the law, Franlkin Raines would not have been able to manipulate the Fannie financial reports as he did to grease his own palms to the tune of about $50,000,000, and that is the amount after he gave back many millions.

I for one don't want to see more studies. I want to see perp walks. That is the ultimate deterrent.

As I waded through all these responses I couldn't help but note that few fingers pointed back to our profession,..

Found it rather revealing, that as a group, we still don't see are own complicity. Yes, bankers, bureaucrats, wall streeters, and big money did their fair share, but what about the crucial role we had as a profession? Who was writing these purchase contracts, closing these transactions and pedaling this stuff? Anyone want to donate their commission checks to a worthy homeless person? I didn't think so,..

Didn't we learn anything from our own involvement? Where were the major Realtor organizations like NAR in this catastrophic disaster? Is it possible they (we) were in bed with the powers to be?

I don't mean to sound so self-righteous, but don't we share some responsibility?

For Jim Price.

Agents and brokers who entered into agreements with lenders and appraisers to defraud, mislead and generally misrepresent the interests of home buyers and sellers, yes. They do bear some responsibility.

That said, until fraud, conspriacy or other misdeeds is involved, we sell homes. We don't approve the mortgage loans and we have no policy making authority.

There is certainly plenty of blame to go around. And yes, 'they' still don't get it. I lived through a not dissimilar housing/job crisis in the late 80's in Oklahoma. The state eventually pulled out, and they didn't have government interference and the lenders actually had some brains about them. But my concern is that there is too much interference, the banks just frankly don't care, aren't staffed and are looking to clear up their books and get paid as quickly as possible. I've been working with a mega lender who merged with another mega lender on a short sale and I'm certain that we all may be going to heck without a hand basket and are just being tossed into that pit head first. Next year there will be more loans (the 5/1 arms, etc.) coming due and we're going to get hit some more on this front.

I'm waiting for the Raines connections to pop up... We know they are there.

JUL

Lenn

Great comment. To be honest I wasn't aware that Fannie and Freddie were exempt from SOX. Spending 26 years on Wall St I'm well aware of SOX and the havoc it created. That they are exempt is something that needs to be looked into. Who drafted that little tidbit of an amendment that exempted them from that piece of legislation.

As for perp walks... I think that will go along way to bringing back some confidence to the system. Both consumer confidence and investor confidence without which, our system cannot operate. For the first 2 perp walks I nominate Barney Frank and Maxine Waters, both who claimed soundness of Fannie and Freddie and that what they were doing was great, and that they should do more of it. Even to this day Frank wants to once again, expand who they will lend to. This is NO different to Ken Lay of Enron who got the "silver behind-the-back bracelets" and led directly to SOX.

Unfortunately the only thing that will probably come from this report is the firing of those who wrote it by the current administration, after all those that wrote it must be feable minded and frail.

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