How the "Ownership Society" Backfired

The Bush Administration's ideology of homeownership combined with a lack of oversight contributed significantly to the collapse of the housing market and the present economic crisis, according to this New York Times investigation.

"There are plenty of culprits [for the mortgage crisis], like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of [President] Bush's own making. From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone. He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent - and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn.

Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions."

Full Story: White House Philosophy Stoked Mortgage Bonfire

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An Alternative Analysis

Fannie Mae Eases Credit To Aid Mortgage Lending

"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers . . . In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."

- New York Times, Sept. 30, 1999

If only! the S&L thing was tiny by comparison

As the NYT recent series makes clear, the troubles at Fannie Mae & Freddie Mac are not the primary, much less the sole, cause of the meltdown nor of the global economic crisis. Trying to increase lending to poor people was not a substantial part of the subprime story, and was totally irrelevant to the unregulated, untracked, and unsustainable securitization of debts. The global explosion of worthless paper causing the global collapse is directly attributable to the Bush administration. To quote Krugman, "What we’re looking at now are the consequences of a world gone Madoff."
The attempt by Skeisenbeiser et al. to pin blame on Democrats by citing stories from a decade ago would be funny if not so pathetic.

the question you might ask

is why the paper was worthless, as you state. The securitization process was not and is not the problem. It is worthless because of what was being collateralized. The mortgages were too ridiculous for the borrowers - stupidity and greed on the part of the borrowers, lenders, mortgage brokers, and real estate agents. Lots of blame to go around - Freddie and Fannie are part of that - why would they buy such ridiculous mortgages. Forget regulation for a moment - they were profit-making enterprises. We should have cut them loose a long time ago and they would have just failed. Then, we shouldn't need to pump public $$$ into them.

It's fine to talk about an ownership society, but if public policy starts getting ridiculous to achieve those goals, it fails.

Why the paper was worthless

Because the bundles with the bad slices were transferred to off-book entities and since the whole mess was unregulated, nobody knew how much there was, how much was in it, etc.
The securities were supposed to take into account the real value of the mortgages, including default risks.
That was the whole reaison d'etre for them.
The securitization process was and is the problem insofar as it is not regulated enough that buyers and sellers have real information. The main benefit of regulation is information, and unregulated global securities markets had lousy information.
The financial crisis would have happened even if Fannie and Freddie had never existed; the house of cards built on Ponzi-schemed securities traded in secret
Yes there were stupid and greedy players on all sides of the housing, as well as the financial markets, but that is ALWAYS true.
A funny, as well as accurate, explanation is posted here:
http://bigpicture.typepad.com/comments/2008/02/how-subprime-re.html

not quite

The point of securitization of debt is to lower interest rates (spreads) and provide more liquidity to the credit markets. This has been fundamentally true since it's been going on. The point of dividing MBS and CDOs into tranches is because some investors prefer a higher or lower risk/return profile. Spreads are market determined - by the buyers of the B piece notes. That has also worked in the past. The difference in the last few years is the miscalculation and pricing of risk relative to the underlying. When you are buying a derivative product, the value of that "asset" is a direct product of the value of the underlying. It wasn't so much lack of information as it was poor judgement. Almost all of the entities buying mortgages to securitize and sell and MBS investors misjudged and mispriced the risk inherent in pools of 105% LTV loans, liar loans, subprime loans, interest-only loans, ARMs, adjustable ARMs, balloons, etc. Most of all, they blew the "V" part in loan to value. They didn't realize that so many of those loans would be upside down. Of course, when you are 80%+ levered as a company and the value of your assets drop 30%, guess what? It's not illiquidity, it's insolvency.

If you need government regulation to tell you how to price those assets, you need to find another line of work, which is exactly what should have happened to those banks and Freddie and Fannie. Even the credit rating agencies blew it. There is not necessarily a Ponzi scheme here, but I would describe it as follows: whenever the source of capital gets too far detached from the investment, you get problems. We're seeing it with MBS pools and multiple securitizations and we're seeing it with large fund of funds. Bottom line: what is wrong with operating on the following notion: if you don't fully understand a financial product, don't buy it. Hank Paulson barely understands this stuff, how could he have regulated it better?

One of my top lessons to be learned for people in all of this: Ownership is fine as long as you don't overlever yourself or your company to do it.

ownership

I aways thought the word was "leverage."
and the fringe Architects "Dreamers" of the world, have been outdone by a good ol Texas boy whose quaifications are a money losing football? team and a loser S&L.
What a LOSER!

"ownership society"

AMEN

the Bush Adm & owner society backfired

AMEN!
way back, should have put the HUD 235 crooks in jail. and continued with farm valuation and credit crunch. and S&L
and followed through on all.
Bush, Cheney and Rove represent the best examples of the worst administration this country has ever suffered.
And anyone who thinks the difference in having every household a homeowner would be in the public policy approach, whatever, I have a bunch of rainbows and pots of gold for you to find. not to mention a herd of unicorns, Jack in the Beanstalk, Rumpelstilskin,
They have been living in DC for the Past 8 Years

Sounds like supply side economics.

who will own us when this is all over?
B******s
and to have the Republican candidate chose a neophyte? Hasnt been a true good Republican I could respect since Barry Goldwater.

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