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Originally Posted by leastprime
IIRC, there was an article in WSJ about many people in 2001 who lost considerable amount of $$ in the equities (dotcom stock market) moved towards investing in homes/houses. Bush43 encouraged more access to home ownership as a method to build stability and equity.
My brother (now retired, 77), a senior economist and risk manager at a NYC big bank, would say that 9/11 didn't help the equity market but promoted alternative investments & low entrance home ownership (mortgage) requirements. This bank was a seller, buyer, and packager of mortgages.
YMMV
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The causes of the 2008 Great Recession trace back to the 1st Clinton Administration nearly 30 years ago -- specifically under Henry Cisneros, then U.S. Secretary of HUD, and the now-disgraced Roberta Achtenberg, then Assistant Secretary of the U.S. Department of Housing and Urban Development for Fair Housing and Equal Opportunity.
Roberta Achtenberg observed that for the bulk of the 20th century, Dad had a job, and his wages put food on the table, clothes on the backs of the family, and most importantly, a roof over their head.
By the latter part of the 1980s, the model seemed to have been flipped on its head. A house became the major source of a family's wealth, and Dad's job (and Mom's too) was primarily cash flow to pay the mortgage -- and the magic of leverage-based housing price appreciation did its job. After all, home prices only go up, right?
Roberta Achtenberg saw home ownership through the lens of Social Justice & Racial Equity. After all - that was her job title. She was supposed to root out and destroy violations of Fair Housing and Equal Opportunity.
Specifically, Achtenberg argued low-income people lacked wealth (duh), and specifically low-income protected minorities were turning into a permanent economic underclass because they didn't own homes at the same rate as White and Asian people and those farther up the economic ladder.
The train of home-ownership was leaving the station without protected minorities, and as the Fair Housing and Equal Opportunity Czar, she wanted to do something about it. The Federal Government saw this disparate ownership rate as a "wrong" that needed to be "righted" via federal intervention.
How did our government intervene?
Roberta Achtenberg led the effort to rewrite regulations throughout the federal government so as to twist the arms of mortgage originators to write mortgages to increase home ownership in the poor and minority communities. How? By lending them money even though they did not pass the normal hurdles for credit worthiness.
Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their local geographic communities, giving a leg-up to the poor and more specifically poor protected racial minorities. The original quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and ultimately 55% by 2007.
It is certainly possible to find prime borrowers (that is, people who are likely to repay their loans) among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards. Money was being lent to borrowers who couldn't reasonably be expected to repay. Double-Duh.
Achtenberg also led the Clinton Administration effort lobbying Congress for what ultimately became the Financial Services Modernization Act Of 1999. This law repealed many of the last vestiges of the Glass-Steagall Act so that mortgage originators could more easily securitize and sell off the alphabet soup of CDOs, MBSs, ABSs, etc. The wanted to securitize the mortgages and sell them off to reduce their own risks, because they knew the probability of repayment by those sub-prime borrowers was low. The only way they could lend to them (with federal regulator's guns to their heads) was if they could foist them off on someone else. Thus the securitization of mortgages proliferated - but only because of the FSMA of 1999.
Quote:
Originally Posted by leastprime
Bush43 encouraged more access to home ownership as a method to build stability and equity.
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Yes, he did. I think he called it promoting an "Ownership Society" - owners have a vested interest in their communities that renters do not (although renters can care about their communities just as much, but because they do not own, they are not similarly vested).
(I suspect you're old enough to remember the collapse of Bear Stearns. It turns out Bear Stearns first issuance of a mortgage backed security was in the first month or so of Bush43's Presidency - but all the regulatory groundwork that needed to be in place as well as the Financial Services Modernization Act of 1999 had all been done before Bush43 stepped into the White House. Bear Sterns quickly discovered they could make money doing this, and under then-CEO Jimmy Cayne, Bear Sterns pursued MBSs and CDOs aggressively.)
Fannie and Freddie were not the only federal government-backed or government-controlled organizations that were enlisted in this process. The Federal Housing Administration was competing with Fannie and Freddie to buy the same mortgages. And thanks to new rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served.
27 million loans—half of all mortgages in the U.S.—were subprime or otherwise weak by 2008. That is, 27 million loans were made to borrowers with blemished credit, or were loans with zero or low down payments, no documentation, or required only interest payments. Remember "Liar Loans?"
Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution. Thus it is clear where the demand for these deficient mortgages came from.
The huge government investment in subprime mortgages achieved its purpose. Historically, the US home ownership rate had been about 65%; because of the federal government's interventions, home ownership in the U.S. soared to 69% with most of the delta being in low-income communities and specifically among borrowers who were protected minorities. But it also led to a huge run up in prices from 1997 to 2007, and also created a huge private market for mortgage-backed securities (MBS) based on pools of subprime loans.
Most people call this a bubble, although I would quibble with using that word. As housing bubbles grow, rising home prices suppress delinquencies and defaults. People who could not meet their monthly mortgage obligations could refinance or sell, because their houses were now worth more.
Accordingly, by the mid-2000s, investors had begun to notice that securities based on subprime mortgages were producing the high yields, but not showing the large number of expected defaults that are usually associated with sub-prime loans. This triggered strong investor demand for these securities, causing the growth of the private market for MBS based on sub-prime and other risky mortgages.
By 2008 this market consisted of about 7.8 million sub-prime loans, nearly one-third of the 27 million that were then outstanding.
Because housing prices only go up... until they don't.
And the rest, as they say, is history.
There is a special place in Hell reserved for Roberta Achtenberg -- she caused massive misery across the world.
Quote:
Originally Posted by leastprime
My brother (now retired, 77), a senior economist and risk manager at a NYC big bank, would say that 9/11 didn't help the equity market but promoted alternative investments & low entrance home ownership (mortgage) requirements.
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Well, he certainly has first-hand knowledge, having been in the trenches.
From my perspective, the dot-com "bubble" was fueled by a risk re-allocation (from equities of blue chips to equities of companies with speculative business models). When that didn't work (the "bust" of the bubble), there was a re-allocation of funds from the "equities" asset class to the "real property" asset class.
Quote:
Originally Posted by Dub D
^ Revisionist history
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Did I miss a scholarly article on the topic of the Great Recession that blamed 9/11?
Please list the citation.