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Originally Posted by midlifesailor
I worked at one of the GSE's mentioned and have some insight into how the secondary mortgage market developed over the last 15 years or so. Our situation is one of the road to hell being paved with good intentions. Governmental policy, with the intent of helping those at the low end of the financial spectrum become home owners, unintentionally opened the doors of greed for millions of Americans to walk through. It is not those the relaxed standards where intened to help that brought the markets to their knees.
It was the releasing of the genie from the bottle, for QUALIFIED buyers. The former limits of income loan amount were dropped so why buy the townhouse that would meet the old ratio when you could just sign your name and have the 4000 sq. ft single family with the pool? Just look at how housing changed in that decade. Why are families smaller and houses bigger? The fancy ARM rates and extended terms let people buy bigger and bigger bozes to live in and keep the payments where they could handle them. Besides rates can only go down while home prices can only go up --- What a deal!!! We'll just refi in a few years and get an even better deal! The problem gets bigger and bigger over a decade, until the house of cards comes down. There are no low income families in my imediate neighborhood yet there are a few forclosure signs because people bought more house than they could afford. I personally know how easy it would have been since we "qualified" for over twice the house I felt we could afford based on the "old fashioned" qualifying ratio's. I stuck to my guns and as a result we were able to keep our house when I was laid off and took a much lower paying postion while I transitioned into a new industry.
There was nothing wrong with the concept of relaxing standards, so some low income families could become home owners and that alone is not what took the market down. Helping hardworking folk without credit histories become home owners is a noble goal and is in line with American ideals and there are many obstacles faced by those climbing from the lowest economic levels. However, there should have been strict limits on the amount that could be borrowed under these programs and they should never have been opened up to the mass market. The idea was to help the folks on the bottm rung not so everyone could keep up with the Jone's and buy a McMansion instead of the townhome their salary would support. Those are the loans that broke the market, not the low income buyers the relaxed standards were intended for.
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Thanks for your insight, midlife. I'm afraid though that you said it best when you said that, the road to hell is paved with good intentions. We some times think that these expressions were invented with our generation instead of being age old proverbs.
The idea is
always to help the poor and those less fortunate. Aside from being a uniquely human ideal, whereas the poor and less fortunate in the animal knigdom just get eaten, it strikes at what gives each of us dignity, meaning, and worth to our lives.
If this impulse is so beneficial to us as individuals, imagine how much good we could do and how enriched we'd be if we did similar things as a country? That's where the wheels come off. If I lend my neighbor $50, he'll generally pay me back as soon as he can. He knows me and he has to live next to me. If the government lends him the money it quickly becomes a situation where he doesn't have the money to repay them and, besides, the government has lots of money..let 'em wait.
The only way people, throughout history, have ever appreciated anything is by the earning of it. You cannot give them anything for free and expect it to come out well in the end. That's how we ended up with generational welfare. In the case of home mortgages the hubris of the government was so great that they never considered that a goodly percentage of the poor either do not want to own a house or should not own a house, with renting being a more viable solution. The government presupposed that home ownership, in and of itself, was a good thing. Where'd they get that idea? Probably from the middle class bureaucracy that makes up the majority of government and firmly believes it to be true. Not everyone shares their vision of the American dream. Government should not be in the dreams delivered business.
The rest of your points are spot on. Of course the middle class was going to take advantage of the situation; contrary to popular belief they're not stupid and, if banks are lending money at historically low rates under extremely favorable terms, they'd be foolish to not take advantage of that fact, correct? That not all had the sense they were born with, or engaged in willful suspension of disbelief, should come as no surprise. Millions get fooled annually be deals that look too good to be true, and are. You'd normally rely on the bank to qualify those dreamers back down to reality but, with the promise of Uncle Sam behind everything, well, where was the downside? And brokers get paid to write loans.
So you're entirely correct that one little unrestrained impulse by government to "do good" led to a whole cacophony of unintended results. One would think that the politicians would have had more than enough experience in that area to not make such a mistake. But they felt so good about it. When they get such impulses, they should drive over to the poor side of town and start handing out more than a few one hundred dollar bills of their own. They could then benefit from driving by in a few months to do an informal survey to see who spent the money on paint for the house or braces for the kid.