Housing bubble

Mortgage Binges and Painful Hangovers

After the last mortgage binge, we woke up in the gutter. Isn't once enough?

|

Up
Up / Pixar

Plenty of people who go on wild drinking binges end up with sound reasons to avoid repeating the experience: painful hangovers, lasting embarrassment, ruined relationships, encounters with police. But that doesn't stop some of them from doing it again. Maybe these are the same people running the federally backed mortgage companies.

The possibility comes to mind because these two entities, known as Fannie Mae and Freddie Mac, have decided to lower the down payment they require on some mortgages from 5 percent to 3 percent. The horrific lesson of what results from encouraging marginal borrowers to buy homes has somehow vanished from their memories.

"Our goal is to help additional qualified borrowers gain access to mortgages," said Andrew Bon Salle, an executive vice president for Fannie Mae. The goal is one that a few years ago would have sounded uncontroversial: making it possible for more people to buy houses. Homeownership has long been taken to be a civic virtue, an economic boon and a central feature of the American dream.

But homeownership, as we have discovered, has a huge downside. It can be far more dangerous financially than renting. As long as real estate prices are rising, a mortgage serves as a vehicle for accumulating wealth. When they fall, it can destroy it just as quickly—and upend lives in the process.

Between 2005, near the peak of the housing boom, and 2010, the default rate on home mortgages rose eightfold, according to the St. Louis Federal Reserve. Even today, it's five times higher than it was in 2005. The crash caused $6 trillion of household wealth to go up in smoke. It also set off the worst economic downturn since the Great Depression.

All that is ample reason not to return to the bottle. But Fannie Mae and Freddie Mac are doing just that, all while proclaiming their intention to remain sober.

They insist that they will limit the mortgages to creditworthy borrowers who can be expected to make their payments. But the new rules ensure the proliferation of loans that will not be repaid. Arnold Kling, a former Freddie Mac economist now at the Mercatus Center at George Mason University, says that under this new policy, the mortgage giants "are setting people up to fail."

One reason, he told me, is that "people who can come up with a bigger down payment have shown prudence, the ability to save and the willingness to save, which are all key ingredients in being able to repay a loan." On average, he noted, the lower the allowable down payment, the higher the delinquency rate.

Many borrowers who can afford only a smaller down payment will make good on their loans. But a disproportionate number of them won't.

One reason is that a borrower with only 3 percent equity in a house is far more vulnerable to a drop in prices than a borrower with 10 or 20 percent. A small decline could put her underwater. In that case, she would have a financial incentive to default.

A renter who loses his job or suffers an expensive medical calamity can easily move into a cheaper place. But a homeowner with no equity may not have a good option. She may not be able to afford the mortgage payment or the cost of selling the house for less than her mortgage. She may not be able to move to take a better job. She may find herself stuck, with foreclosure the likely outcome.

The danger here is not just to unlucky homebuyers. When things went south the last time, the taxpayers got dunned for $187 billion to rescue Fannie and Freddie. The two eventually paid it back —but there was no guarantee they would. And there's no guarantee they will if they are someday bailed out again.

What we should have learned from the vast trauma we endured is that the federal government should stop trying so hard to enable Americans to buy homes. People in France and Germany lead productive and satisfying lives despite much lower rates of homeownership. More Americans have learned to do so since the bust.

By luring many of them back to betting their savings on the housing market, the mortgage firms are selling them an obsolete version of the American dream that puts us all at risk of another debacle. After the last mortgage binge, we woke up in the gutter. Isn't once enough?

NEXT: Brickbat: You Know the Drill

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. I want Alloidal title, not fee simple.

    1. Just do what Roy Bates did in 1967:
      http://en.m.wikipedia.org/wiki…..of_Sealand

      All you need is an abandoned oil rig in international waters and enough arms to protect it.

      1. The inspiration for “Waterworld”.

        Who knew?

  2. The Cause of the 2008 Mortgage Crash
    CRA push + GSE pull + regulation changes = mortgage crisis.

    1. FAYK SKANDULL.

      I blame BOOOOOOOOOOOOOOOOOOOOOOOOOOSH

  3. Apparently, building stadiums isn’t the only way taxpayers support professional football.

    If you’ve already bought tickets for Super Bowl XLIX or are looking forward to watching it with your friends and family, you may be surprised to learn that there is a chance it might not be played. Congress first needs to make a decision on renewing a piece of legislation that you possibly never have heard of: TRIA?the Terrorism Risk Insurance Act.

    http://www.businessweek.com/ar…..super-bowl

    1. Yeah but they really need is STEVE SMITH insurance.

      1. I think STEVE SMITH will insure that STEVE SMITH is where STEVE SMITH needs to be when the Stupor Bowl commences.

        OHHHHHH. That’s not what they meant.

        Never mind….

        1. Imagine a STEVE SMITH & Warty halftime show complete with audience participation.

          1. I’m picturing “participation” being the way that a pig “participates” in a BBQ….

            Poor bastards….

            *shudder*

      2. SMITH SMITH LOVE CHEWY NFL EGGS!

    2. Crony Capitalism for the win.

  4. People in France and Germany lead productive and satisfying lives despite much lower rates of homeownership.

    Really Chap-MAN? So universal healthcare is okay too because Europe? How bout we stick to facts and leave the “Jonny’s mom lets him!” arguments to team free shit.

    1. Socialized healthcare doesn’t work. Socialized homeownership doesn’t work. When markets are distorted by the government, they don’t “work.”

      Chapman doesn’t mention health care, and I don’t know what European countries do or do not do when it comes to encouraging homeownership — but I read Chapman as saying that the market will tell us what’s possible, and we don’t need government to encourage anything.

  5. Our goal is to help additional qualified borrowers gain access to mortgages,” said Andrew Bon Salle, an executive vice president for Fannie Mae.

    There’s that “access” thing again. Why doesn’t someone give the US access to a balanced budget?

  6. They paid their $187 billion back and are still spitting out enormous profits for taxpayers. Geithner did a great job on getting taxpayer money back via TARP.

    1. What about the other 2 trillion the FED has on the books?

    2. Actually it was the banks who paid it back and the money was just funneled through fannie and freddie.

      The banks were forced to pay for the sins of fannie and freddie by buying back bad loans that would never have been made to begin with absent fannie and freddie’s solicitation and complicity.

      The government has been fining and beating up on banks in an attempt to divert attention away from it’s own actions as a cause of the financial crisis and make it appear that the private sector was the proximate cause of it all.

      Which, of course, is flat out wrong.

      Here is some more detail on fannie and freddie regarding the bail out.

      http://blogs.wsj.com/developme…..uncle-sam/

      1. What’s up with all these useless facts?

      2. My favorite is how progderps point to repeal of some provisions of Glass-Steagal as the cause of the financial crisis when those things that were repealed had nothing to do with the mess the banking industry government got itself in.

        I tried to explain to a progresive once how regulation standardizes risk management, and when values of risk are improperly attributed to a security it forces banks to buy up that security. If that security drops like a rock, guess what? Boom, there goes your whole banking industry because everyone was forced through regulation to invest in said security.

        I think they replied with something about how I was beneath even speaking to because derp.

    3. Geithner did a great job on getting taxpayer money back via TARP.

      If only I could get my tax money back…

  7. Oh, there’s that shrieking again, shilling for Big Gummint and telling us how the taxpayers were “paid back”. HAAAAAAAAAHAHAHAHAHA! Oh, that one’s always funny!

    Well, 8% of the time it’s funny…

    1. Missed the thread you have, smack the sock poppet you won’t.

      1. I still hear shrieking. I refuse to post in the thread.

        Is that an RC Dean or a P Brooks (RIP) thing? I follow suit with trolls. Esp shriek.

  8. PS Green Bay loses, Lions eek out a win over the hapless Vikes, both have 10-4 records, Lions lead division cause they beat Green Bay in first meeting….

    This is the end times, fellow Reasonoids. I hope you are right with the Lord, b/c if Detroy-it hangs on and wins the Division, the 7th seal breaks, and it’s Katy bar the door, events to follow will be a….Revelation, if ya know what I’m sayin’, and I think you do.

    1. Of course, I predict the Leos to revert to form and lose badly in the first round.

      That’s what I’m hanging my hope for humanity on…

    2. Still time for Apocalypse to be averted: Last game of season, Detroit at GB.

  9. This time the right people are in charge.

  10. and any mortgage broker or bank that doesn’t make these loans will get sued. just like before 2008. meet the new scapegoats, same as the old scapegoats.

  11. Why does Chapman hate poor people?
    Why does Freddie and Fannie hate the enviroment and offer more people the ability to buy homes and add to commuter hell and urban sprawl?
    Why am I writing like the Judge?

    I retire in 18 months and plan on leaving Ca shortly thereafter. A good 18 more months of this house of cards please!

  12. The lower requirements are necessary today because of white privilege. In the past, most of the US population was white, so Americans could meet the higher down payment requirements. This is why it works in Germany and France — there’s still a whole lot of white folks there.

    As America continues to diversify, there’s not enough white privilege to go around. Fannie and Freddie are responding in a prudent civic manner.

    To be fair, perhaps at least every two years during national elections Americans should vote on down payments should be.

  13. The crash caused $6 trillion of household wealth to go up in smoke.

    If that’s a widespread belief, then perhaps our definition of “wealth” could use some work.

    1. I don’t see why that is wrong?

      If wealth in economics is a measure of the value (generally in dollars) of all assets owned minus liabilities, and the value of your house dropped, your wealth would as well.

      I’m not sure if you’re arguing that said wealth wasn’t real in the first place, but strictly speaking I don’t see anything wrong with the sentence.

      Not trying to be argumentative, please educate me if I’m wrong. 🙂

      1. The concept of wealth should be objectively grounded in the action and result of productivity.

        You bring up the concept of assets vs. liabilities. But that’s another concept that has been destroyed by lamestream economics–the concept of an asset. If they have to differentiate between a real and nominal asset, it begs the question of what the alternative to a “real asset” would have to be. If it’s not a real asset, it would have to be an unreal asset; the term “nominal” is muddying of the waters by lamestream economics, whose theoreticians are leftwing statists who use the state to create and prop-up phony assets through fiat money and credit manipulation schemes.

        The seekers of the unearned, the uncaused, and the unreal have infested the science of economics, and our civilization will be ruined if they are not displaced.

  14. Cameron . I see what you mean… Christina `s blog is astonishing, on sunday I bought a brand new Lexus LS400 since I been bringin in $5235 recently and even more than $10k lass month . without a doubt it is the easiest work I have ever had . I began this 10-months ago and almost immediately started bringin in minimum $75 p/h .
    read the full info here =-=-=-=-=-=-= http://www.jobsfish.com

  15. my neighbor’s mother-in-law makes $83 /hour on the computer . She has been fired from work for 6 months but last month her income was $20084 just working on the computer for a few hours. check this site out……..

    http://www.Jobs-spot.com

  16. This whole being upside down on your loan is a problem is overblown.

    If you are upside down for a few years until real estate prices rise again,
    who cares? It only matters if you want to sell your house. The fact that
    your house is temporarily worth less than your monthly mortgage is
    usually not a problem. This matters most for house “flippers”. And most
    of these got rich off of these kinds of ridiculous policies by Fannie and Freddie.
    Fuck the house flippers. Who cares if they go broke? It sucks to see the same
    stupid policies being put in place to allow a new generation of flippers.

Please to post comments

Comments are closed.