Once upon a time, Congress mandated Fannie Mae and Freddie Mac to promote a subprime brand of loans for low-income Americans. Lots of people took advantage of these nothing-down, zero-interest-for-the-first-year loans. There were 66,000 subprime loans in 1993 and 660,000 in 2000 — a ten-fold increase.
The housing industry, ultra-profitable because of dirt-cheap illegal immigrant labor, built two million new houses a year.
Wall Street bought up the cheap mortgages, created “mortgage-backed securities,” and sold these securities at a hefty discount around the world.
Interest rates jumped after the initial teaser period, and homeowners started ditching the subprime loans. Early reports said many of the original mortgages were held by undocumented workers who did not understand the English fine print in the legal documentation.
More and more foreclosed homes came onto the market, and housing prices dropped dramatically. Meanwhile builders kept building millions of new homes. The market got even more overbuilt, and home prices dropped more and more.
All this time, the securities-rating agencies kept giving the “mortgage-backed” securities their best AAA rating, so Wall Street kept selling these investments – even though the bottom had long since dropped out of the subprime market.
Prime mortgage holders started defaulting on their loans because home values dropped so drastically, and they were “under water” – i.e. owned more on the mortgage than the house was worth.
Housing prices kept dropping. Property taxes dropped. Cities and counties and states and school districts were taking in less money. They started laying off people, and so forth.
The government gave hundreds of billions to the banks. The big banks stayed alive. Regional banks are still failing at an escalating rate.
The government gave a tax credit to new home buyers. The market has improved since then, but the credit ended May 1st and the future is still very uncertain.
Humpty-Dumpty
As it is, Wall Street sliced and diced mortgages so much that it now costs $60k just to put each mortgage back together for a foreclosure auction – at the originating bank’s expense, or the homeowner’s. That is, major Wall Street banks keep the profits, and regional banks bite the dust – along with the poor consumers who lost their home.
The Numbers
New housing starts from 2003-2005 were 2 million. New housing starts now are less than half a million. Existing home sales in 2005-2006 were 6 million. Existing home sales now are 4.5 million.
Congress
This is the seventh time that Congress has tried to improve the plight of the poor by mandating these mortgage-backed securities along with artificially-low interest rates. It’s the seventh time the plan has failed.
Action Items
The number of homes on the market determines the price. Home builders kept on building away, full-steam ahead in the beginning, exacerbating the problem. The best way to ensure this housing market recovers fully from here on out is to hold down new home construction until housing prices recover.
If there weren’t 7 million unemployed illegal immigrants in the country willing to work for room and board, new home construction would be more in sync with the economy as a whole.
The Wall Street Reform bill does not mention Fannie Mae and Freddie Mac – the very institutions who caused the whole financial meltdown to begin with. Lending institutions around the nation are still mandated by federal law to give subprime-type loans (zero down, low interest) to low-income families. That must stop, or this whole scenario will repeat itself – soon!
