Our current economic distress: If we don't understand where we have been, we cannot know where we are going.

Contributing Factors Leading to the 2008 Recession: 
how Affordable Housing contributed to our current financial collapse.
January 11, 2012

J Smithson

The accepted pro-government myth as relates to assessed fault and the financial crisis in which we find ourselves is this:  an unregulated,  greed driven capitalist system gave birth to the mess we are in. Greedy capitalism got the blame.   


While the “greed” part is true, we point out that it is always true.  Greed and capitalism are always shameless partners.  The occasion for greed is pushed back by regulation and penalties.  Again,  the high pressure divide that is “greed and dishonesty versus doing what is right, under the law”  is a dialectic in perpetuity. That dialectic is always the case. Economic systems function in spite of this dialectic.  The Sarbanes–Oxley Act of 2002  was a regulator solution, a structured antithesis,  if you will, to the driving force of capitalist greed.  And decades before Sarbaines-Oxley,  we had the Glass Steagall Act of 1933 and its 1956 extended amendment.  Truth be told, preventative measures were in place.  The tension between right and wrong had been dealt with.  So, what happened?  


Understand this,  while some might argue the over-all effectiveness of previous and in-place regulations,  the fact of the matter is that they were in place.  So we ask,  again,  “Why,  suddenly,  this problem?” 

Two historical realities came together at just the wrong time.  One was the reversal of the Glass Steagall Act in 1999.  Within five years of the reversal of this act,  our financial collective had already shown the seeds of the current recession.  In addition to the repeal of the GSA,  increases in high risk home loans were ordered by congress under the revitalized policy coming out of the Clinton Administration( 1999) that is known as “Affordable Housing.”  I think that Bush knew problems were being created via “Affordable Housing,” but he, too,  had bought into the communal view that “everyone deserves to own their own home.”  I remember him saying precisely this. He tried to introduce legislation to correct  lending abuses under Affordable Housing requirements,  but was accused of hating the little man,  by the Democrats of the day, and the matter was dropped.     


Understand this historical fact:  "Affordable Housing" as a national policy,  was the case,  first in Europe and Australia,  before it came to this country. Under the guise of social justice, standardized equations were officially ignored as lending institutions tried to comply with increasing sales quotes [to low income families] levied on them by the Federal government.  While  home ownership could not exceed 30% of a family's income,  after 1999,  that limit was changed or ignored.  Incomes were not verified and floating or variable rate loans were written that allowed for purchasing qualification.  Low income folks could buy a home with use of a variable rate loan.  But,  there are time limits on such loans. When it came time to move the loan to a fixed rate,  the monthly payments increased two, three, four times the original payment total,  and folks could no longer make their payments.    


In the end,  Fannie and Freddie became clearing houses for these high risk,  subprime loans.  The risk for these loans was purchased by these two GSE’s and life was good,  until the high risk/low income clientele stopped making their payments.  Two trillion dollars and 13 million subprime loans, held by Fannie and Freddie,  immediately became “troubled assets.”  74 percent of these loans were written under the pressure of “Affordable Housing.”  And that is how we got to where we are. 

Conclusion:

While greed is always there,  no matter what the economic system,  it cannot be denied that federal ideology as relates to social justice issues played a major role in the current distress. It is critical to impending solutions that we understand the issue of cause and effect as relates to our current distress.   --  J Smithson , Jan 11, 2012. 

Research done by The American Enterprise Institute confirms the above. 

. . . . . . in its non-prosecution agreement Freddie agreed that as of June 30, 2008, it had $244 billion in subprime loans, comprising 14 percent of its credit guaranty portfolio, rather than the $6 billion it had previously disclosed. Freddie also agreed that it had $541 billion in reduced documentation loans alone, vastly more than the $190 billion in previously disclosed Alt-A loans which Freddie had said included loans with reduced documentation.   

The SEC findings add $219 billion and 1.43 million loans to our original Fannie and Freddie subprime and Alt-A totals, bringing the combined subprime and Alt-A total to $2.041 trillion and 13.37 million loans.

All told, after adding the SEC’s new data to our original estimates, there were approximately 28 million subprime and Alt-A loans outstanding on June 30, 2008, before the financial crisis, with a value of approximately $4.8 trillion. This was half of all mortgages in the United States. Of these loans, over 74 percent were on the books of U.S. government agencies and firms subject to government housing finance policies. This shows where the demand for these low quality loans came from. Fannie and Freddie were themselves exposed to more than 13 million subprime or Alt-A loans, or 65 percent of the government total

http://www.american.com/archive/2011/december/why-the-left-is-losing-the-argument-over-the-financial-crisis