The 2008 Financial Crisis Explained

The Financial Crisis Explained: Why Complexity Wasn’t the Problem

We are nearing the fifth anniversary of the 2008 financial crisis, and despite an abundance of evidence, the media and the general public still seem largely misinformed about the hand of government in planting the seeds for the meltdown. The twitchy finger of that hand was the federal government’s aggressive affordable housing policies.

Most folks, however, still believe that the cause of the crisis was some combination of Wall Street greed and government deregulation of financial markets. There also exists the impression that the housing finance market, and especially securitization, had just gotten too darned complex, and that that complexity caused the crisis.

I confess that until I studied the details carefully, I held the same impression. . .

Last two paragraphs:

AEI’s Peter Wallison and Edward Pinto were courageous in identifying the real causes from the very beginning, and the numbers that subsequently emerged confirmed their claims. As a result of government efforts to expand homeownership, by 2008 about half of the loans in the market — some 27 million loans — were risky, subprime, or otherwise nontraditional. Of these, Fannie Mae and Freddie Mac held almost half — 12 million. FHA and other federal agencies (such as the Veterans Administration and Federal Home Loan Banks) held 5 million, and Community Reinvestment Act and HUD programs had another 2.2 million. That’s a whopping total of 19.2 million risky loans held by entities controlled by or within the federal government, leaving just 7.8 million for Countrywide, Wall Street, and other private institutions.

Five years on, it should be obvious that the federal government’s well-meaning but misguided affordable housing policies played a decisive role in the crisis.

Sad letter from a California property owner to a friend who's lived and worked abroad for several decades

You haven't been to America in many years.

Believe me it has changed.

Every day I see drug addicts and homeless people walking up and down the boulevard.  I have tried to offer them food.  They don't want the food, they want money.  I've actually been spit upon for offering food.  The 7/11 is daily flanked with people who are looking for money.  Again, if you offer them food they turn it down.

The immigrants piss on the street where I live and set off massive commercial fireworks on any given holiday which land in people's yards scaring our animals.  If asked to please move their car from your driveway you get flipped off. If you call the police for unlawful fireworks, you get no assistance.  If you don't have a "No Trespassing" sign on your gate, squatters can walk on your property and pitch a tent.  You have to treat them like a paying tenant.

A friend of mind has a home that she rents.  Her tenants left about 6 months ago and before you know it a squatter moved in.  My friend is not allowed to turn the lights off and the squatter has all the rights of a paying tenant.  She has a lawyer and they have not made any progress.  In fact the city has given the squatter a lawyer for nothing.

I have a guest house that I leased to a woman who was homeless for 12 years.  She dug herself out and started her own feeding program for the homeless at a church. I was so impressed with her that I rented my very lovely guest house to her for 300.00 less a month than I would have rented to someone else.  She has been with me for two years.

I went to Utah for five months leaving her there.  I would have trusted her with my life.  I got back and found that she had had some guest there for a couple of weeks.  This was not our agreement.  I don't mind an occasional "sleep over", but I'm paying all the utilities and I do not want strange people walking on my property.

She got into my face and threatened and told me the "she could have anybody there for 15 days at a time if she wanted".  She then proceeded to scream  "was my house permitted."  She told me I was rude etc, etc, etc.  I didn't say anything.  I now have a lawyer and we are trying to get her out.

She wants $10,000.00.  And, she can get it.  This would also be true even if she was doing something illegal on my property.  She is 60 years old.  If she was 62 I would have to give her 12,000.00,  It goes on and on.  If I had done something inappropriate to her, I could understand her attitude.  But, here is a woman I willingly helped and she pulled "the system" out on me and has not yet called my lawyer back and responded to his offer.  This is what happens when there are no boundaries in the system.

I've also been made to feel guilty for having Social Security (which I paid into), Retirement (which I paid into) Annuity (which I paid for) and owning a home.  I am now living in a trailer in a trailer park because the woman on my property has more rights than I do.  This is what is happening in America.

Also, I am trying to sell my house this year because if I wait until 2013, Obama Care kicks in and my Capital gains from my home (which is not that much) will be taxed 3.8% (for Obama Care) on top of state tax and closing cost.  This is only one story.  IT'S A BRAVE NEW WORLD!

I love America.  I wish I had a wonderful solution that would balance all the hatred.  I wish you could too.  I'm so glad that you don't have to be here to witness America.....it's so sad.

Love you.

A clever little mortgage scheme in Europe foiled

Hungary has approved a ban on mortgage lending in foreign currencies. Talk about closing the barn door after the horse is gone.

The government had no problem with consumers borrowing in Swiss francs at low interest rates when CHF/HUF was at 165. Now that it is at 215, they think its a bad idea…

Hungary announced a package of reforms a short while ago, including a bank tax. A new "precautionary" deal with the IMF is their aim, the economy minister says.

The same problem extends across central Europe where homeowners "cleverly" borrowed in Swiss to avoid high local rates.

Those homeowners are now choking, helping drive the franc ever-higher. An ugly situation that never should have been allowed to happen.

NOW Hungary bans FX mortgage lending

Big Government: "Some of us who don’t even own homes are paying to support others and their home ownership..."

For American taxpayers, now on the hook for some $145 billion in housing losses connected to Fannie Mae and Freddie Mac loans, that amount could be just the tip of the iceberg.

According to the Congressional Budget Office, the losses could balloon to $400 billion. And if housing prices fall further, some experts caution, the cost to the taxpayer could hit as much as $1 trillion.

Fannie-Freddie Bailout Could Cost Taxpayers $1 Trillion

Warning

Phony Mortgage Plan
By Dick Morris (former advisor to Bill Clinton)
Posted: 03/10/09 04:46 PM [ET]

President Obama and his big spenders are moving quickly, to the relief of those who are facing foreclosure on their mortgages. But the program they are offering will do nothing for those most in need.

In the fine print, Obama’s plan provides no relief for any homeowner whose mortgage exceeds the total value of his home. But these folks are the ones who have been conned into taking sub-prime mortgages so loaded with brokerage commissions, interest rate subsidies, bank fees and lawyer and title-company charges that the amount of the mortgage has ballooned. These high mortgage amounts, coupled with declining property values, have turned about 20 percent of American mortgages upside down, so that the debt exceeds the value of the property.

By excluding these homeowners from help, Obama is guilty of a holier-than-thou hypocrisy. Was it not Fannie Mae and Freddie Mac that encouraged such over-mortgaged properties? Was it not the Democrats in Congress who passed legislation urging Fannie and Freddie to weaken the standards to allow more low- and lower-middle-income families to buy homes?

How can Obama suddenly pretend to be so shocked — shocked — that about 20 percent of America’s home mortgages are now worth more than the property they finance? It was the insistence of liberal Democrats that made it so. When Housing and Urban Development Secretary Henry Cisneros demanded that Fannie and Freddie invest 42 percent of their assets in buying low- and lower-middle-income mortgages, and when his successor Andrew Cuomo raised the quota to 50 percent, what did they think would happen? When they explicitly told Fannie and Freddie not to insist on down payments in the mortgages they purchased, how did they think the purchase would be funded? Obviously, if you don’t require the borrower to put money down, the full purchase price must be covered by the mortgage. To now, piously, refuse to come to the rescue of those who fell for your party’s seeming generosity and bought homes on the terms it suggested is hypocritical at best.

But it is not only the over-mortgaged whom Obama will ignore, but those who have lost their jobs! If you do not make enough money such that your mortgage payments come to 31 percent of your income, you can’t get your mortgage refinanced. If your income has dropped to a point where your monthly payments on your loan consume a greater part of your earnings than 31 percent, you are stuck.

So we have Obama rushing to the aid of those who have been hurt in this bad economy, but exempting from his proposed relief anyone who has lost his job and seen a cut in income or whose property values have dropped below the amount of his mortgage. In other words, he’ll help anyone but those most in need.

And, once again, Obama would limit his aid to those who make below $200,000 a year. While he doesn’t specify this limit in his proposal, he does limit his intervention to mortgages of less than $720,000. At standard mortgage interest rates, such a loan would call for $60,000 or so in payments a year. To qualify for relief, your mortgage payment can’t be larger than 31 percent of your income — or about $200,000. Once more, Obama makes it clear that he is not the president of anyone who makes that much money or more. He is only the president of the other people.

Obama, of course, forgets — or doesn’t care — that those making over $200,000 account for almost a third of the total national spending and that you cannot stimulate an economy while constantly cutting off those people from any consideration in any government program. But Obama is determined to try.

Morris, a former adviser to Sen. Trent Lott (R-Miss.) and President Bill Clinton, is the author of Outrage. To get all of Dick Morris’s and Eileen McGann’s columns for free by e-mail or to order a signed copy of their new best-selling book, Fleeced, go to dickmorris.com.