This was published in the February 11th Washington Examiner
As the housing market continues to sag and foreclosures increase, there has been a rush by politicians, most especially Democrats, to point fingers. Foremost among them has been Sen. Hillary Clinton, D-NY, who has fed into the "predatory lending" rhetoric emanating from Congress, as well as self-appointed black leaders like Jesse Jackson.
It makes it no less painful for a homeowner, even a recent one who was, in a sense, speculating on the market, to lose their home but for politicians to twist that outcome into the self-serving notion that insolvent borrowers are "victims" because they made and lost a large bet is not only wrong but hypocritical.
One of the major unheralded (at the time) initiatives of President Bill Clinton's first term was a significant increase in the homeownership rate, which measures the percentage of occupied housing units being occupied by the unit's owner.
In 1992, the homeownership rate stood at 64.1% according to the U.S. Census Bureau. By 2000, Clinton's last full year in office, the rate stood at 67.8% and peaked at 69% in 2004. Many factors contributed to that increase but policies introduced by Fannie Mae and Freddie Mac in the mid-19990 played a major role. Fannie and Freddie, the two government-sponsored entities (GSEs) authorized by Congress to make loan guarantees in order to make it easier for Americans to get mortgages, largely dictate the terms on which commercial lenders operate.
In response to political pressure at the time, the GSEs took steps to make homeownership more affordable for lower-income Americans and those with a poor credit history. Particular emphasis was placed on the needs of African-American borrowers as a way to address the effects of past "red-lining" – the practice of refusing mortgages in areas where blacks lived.
Red-lining denied millions of black families the opportunity to create wealth through home ownership, develop experience with managing credit and, most importantly, passing accumulated real estate wealth on to children, thereby giving them the funds needed to make down payments on their own homes.
The GSEs did three things: First, they created new ways for those with little or no credit history to qualify for "conforming" loans by presenting utility bills, a particular boon to many low-income African-American borrowers; second, they loosened restrictions on debt-to-equity ratios to decrease down payments from the traditional 20% to as little as five percent or even zero down; (3) sought to lower initial payments by encouraging commercial lenders to offer various forms of back-end loaded mortgages including floating rate loans with low-interest "teaser" rates.
The new policies worked and homeownership rates rose steadily, especially among African-Americans. Many first-time homeowners began accumulating equity in their home as housing prices soared. So long as housing prices rose, and equity-levels increased, all was well. Lenders were more than happy to take fees to flip borrowers from floating to fixed rate loans because they were no longer securing the loans against the borrowers credit history but rather the equity value of the house.
When home prices began to decline, home equity began to evaporate and, in some cases, disappear altogether. What happened next was entirely predictable ? a two-step price decline followed by a dramatic increase in foreclosures.
The first step was the normal cooling off of what had been an overheated housing market. The second step, currently underway, has been driven primarily by the inability of new homeowners to swap from floating to fixed rate loans as teaser rates expired and homes were, in many cases, worth less than the amount of the mortgage.
The response of politicians has been equally predictable. Rather than consider the role of Congress and the Executive Branch in encouraging lenders to extend credit to borrowers with little or no credit history to purchase homes with little or no money down at artificially low interest rates they've run to the nearest microphone to denounce predatory lenders."
Are there such lenders out there? Sure but history has always shown that any overheated market invariably brings out vultures looking to exploit inexperienced investors. The fact is, however, that people who invested in the real estate market with little of their own money were less "homeowners" and more "speculators" and when a financial bubble bursts speculators take the hit.
Likewise, history has shown that when politicians cause a mess like the so-called "mortgage crisis," they are the first to point the finger in any direction except their own.
