How Did America Get Into This Mess? The Housing Collapse

How Did America Get Into This Mess?  The Housing Collapse

In the 80s the term Home Equity Loan was introduced.  Before this, the term was Second Mortgage and it had a bad connotation.  The only people who took out second mortgages were those in serious financial trouble.  Keep in mind that this is also the time that the quasi-government agencies, Ginnie Mae, Freddie Mac and Fannie Mae started packaging their mortgages and selling them as investments.  As the investments took off, they needed more mortgages and told the banks that they would start guaranteeing all the mortgages sold to them, thus transferring the risk of the mortgage from the bank that made the loan, to the investor who purchased the GNMA, FNMA or Freddie Mac investment.  So investors took risks without realizing what risks they were assuming since they thought, “what bank would make a mortgage that would be a bad risk?”

 In order to create more mortgages and to help along the housing rush, adjustable rate mortgages were introduced.  The adjusted rate would only last 2 -5 years, and then a fixed, higher rate would take its place.  Homeowners thought that they were like Donald Trump and started buying homes they could not afford, if they were to purchase them at 20% down and on a 30 year fixed rate mortgage; to get around that,  the banks told potential  home buyers that they would qualify, with the lower payment adjustable rate.  And why would the banks care?  They would sell that loan to GNMA, FNMA, etc. so why worry! 

 People began flipping real estate without considering the consequence of whether they could afford to hold the property should they 1) not be able to sell it and 2) had to hold it when the higher fixed rate mortgage kicked in.  Well, they actually WERE like Donald Trump (the real estate bankruptcy king!) and got stuck with properties they could not sell, nor afford.  Then, to top it off, many of them started losing their jobs.

 Then like a big bad tidal wave, the housing market started collapsing on itself.  So, it’s not that there was a lack of regulation in the banking industry that caused this.  It was the GOVERNMENT saying that they would guarantee any mortgage they bought – regardless of the risk – that started it.  The US government is now the largest owner of real estate in the US.  Perhaps THIS is what they wanted all along?