Our Faltering Housing Market: It's the Democrats, Stupid
The time has come to tell the truth about the collapse of the housing market and the approaching recession, brought on largely by the congressionally mandated sub-prime mortgage industry and so-called predatory lending practices of financial institutions seeking to comply with those mandates.
The Democrats in Congress now seem bent on attacking the very industry they forced into existence. Throughout the 1970’s, the Democrat Party controlled Congress pushed financial institutions to extend ever more credit to low income home buyers and created overly generous tax incentives to encourage low income families to take out mortgages. Their aim was to increase minority access to private home ownership.
In 1977 this misguided effort motivated Congress to pass the Community Reinvestment Act which forced lending institutions to loan money to residents in poorer neighbourhoods, who by their very circumstances represented greater credit risks. This was done under the guise of stopping “mortgage discrimination” or as it was then called, “red-lining.” Red-lining may not have been a politically correct practice, or a “compassionate” business practice, but it was a sound business practice.
Of course the do-gooder Liberals in Congress didn’t care about “sound business practices,” their only concern was pandering to special interest groups. Therefore, prodded by Congress, regulators began operating on the principle that increasing the number of homeowners by extending more loans couldn't possibly damage the economy. These actions by a Liberal Democrat controlled Congress thus created the sub-prime mortgage industry.
Bad credit? No Credit? No down payment? No problem!
First let’s set a couple things to right. Home ownership is normally a desirable situation, when the family or individual buying the house has the financial wherewithal to afford the loan payments. The family buying the house makes a substantial down payment (normally a significant percentage of the total cost of the house) and then obtains the balance of the cost of the house by taking out a loan; a loan which was restricted historically to those capable of meeting the financial burdens such a large purchase places on them.
The most interesting (and apparently surprising to Liberals) fact about home ownership is that IT IS NOT A CONSTITUTIONAL RIGHT!
“Sub-prime” loans, for the uninitiated, are not loans given at interest rates below the prevailing market rates (or "prime" rates), they are loans given to individuals who otherwise would not qualify for a mortgage based on credit history, income, and employment prospects. Those factors make them greater ("sub-prime") risks to the lenders and they are therefore required to pay much higher interest rates. These loans have come about largely because some members of C0ngress wrongly assume that home ownership is an entitlement and by some bizarre twist of logic guaranteed by the Constitution
Thanks to the politically motivated congressional interference mentioned above, loans were made to the people who were and still are the least likely to be able to meet the terms of those loans...in other words, Liberals forced lending institutions (banks, private holding companies, and other lending institutions) to make loans to bad risks and because of those bad risk loans and the inability of those borrowers to keep up with their payments, we are now facing a collapse of the housing market and even worse, a recession similar to that we experienced in the early 90’s.
These sub-prime loans created a huge demand for single family dwellings. This demand created artificially high prices in the real estate industry and sparked an explosion in the home construction industry.
As housing prices rose, so did the expectation of buyers and sellers. Those who owned older homes saw an opportunity to realize large profits by selling their homes which, in turn, allowed them to move into larger, more expensive homes, thus placing them in a less tenable financial position. As a result, individuals who were financially balanced in their old homes placed greater stress on their finances by taking out loans with payments above those they could reasonably afford.
The buyers of those older homes were new homeowners; individuals who had never owned a private home before. Many of these new homeowners were unprepared for home ownership and the fiscal burden home ownership places on the owner. Additionally many of these new homeowners were sub-prime buyers; thus loaning them money for their homes placed the loaning institutions at greater risk.
Now that we are faced with a congressionally manufactured crisis in the housing market, the prevailing thought in congress is to…you guessed it…throw more tax-payer dollars at the problem in a multi-billion dollar bailout of people who used poor judgment and bought more than they could afford.
Yep folks, get ready ‘cause here it comes. Once more it is the taxpayer who is being asked to pay for other people’s mistakes. We (the tax-payers) are victims of the Liberal philosophy in Congress which is all too eager to say "ego te absolvo" to individuals who make bad financial decisions and "j'accuse" to lending institutions for what they deem "predatory lending practices" (practices which have largely come about because of Congress and the unsustainable demand for new housing they created) as they don their green tights and feathered caps while doing what they imagine is their best imitation of Errol Flynn. In actuality, they more closely resemble the evil Sherriff of Nottingham (Basil Rathbone); imposing upon their subjects onerous taxes at sword point to give the money to their constituents.
Now, lest you think that I am blaming Congress alone, those in the lending industry bear their fair share of the responsibility for this crisis. Bowing to the demands from Congress to make mortgages available to those who would under normal circumstances not qualify for such loans, banks and lending institutions have been overly creative in devising means for high risk borrowers to afford loans their incomes could not justify.
These high risk loans, being issued at higher than market interest rates and often carrying substantial premiums over and above the price of the dwelling, make for a very lucrative investment vehicle with high yields and great returns on investment. Two of these financial instruments are particularly nasty; ARMs (Adjustable Rate Mortgages) and IOLs (Interest Only Loans). Both have contributed a great deal to the rapidly collapsing "marginal" housing market.
And here is the final rub, This situation is not new. It is, to quote Yogi Berra, “déjà vu all over again.” ARM's became notorious during the Carter years when interest rates, then in double digits, made obtaining a loan to buy a house virtually impossible. Lenders began to offer loans at low nominal rates to attract borrowers. These loans began with what appeared to be bargain payments and lured many unsuspecting victims into buying houses when they shouldn't have.
The idea was that the payments would later “balloon” as the borrowers salary increased. In reality, as interest rates climbed, so did the monthly payments, but incomes failed to keep pace and the economy began to tank, the monthly payments on those houses began to escalate at an alarming rate. Just as we are seeing today, people began to default on their loans because the new higher rates outstripped the homeowners’ ability to pay them.
The pressures of double digit inflation, double digit interest rates, and the fruitless and unjustified interference in the mortgage industry by Congress during the 80’s in an attempt to prevent the defaulting of loans (deregulation of the Savings and Loan industry by altering the limitations and margin requirements which had been placed on those institutions) ultimately led to a collapse of the Savings and Loan industry.
Throughout the mid to late 80's and early 90's, people began simply to walk away from their houses and default on their loans. Congress, through their constant intervention and interference, had created a market which never should have existed, or as it is called in tort law, a "moral hazard;" luring people into buying houses they should never have bought.
Of course ultimately it was, as it will be this time, the tax-payer who wound up footing the bill for the poor judgment of Congress and the poor business practices of Banks and Savings & Loans. As a recession became inevitable, businesses contracted and jobs disappeared.
Just as the "dot-com" explosion of the mid 90's led to unreal expectations and artificially inflated (and unjustifiable) stock prices as each highly anticipated new IPO (Initial Public Offering) was announced, these unsound policies have once more led to our “housing boom” and just as the IPO boom of the mid-90’s resulted in the recession of 2000, this housing boom has, as was inevitable, led to the rapidly approaching housing bust which we are now beginning to witness.
As George Santayana famously said, “Those who do not remember the past are doomed to repeat it.”
Long Live Our American Republic!!!
References:
http://www.theglobeandmail.com/servlet/story/RTGAM.20070227.wxibworld27/BNStory/Business/home
http://www.washingtonpost.com/wp-dyn/content/article/2007/02/16/AR2007021600813.html
The Democrats in Congress now seem bent on attacking the very industry they forced into existence. Throughout the 1970’s, the Democrat Party controlled Congress pushed financial institutions to extend ever more credit to low income home buyers and created overly generous tax incentives to encourage low income families to take out mortgages. Their aim was to increase minority access to private home ownership.
In 1977 this misguided effort motivated Congress to pass the Community Reinvestment Act which forced lending institutions to loan money to residents in poorer neighbourhoods, who by their very circumstances represented greater credit risks. This was done under the guise of stopping “mortgage discrimination” or as it was then called, “red-lining.” Red-lining may not have been a politically correct practice, or a “compassionate” business practice, but it was a sound business practice.
Of course the do-gooder Liberals in Congress didn’t care about “sound business practices,” their only concern was pandering to special interest groups. Therefore, prodded by Congress, regulators began operating on the principle that increasing the number of homeowners by extending more loans couldn't possibly damage the economy. These actions by a Liberal Democrat controlled Congress thus created the sub-prime mortgage industry.
Bad credit? No Credit? No down payment? No problem!
First let’s set a couple things to right. Home ownership is normally a desirable situation, when the family or individual buying the house has the financial wherewithal to afford the loan payments. The family buying the house makes a substantial down payment (normally a significant percentage of the total cost of the house) and then obtains the balance of the cost of the house by taking out a loan; a loan which was restricted historically to those capable of meeting the financial burdens such a large purchase places on them.
The most interesting (and apparently surprising to Liberals) fact about home ownership is that IT IS NOT A CONSTITUTIONAL RIGHT!
“Sub-prime” loans, for the uninitiated, are not loans given at interest rates below the prevailing market rates (or "prime" rates), they are loans given to individuals who otherwise would not qualify for a mortgage based on credit history, income, and employment prospects. Those factors make them greater ("sub-prime") risks to the lenders and they are therefore required to pay much higher interest rates. These loans have come about largely because some members of C0ngress wrongly assume that home ownership is an entitlement and by some bizarre twist of logic guaranteed by the Constitution
Thanks to the politically motivated congressional interference mentioned above, loans were made to the people who were and still are the least likely to be able to meet the terms of those loans...in other words, Liberals forced lending institutions (banks, private holding companies, and other lending institutions) to make loans to bad risks and because of those bad risk loans and the inability of those borrowers to keep up with their payments, we are now facing a collapse of the housing market and even worse, a recession similar to that we experienced in the early 90’s.
These sub-prime loans created a huge demand for single family dwellings. This demand created artificially high prices in the real estate industry and sparked an explosion in the home construction industry.
As housing prices rose, so did the expectation of buyers and sellers. Those who owned older homes saw an opportunity to realize large profits by selling their homes which, in turn, allowed them to move into larger, more expensive homes, thus placing them in a less tenable financial position. As a result, individuals who were financially balanced in their old homes placed greater stress on their finances by taking out loans with payments above those they could reasonably afford.
The buyers of those older homes were new homeowners; individuals who had never owned a private home before. Many of these new homeowners were unprepared for home ownership and the fiscal burden home ownership places on the owner. Additionally many of these new homeowners were sub-prime buyers; thus loaning them money for their homes placed the loaning institutions at greater risk.
Now that we are faced with a congressionally manufactured crisis in the housing market, the prevailing thought in congress is to…you guessed it…throw more tax-payer dollars at the problem in a multi-billion dollar bailout of people who used poor judgment and bought more than they could afford.
Yep folks, get ready ‘cause here it comes. Once more it is the taxpayer who is being asked to pay for other people’s mistakes. We (the tax-payers) are victims of the Liberal philosophy in Congress which is all too eager to say "ego te absolvo" to individuals who make bad financial decisions and "j'accuse" to lending institutions for what they deem "predatory lending practices" (practices which have largely come about because of Congress and the unsustainable demand for new housing they created) as they don their green tights and feathered caps while doing what they imagine is their best imitation of Errol Flynn. In actuality, they more closely resemble the evil Sherriff of Nottingham (Basil Rathbone); imposing upon their subjects onerous taxes at sword point to give the money to their constituents.
Now, lest you think that I am blaming Congress alone, those in the lending industry bear their fair share of the responsibility for this crisis. Bowing to the demands from Congress to make mortgages available to those who would under normal circumstances not qualify for such loans, banks and lending institutions have been overly creative in devising means for high risk borrowers to afford loans their incomes could not justify.
These high risk loans, being issued at higher than market interest rates and often carrying substantial premiums over and above the price of the dwelling, make for a very lucrative investment vehicle with high yields and great returns on investment. Two of these financial instruments are particularly nasty; ARMs (Adjustable Rate Mortgages) and IOLs (Interest Only Loans). Both have contributed a great deal to the rapidly collapsing "marginal" housing market.
And here is the final rub, This situation is not new. It is, to quote Yogi Berra, “déjà vu all over again.” ARM's became notorious during the Carter years when interest rates, then in double digits, made obtaining a loan to buy a house virtually impossible. Lenders began to offer loans at low nominal rates to attract borrowers. These loans began with what appeared to be bargain payments and lured many unsuspecting victims into buying houses when they shouldn't have.
The idea was that the payments would later “balloon” as the borrowers salary increased. In reality, as interest rates climbed, so did the monthly payments, but incomes failed to keep pace and the economy began to tank, the monthly payments on those houses began to escalate at an alarming rate. Just as we are seeing today, people began to default on their loans because the new higher rates outstripped the homeowners’ ability to pay them.
The pressures of double digit inflation, double digit interest rates, and the fruitless and unjustified interference in the mortgage industry by Congress during the 80’s in an attempt to prevent the defaulting of loans (deregulation of the Savings and Loan industry by altering the limitations and margin requirements which had been placed on those institutions) ultimately led to a collapse of the Savings and Loan industry.
Throughout the mid to late 80's and early 90's, people began simply to walk away from their houses and default on their loans. Congress, through their constant intervention and interference, had created a market which never should have existed, or as it is called in tort law, a "moral hazard;" luring people into buying houses they should never have bought.
Of course ultimately it was, as it will be this time, the tax-payer who wound up footing the bill for the poor judgment of Congress and the poor business practices of Banks and Savings & Loans. As a recession became inevitable, businesses contracted and jobs disappeared.
Just as the "dot-com" explosion of the mid 90's led to unreal expectations and artificially inflated (and unjustifiable) stock prices as each highly anticipated new IPO (Initial Public Offering) was announced, these unsound policies have once more led to our “housing boom” and just as the IPO boom of the mid-90’s resulted in the recession of 2000, this housing boom has, as was inevitable, led to the rapidly approaching housing bust which we are now beginning to witness.
As George Santayana famously said, “Those who do not remember the past are doomed to repeat it.”
Long Live Our American Republic!!!
References:
http://www.theglobeandmail.com/servlet/story/RTGAM.20070227.wxibworld27/BNStory/Business/home
http://www.washingtonpost.com/wp-dyn/content/article/2007/02/16/AR2007021600813.html
What do you think?
To leave your opinion click on the word "COMMENT(S)" below
posted by Will Malven at 10:45 AM
2 Comments:
is there anything you don't blame on the Democrats? Seriously....
Do you have any thing intelligent to say or did you come here simply to complain? Seriously...
Facts are stubborn things, and what I stated are facts. As for your whiney question the answer is yes. I don't blame the Democrats for the Republican Congress spending money like Democrats. I don't blame Democrats for the Republican RINOs and President Bush's tin ear when voting for adopting the Democrat position and voting for amnesty for illegal aliens. I blame Republicans for that.
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