I recently received an email containing this title: Roots of the Panic of 2008. This article was pointing the finger of the current mortgage, credit and housing crisis at the Community Reinvestment Act and the Jimmy Carter and Bill Clinton Administrations. I couldn't hold my fingers from quickly typing a response to correct the author of this article to propose an alternative place to point the finger and to propose an alternative to the bailout that Congress just passed.
Community Reinvestment Act And Past Presidencies To Blame? I Do Not Think So
The CRA loans that the "Roots of the Panic of 2008" article points at are not the same subprime loans that caused this housing, mortgage and credit crisis. Among other reasons, the subprime loans that caused this mess have come from the ridiculous new home build out in suburban areas since 2002 or so. This incredible expansion of new home construction was driven by big shot developers, real estate investors, wanna be common folk real estate investors looking for a quick buck who knew nothing about staying power in a real estate market, and new home builders using seller funded down payment assistance programs to sell to marginally approved home buyers.
Many of these homebuyers are not from the ranks of low income as CRA loans are intended. Many of these loans went to Middle America. Additionally, many of the subprime mortgages (the 2/28's 3/27's, stated income, stated assets, no docs, and the 5 yr option arms) that are now bad or going bad do not have anything to do with the CRA requirements that Banks have to meet according to the affordable housing bills of years gone by.
These subprime loans were offered by greedy people working at greedy banks encouraged by greedy investors who knew exactly what they were doing. Big banks, investment bankers etc are the very folks who benefited from all of this lending crap and now we want to bail them out and let them benefit again?
Congress, drop the partisanship crap - how about bailing out all the middle Americans like a friend of mine who makes $80K but got a loan because they could for a home they couldn't afford because they could and are now going to lose it because their ARM is adjusting and their bank is unwilling to work with them. My friends are seriously removed from being included in the stereotypical CRA beneficiary to which this “Roots of the Panic of 2008” article points. They are not low to middle income, nor are they a minority. These folks are Middle Class Americans. They are however looking for homeownership like most other Americans.
CRA Loans Not To Blame
The following is a few "sound bytes" I pulled from a CNN Money article from earlier this year. I’m drawing from this article to provide some data to show a possible cause of the Mortgage Panic and possible solution to the current Credit Crisis that counters what Congress is doing. Here is the link to the article for your reference:
Homes In Foreclosure Top 1 Million
The following are excerpts from the article for your convenience...with my commentary relative to my earlier discussion about the incorrect finger pointing at the CRA being the root cause of this whole mortgage and credit mess.
“Much of the problem lies with subprime loans given to borrowers with weaker credit records, especially those loans that had adjustable rates. Nearly four out of ten subprime ARM loans are a month or more late, or in foreclosure. And subprime ARMs account for 39% of the loans that fell into foreclosure during the quarter.” (my commentary - these loans are not CRA style loans)
“Prime fixed-rate loans, which are considered very low risk, have also seen sharp increases in their delinquency and foreclosure rates, although they are performing far better than the riskier loans on the market.” (my commentary - these are CRA style loans)
“California, Florida, Arizona and Nevada have been hit by a hangover after a home building boom in the middle of the decade” (my commentary - notice it said home building in these areas which account for 40% of all the foreclosures in these four states - not all of these folks are CRA loan candidates), “which was fueled by rising home prices and investors snatching up real estate using risky mortgages” (my commentary - notice it said "investors" not CRA loan candidates).
“Those four states have nearly 400,000 homes in foreclosure, or a third of the nationwide total. Roughly 3.6% of all of the loans in these states are now in foreclosure.”
“According to Jay Brinkman, MBA's vice president for research and economics, the prime loan segment was hurt by so-called Alt-A loans which didn't require income verification for buyers with good credit. Prime loans are also getting into trouble in places such as Florida and California, which have seen sharp home price declines.” (my commentary - Alt-A loans are not CRA loans - CRA loans are FHA, Fannie Mae/Freddie Mac guaranteed loans that require a borrower to provide full income and asset documentation.)
All of these excerpts point the finger away from blaming the CRA loans as the source of the current crisis. This also should redirect the finger away from the Presidential Administrations from years gone by. The programs that promoted homeownership for everyone in the U.S. were good concepts – the people empowered to sell these loans and provide the loan products are to blame – uh the mortgage lenders, banks, builders, etc.
Home Builders Caused A Huge Mess But Nobody Is Talking About Them
Now let's look at the Housing And Economic Recovery Act of 2008 that was passed in late July 2008. Among other things that will slow the home purchase market to recovering, this bill eliminated seller funded down payment assistance (The AmeriDream and Nehemiah Programs for example) citing that these programs have some of the highest default rates in the FHA loan portfolio. FHA is the only mortgage guarantor of the big three (Fannie, Freddie, and FHA) to allow these programs.
The assessment that this bill is based on seems to make sense that if these loans that were originated by seller funded programs like AmeriDream and Nehemiah are not performing that maybe we should eliminate them. But if we take a closer look there is something else to see.
Home builders everywhere used these loans like the Pope blesses people - all the time, everywhere, as much as possible. Unlike the Pope however, home builders elevated home prices to maintain their profit margins and offered the seller funded down payment programs to excited and dream filled home buyers.
Hmmm, who wrote the mortgages for the builder’s customers? Well, it was the builder's mortgage company (or their preferred mortgage company). And if the home buyer used the home builder's mortgage company the home buyer would get the benefits of a pretty sweet upgrade package. Just so happens that if the home buyer wanted to get their own financing there were not allowed to have the upgrade package. Can you say “Steering”?
Homebuyers To Blame? Maybe – Let Us Analyze Further
Here it begs me to look at the home buyer for a minute.
- To get the seller funded down payment assistance program, the homebuyer had to get a full documentation loan, not a subprime loan - nothing suspicious about this for the home buyer so far so good.
- Next, the builder offered a great incentive with closing costs and down payment assistance if they buy the builder's home through the seller funded down payment assistance program. Again, a good deal for the home buyer.
- Lastly, the homebuyer was offered a significant amenities upgrade if they use the builder's mortgage company. How sweet it is for the home buyer?
And Now Back To The Homebuilder
How so sweet for the home builder as they essentially got away with some incredible "steering" practices. Builders are the sellers of the homes. Sellers do not have to be licensed as a real estate agent to sell their home. With this being the case, builders are unregulated.
Builders did what they wanted when it came to selling them – they got to dictate the flow of business using seller funded Downpayment assistance programs and subprime loans and got rich doing it. Now, 400,000 of their homes out of the 1.1 million are in foreclosure according to the CNN article and no one is pointing the finger at them.
A Possible Solution To The Credit, Housing, Mortgage Panic of 2008
Now that we have the finger pointing at the right player – the home builder let us look at a possible solution. I promise this will be quick as Congress has already decided what they want to do to fix this credit, housing and mortgage crisis.
The CNN article states that there are something like 1.1 million homes in foreclosure as of the first quarter of 2008. How much money do we want to spend with this bailout of the banks? $700 Billion? What if we put $100,000 per foreclosure to correct the mortgage? We could than have the mortgage company reset the loan at a lower balance and fix the interest rate to current market rates? This would only cost the U.S. Government around $100 Billion and we'd have another $600 billion left over to cover more foreclosures on the way - and we could toss a few bucks at the banks if we needed to get their books back in order to open up the credit markets again.
