The Housing Meltdown

I am tired of the media portraying the meltdown of the housing market, and the following meltdown of the financial markets as the fault of George W. Bush. There was nothing he did that caused the problem, and little he could have done to stem the problem. True, the problem did arise on his watch. But it was at such a time that he was fighting criticism for everything he did. He just did nothing. From my perspective, the only thing Bush did wrong in this case was to wait and hope that the problem would, as it had other times before, resolve itself. However any action he could possibly have made, no matter the outcome, would have created a result in criticism towards him.

Where did this problem start? The answer is simple, it was during the Carter years. I will remind you that I am neither a Republican nor a Democrat. I am an independent who examines a problem from all sides, and determines the solution. At this point, placing blame is senseless. Finding the cause, and preventing it from happening again should be our goal. Anyway, during the Carter years, something called the “Community Reinvestment Act” was passed. On the surface, it looked like a good idea. Many of these programs look good. It is in implementing these programs that we tend to have problems.

The purpose of the Community Reinvestment Act was to provide more funding for the “underserved lower economic areas” to buy homes and start businesses. And, in the beginning there were standards that the banks were to have followed that insured sound business practices on their part. Life was good. Carter had a program that was serving the lower class. The upper group of the lower class were able to buy houses and start businesses. And, that is what the program was designed to do - establish home ownership and businesses in areas where little to none existed before.

So, the program was expanded. The banks were pressured to grant more loans in order to keep their score up. Banks were no able to merge without a good score. And, the interest rate the banks had to pay for their money was based on their score. The score was important. Since the first round of lending, involving those lower income people who were ambitious enough to work diligently, was successful it was decided that more opportunity should be offered these areas. As I have said before, and will say again, America is the land of opportunity. No group should be kept down because of race, religion, sexual orientation. But, not everyone has the means to pursue opportunity. Anyway, as the bar for these loans were lowered, and more people took advantage of these lower standard loans and were able to buy houses, the housing market expanded tremendously.

Then came the speculators. Speculators are generally a bad thing. They drive the prices up, when there is no basis for the increase. They would find a house that needed upgrading. They would buy it for, perhaps $60,000. They would put in new lighting fixtures, some new carpet, slap a fresh coat of paint on it and sell it for $125,000. The interest rate was cheap. And the standards for the borrower was low. And loans were being given for 125% of the value of the house, so people who never would have considered buying a house like that before, could and did.

The basic problem was the rapid increase in the values of the house. Housing has, until the last twenty years, been a good investment. Housing values would increase a steady 4-5% a year. When you keep a house for 30-40 years, the return is respectable. But, when the flood of first time buyers started buying houses, the supply of houses dwindled. With the law of supply and demand, the price of houses rose even faster. The combination of the Speculators flipping houses and the higher demand for houses created a increase of 10-20% per year. And, this artificially high return on investment brought in other round of Speculators.

There was a Television show several years back called “Flip this house” or something like that. In fact, there were several of these shows. The concept was, document from the beginning to the end, the transformation of a house as it was converted and upgraded and sold. The Speculator would buy a house for perhaps $150,000 with little or no money down, and hope to fix it up and sell it for $250,000 before the payments started coming due. In general, they had 4-6 weeks to do this. Some made great profits. In the cases where the houses failed to sell quickly, they lost - often spectacularly. The lure of these riches brought in thousands of more Speculators. Everyone thought they could flip a house in a few weeks and make a fortune. It didn’t work.

As these shows spurred others to become Housing Speculators. And again the law of supply and demand came into play. The cost of housing surged again. And more Speculators and more dramatic increase. And, more lax lending standards. No proof of income loans appeared. It seemed that banks were giving money away to anyone who wanted to buy a house.

The standards for lending got so low, that they were practically nonexistent. I was watching the news the other night where a lady was being interviewed. She was losing her home. It seems that she was unemployed, and bought a $360,000 house. It is ludicrous that she would have been able to do that. When I bought my first house, I had to provide proof of income, job history, credit history and a 20% down payment that had to come from my own savings, not as a gift from family or friends. The theory is, when the home owner has real investment in the house, they are less likely to walk away from it. It is sad that this woman lost her home. But, the reality is, she never should have bought it in the first place. The $360,000 price of the home was inflated by the surging market. Then, when the market bubble burst, the value dropped to below $300,000. She could not make the payments, she could not sell the house. She had no option other than foreclosure.

There are many like her. The housing market is glutted with foreclosed houses. The law of supply and demand comes into play again. More houses than buyers means the prices fall. Those who can not make the payments are forced to sell. If they do not have the equity to cover the drop in value, they can’t sell for enough to cover the loan.

Many times through the years I have heard the comment “It is just a matter of time before the housing bubble bursts. The comment was stated again and again. And through the years, the housing market rose. There were times when questions were raised about the sustainability of the market were raised. But, there were those who said that to change the system would be unfair to the disadvantaged. With all the warning, there was still an outcry of surprise when the market failed. The failure of the housing market was not surprising. In fact, the failure was inevitable. A balloon will only hold so much air before it bursts.

That is what happened to cause the falling housing market that caused the financial meltdown. And, the President had nothing to do with it. Presidents have no power to do much of anything. They are just there when things happen. It is Congress and the Senate that creates bills and passes them. The President can veto a bill. But, for the most part this doesn’t happen because when if a bill passes by a good majority in the Senate and Congress then a veto is sure to be overturned. And, if the President vetoes a bill that the Senate and Congress have passed, then any bill he suggests will never make it out of committee. That is the way the game is played.
The Community Reinvestment Act happened on Carter’s watch. It seemed like a good idea, so it passed. And, through the years, it was expanded upon, by Congress and the Senate, and the expansions also passed. Somewhere along the line, greed and speculation got involved. And now that the scam is falling apart, the Federal Government (spelt “TAXPAYER”) is on the hook for the failing. In the past, businesses had to live with the consequences of their actions. To bail out these failed businesses is just wrong. I realize that it will be painful, shore term, to allow these banks to fail. But, a bail out, long term, sets a dangerous precedent. The Government has become a safety net for failed businesses. This is just wrong. My taxes are going up and my savings are going down to cover the losses involved in business ventures that I had no involvement in and no chance of gaining from.

On the other hand, these banks were operating under laws that forced them to follow poor business practices. Sure, there was a little wiggle room. They could not give these loans. But doing so would limit their ability to take part in the mergers that were happening at the time. And, limiting these loans would also raise their cost of doing business by limiting the sources of capital that were available to them.

That is all in the past now. Banks have failed. The Economy is tanking. Retirement funds are evaporating. Housing equity has been decimated. All this because a seemingly good program was taken over by greed. The original purpose, remember, was to help the disadvantaged. Now, it appears that the entire country is going to become disadvantaged. I just hope that is our Nation survives, the cycle doesn’t start again. I can just hear the rumblings now, it is unfair that I have more than someone else, perhaps we can change the system, lower standards so they can have more. I don’t want to imply that I think I should have more than other people. That isn’t the case.

This is America, the land of opportunity. Everyone has the right to have whatever they want. And, they have the right to become whatever they want to become. However, it is up to the individual to work for it. Government giveaways do nothing to help the economy. Government giveaways weaken society. Only a strong, working society will bring us out of this hole we have dug ourselves into.