Will the housing bubble burst? Our socialist mortgage system and easy money policy have created a dangerously inflated housing bubble that, if pricked, could take the economy down with it.
Wise men, we are informed by the most authoritative Source of wisdom, build their homes on a rock; the foolish build theirs on sand. For decades, millions of Americans have been building their homes on a financial bubble created by the Federal Reserve's loose money policies. The housing bubble, in turn, has inflated a huge consumer credit bubble as homeowners, exploiting decreases in Fed-controlled interest rates, have repeatedly refinanced their mortgages to consolidate debt. The inevitable bursting of those bubbles may result in an unprecedented financial catastrophe.
The twin engines pumping credit into the housing market are the Federal National Mortgage Association (Fannie Mae Fannie Mae: see Federal National Mortgage Association. ) and the Federal Home Loan Mortgage Corporation Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, privately owned, government-sponsored organization that uses private capital to buy home mortgages as a means to help lower housing costs. (Freddie Mac Freddie Mac: see Federal Home Loan Mortgage Corporation. ), which collectively own or guarantee 70 percent of all American mortgage debt--roughly four trillion dollars. Fannie and Freddie are "Government-Sponsored Enterprises" (GSEs), nominally private institutions backed by the "full faith and credit" of the U.S. government. This means, in essence, that the taxpayer is on the hook Adj. 1. on the hook - caught in a difficult or dangerous situation; "there I was back on the hook"
dangerous, unsafe - involving or causing danger or risk; liable to hurt or harm; "a dangerous criminal"; "a dangerous bridge"; "unemployment reached dangerous to bail them out in the event they succumb to widespread mortgage defaults or some other financial cataclysm.
Fannie and Freddie also enjoy direct federal subsidies, which in 2000 amounted to more than $10 billion. And until recently, they were provided with a $2.5 billion emergency line of credit with the Treasury Department--a relatively minuscule amount, to be sure, but one that created the perception that Washington wouldn't allow them to fail. GSEs are the very embodiment of corporatism--the economic component of fascism. Their profits are privatized, their risks are subsidized, and their losses are socialized so·cial·ize
v. so·cial·ized, so·cial·iz·ing, so·cial·iz·es
1. To place under government or group ownership or control.
2. To make fit for companionship with others; make sociable. .
Fannie was created in 1938 as part of President Franklin D. Roosevelt's Reconstruction Finance Corporation Reconstruction Finance Corporation (RFC), former U.S. government agency, created in 1932 by the administration of Herbert Hoover. Its purpose was to facilitate economic activity by lending money in the depression. . It was intended to expand the ranks of home ownership by purchasing mortgages made by banks to low-income Americans. Those loans are then bundled into marketable securities Marketable Securities
Very liquid securities that can be converted into cash quickly at a reasonable price.
Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has .
In 1968, amid a torrential outpouring of red ink red ink Health administration A popular term for financial losses. Cf in the Black. resulting from the Vietnam War Vietnam War, conflict in Southeast Asia, primarily fought in South Vietnam between government forces aided by the United States and guerrilla forces aided by North Vietnam. and Great Society welfare programs, Lyndon Johnson "privatized" Fannie Mae in order to move it off-budget. It thereby became a GSE GSE
general somatic efferent system. , a nominally private financial institution. In 1970, the Nixon administration created a second federally subsidized housing Subsidized housing (aka social housing) is government supported accommodation for people with low to moderate incomes. To meet these goals many governments promote the construction of affordable housing. lender, Freddie Mac, supposedly to compete wire Fannie Mae. But rather than being competitors, Fannie and Freddie have become a quasi-governmental cartel, with predictable consequences for the housing market.
Prior to 1989, observed Benjamin Wallace-Wells in the April Washington Monthly, "Fannie and Freddie's market share was limited by their ability to attract investment capital." In that year--despite the accumulating financial fallout from the failure of federally backed Savings & Loans across the country--Congress enacted "technical changes that made Freddie and Fannie much more attractive to investors, and able to draw much more capital. Under the new rules, for instance, they were allowed to customize securities at different levels of risk and return to meet more precisely the demands of different sectors of the capital market. Then, too, bank regulators let pension funds and mutual funds class Fannie's debt as low-risk." But the most significant factor, of course, has been the Federal Reserve's loose money policies, which kept interest rates at rock bottom.
The results were entirely predictable: "[D]uring the 1990s, investors practically threw money at Fannie Mae and Freddie Mac, which became enormously, steadily profitable," continues Wallace-Wells. "The GSEs used the new capital to buy up every mortgage they could, and banks were only too happy to sell off the mortgage paper.... Fannie and Freddie went from buying mostly mortgages for low-end homes to those of the middle- and upper-middle class. And [their] share of the nation's conventional mortgage debt has swelled, to more than 70 percent today, double its share in 1990."
The GSEs' cartelization of the mortgage market, he warns, "has profoundly undermined the discipline that once kept housing prices in check." With banks able to sell off mortgages to the federally backed GSEs, the mortgage loans were perceived as essentially risk-free, and countless borderline or unqualified applicants were approved. And rampant demand caused housing prices in many markets to soar to wildly inflated levels.
"Banks and other mortgage lenders are not watching home prices carefully because they rarely hold onto the mortgage paper they create--they just sell it upstream to mortgage investors," warned John R. Talbott, a housing analyst at UCLA's Anderson School Anderson School may refer to:
Commentator Thomas Allen Thomas Allen may refer to:
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. Allen. "Fannie reports are filled with happy stories of government-dependent CBOs [community-based organizations] or organizations such as La Raza La Ra·za
Mexicans or Mexican Americans considered as a group, sometimes extending to all Spanish-speaking people of the Americas.
[American Spanish, the people.] and Chicanos Por La Causa Chicanos Por La Causa, Inc. (CPLC) is a non-profit organization in Arizona founded in 1969. It is a statewide community development corporation (CDC). History
During the 1960s, several Mexican-American Arizona State University (ASU) students from South Phoenix, Arizona partnering with Fannie Mae, private lenders and factory chicken processors to make money for the private sector participants and keep the ethnic lobbies employed."
Thus it's not surprising that the Fannie Mae Foundation is a major supporter of open borders. In January 2002, for example, it sponsored the "National Immigration Forum The National Immigration Forum (also called "The Forum") is an immigrant rights organization based in Washington, DC that publishes studies, lobbies congress members, and networks local organizations with the goal of increasing public support for immigration to the United " in Washington, D.C., where the participants included representatives of La Raza, the Mexican-American Legal Defense and Education Fund, the ACLU ACLU: see American Civil Liberties Union. and other radical legal activist groups--as well as representatives of the Bush administration.
President Bush, in the name of "compassionate conservatism The of this article or section may be compromised by "weasel words".
You can help Wikipedia by removing weasel words. ," has sought to expand subsidies for minority mortgage applicants. "Low interest rates have encouraged a housing boom here in America--and that's good, that's good," declared the president at a photo-op in front of an Hispanic-owned business in California last October. "And even though home ownership is at near-record highs, we've got too many of our fellow citizens who happen to be minorities who don't own a home. Seventy-five percent of the Anglos in America own a home; the minority home ownership in America is below 50 percent."
Accordingly, Mr. Bush signed into law the "American Dream Down Payment Act," a $200 million-a-year welfare program that "will help low-income Americans to afford the down payment and closing costs Closing Costs
The numerous expenses (over and above the price of the property) that buyers and sellers normally incur to complete a real estate transaction. Costs incurred include loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, on their first home." In addition, the president called for making "zero down payment loans available to first-time buyers whose mortgages are guaranteed by the Federal Housing Administration Federal Housing Administration (FHA)
Federally sponsored agency chartered in 1934 whose stock is currently owned by savings institutions across the United States. The agency buys residential mortgages that meet certain requirements, sells these mortgages in packages, and insures ," which he claimed would "help about 150,000 families buy homes in the first year alone."
Pop, Pop, Pop
It's an invincible principle of economics that we get more of what we subsidize. Federal subsidies of the mortgage industry, predictably enough, led to an explosion of mortgage lending to debtors who otherwise wouldn't have qualified (recent immigrants being a very good example). This, in turn, has artificially stimulated housing demand and artificially inflated housing prices.
As a result, noted Robert J. Samuelson Robert J. Samuelson (Born Robert Jacob Samuelson on December 23, 1945) is a contributing editor of Newsweek and Washington Post where he has written about business and economic issues since 1977. His columns appear biweekly in both publications. in the April 19 Newsweek, "Homes fetch 30, 50 or even 100 percent more than they did a few years ago.... Since 2000, the national median price for existing homes has increased 23 percent to $170,000, and many gains are much larger: 31 percent in Boston to $413,000; 64 percent in Los Angeles to $355,000; 32 percent in Minneapolis-St. Paul to $200,000; and 74 percent in West Palm Beach to $241,000...." Housing industry analysts estimate that 15-30 percent of all homes nationwide are overvalued Overvalued
A stock whose current price is not justified by the earnings outlook or price/earnings (P/E) ratio and thus, expected to drop in price. Overvaluation may result from an emotional buying spurt, which inflates the market price of the stock or from a deterioration in a .
Even more telling are various measurements of home price-to-annual income ratios. Nationwide, that ratio is a reasonable 2.4:1. However, in some areas that ratio reaches unsettling un·set·tle
v. un·set·tled, un·set·tling, un·set·tles
1. To displace from a settled condition; disrupt.
2. To make uneasy; disturb.
v.intr. levels--8.3:1 in California, 5.9:1 in Massachusetts, and 10.1:1 in Hawaii. "In California," writes Wallace-Wells, "a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home." Similar conditions can be found in twenty major metropolitan areas across eight states. "In the late 80s," he recalls, "the last time these eight states saw price-to-income ratios this high, the real estate market collapsed."
"What makes the current frenzy especially dangerous is that every relevant institution has an incentive to play along," continues Wallace-Wells. "Who, after all, is likely to say stop? Not the realtors. Not the banks, any longer. Not Fannie and Freddie ... who are turning vast profits on the backs of the bubble. Certainly not the Federal Reserve or the Treasury Department, while the economy depends on a sustained housing boom."
But indications are rife that the boom is about to bust.
"The Clinton boom was built on three unsustainable bubbles," pointed out Dean Baker, co-director of the Center for Economic and Policy Research
The Center for Economic and Policy Research (CEPR) is a progressive  economic policy think-tank based in Washington, D.C. , almost exactly one year ago. "One of them, the stock bubble, has already burst. The other two bubbles--the dollar bubble and the housing bubble--are still with us. The dollar bubble is starting to deflate (file format, compression) deflate - A compression standard derived from LZ77; it is reportedly used in zip, gzip, PKZIP, and png, among others.
Unlike LZW, deflate compression does not use patented compression algorithms. , and the housing bubble is perhaps just now reaching its peak."
Since Baker printed those observations, the collapse of the "dollar bubble" has accelerated. Widespread, Enron-style accounting fraud at Fannie and Freddie may prick the housing and mortgage-refinancing bubble as well.
In March 2002, St. Louis Federal Reserve President William Poole warned that Fannie and Freddie "hold capital far below that required of regulated banking institutions." This is unsettling news indeed to those who understand just how little capital is required by regulated banks, given the universal practice of "fractional reserve banking." But Poole had even grimmer warnings to offer: "Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets."
That crisis was actually underway even as Poole spoke--but it didn't go public until a year later.
The Nomenklatura no·men·kla·tu·ra
1. The system of patronage to senior positions in the bureaucracy of the Soviet Union and some other Communist states, controlled by committees at various levels of the Communist Party.
2. (used with a pl.
In June 2003, Freddie Mac was forced to own up to $5 billion in misrepresented earnings over the previous three years. Ordinarily, this type of accounting chicanery would result in a criminal probe of the corporation's financial and executive leadership; this is especially true in the wake of the Enron, Tyco, WorldCom and Global Crossing scandals. But as GSEs, Fannie and Freddie are effectively immune to such repercussions repercussions npl → répercussions fpl
repercussions npl → Auswirkungen pl . Leland Brendsel, Freddie's chairman and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. during the accounting scandal, was forced to resign, as was his immediate successor, Gregory J. Parseghian. But neither of them faced criminal prosecution. Nor were federal prosecutors provoked by subsequent disclosures of accounting irregularities at Fannie Mae.
Like the members of Russia's nomenklatura--the Communist political elite--Fannie, Freddie and friends are politically protected and essentially above the law. As the June 28, 2003 Detroit News pointed out, board members of Fannie and Freddie are drawn from a pool of "former White House aides, defeated candidates, other former officials and leaders of minority groups whom presidents have appointed over the years...."
In 1994, Dennis DeConcini, who was preparing to retire from the Senate, was told by Bill Clinton: "You've been a great friend, Dennis. What can I do for you?" "I told him I wanted to be on the board of Freddie Mac or Fannie Mae," DeConcini recalled in June 2003. Clinton granted that wish, appointing the former solon Solon, Athenian statesman
Solon (sō`lən), c.639–c.559 B.C., Athenian statesman, lawgiver, and reformer. He was also a poet, and some of his patriotic verse in the Ionic dialect is extant. At some time (perhaps c.600 B.C. to a position on Freddie's board, where he reeled in huge sums in cash, stock and stock options. After five years on the gravy train, DeConcini--like many others--became a Washington lobbyist for Freddie.
Recent presidential nominees to the boards of Fannie and Freddie include such dubious luminaries as former Clinton cronies Rahm Emmanuel, Harold Ickes, Jack Quinn and Eli Segal. Bush appointees include such camp followers as Michelle Engler (wife of former Republican Governor John Engler); David J. Gribbin III, a longtime aide to Dick Cheney; regional re-election campaign director Molly H. Bordanaro; and Victor Ashe, a one-time classmate at Yale.
Representative Richard Baker (R-La.), chairman of the House Capital Markets Subcommittee, describes Fannie and Freddie as residing in "Enron territory," where there is evidence of "conspiracy or collusion to defraud from the very top...." But Fannie and Freddie differ from other corrupt corporations, continued Rep. Baker, in that they have the ability to "use millions from [their] federal subsidy for the sheer purpose of protecting it, by lobbying and influencing the very federal government that bestows it." And this is hardly the only corrupt use to which Fannie and Freddie's friends put their federal subsidies.
In June 2001, FM Watch, a financial industry watchdog group, published a report entitled Shuttered Dreams: How Fannie Mae and Freddie Mac Misspend mis·spend
tr.v. mis·spent , mis·spend·ing, mis·spends
To spend improperly or extravagantly; squander: misspent the funds; misspent their youth. the GSE Housing Subsidy. Among that study's findings was that 37 percent--or $3.9 billion--of the 2000 federal subsidy to Fannie and Freddie "is retained by [them] for shareholder profits.... This is the largest single use of the taxpayer subsidy. It does nothing to promote homeownership, and only serves to enrich private GSE stockholders."
Additionally, 29 percent, or $3.1 billion, "went to [Fannie and Freddie's] ... purchase of mortgages to refinance existing debt. This refinancing activity does not help Americans buy homes. Thus, 66 percent of the subsidy goes either to ... stockholders or refinancing activity...." Only five percent of the 2000 federal subsidy "is spent to create new home ownership opportunities for the bottom half of Americans by income."
Collapse and Nationalization nationalization, acquisition and operation by a country of business enterprises formerly owned and operated by private individuals or corporations. State or local authorities have traditionally taken private property for such public purposes as the construction of
Last February, Fed Chairman Alan Greenspan Alan Greenspan
Dr. Greenspan is Chairman of the Board of Governors of the Federal Reserve System. Dr. Greenspan also serves as Chairman of the Federal Open Market Committee (FOMC), the Fed's principal monetary policymaking body. pointedly warned of a liquidity crisis at both Fannie and Freddie that threatens to bring down the entire financial system. Greenspan prescribed a few "reforms," such as debt caps and stricter regulation of the GSEs. He also floated the incredible suggestion that homeowners consider switching from fixed-rate mortgages to adjustable-rate mortgages (ARMs), despite the fact that interest rates can only go in one direction--up.
Clearly, Greenspan anticipates the collapse of the Fannie/Freddie mortgage axis. Just as clearly, he understands that mortgage refinancing is practically all that sustains our national economy. Those homeowners who act on Greenspan's advice will be clobbered once rates begin to rise, as they inevitably must. And those who already have second (or third) mortgages face similar prospects when housing prices start to fall, as they inevitably must.
"Given the lateness of the hour, and the near-inevitability of the coming crash, there's really only one thing for concerned citizens to do," summarizes Benjamin Wallace-Wells. "Start assigning blame." For the political elite that brought us to this pass, the chief task is to insulate themselves against blame, and find some way to redistribute the financial consequences to the taxpayers.
In early April, the Senate Banking Committee approved a bill creating a new regulator for Fannie and Freddie with the power to take them into receivership in the event of insolvency. This measure, if signed into law, would provide the means to nationalize na·tion·al·ize
tr.v. na·tion·al·ized, na·tion·al·iz·ing, na·tion·al·iz·es
1. To convert from private to governmental ownership and control: nationalize the steel industry.
2. the mortgage industry in the likely event that Fannie and Freddie go bust. Were this to occur, the collapse of these quasi-governmental bodies would likely be depicted as an indictment of free-market capitalism. And the proposed remedy would be to jettison jettison (jĕt`əsən, –zən) [O.Fr.,=throwing], in maritime law, casting all or part of a ship's cargo overboard to lighten the vessel or to meet some danger, such as fire. corporatist cor·po·ra·tist
Of, relating to, or being a corporative state or system.
Noun 1. GSEs like Fannie and Freddie in favor of a more overt form of government control over the housing and mortgage industries.
Given that Fannie and Freddie have combined debts in excess of $1.7 trillion, a federal rescue effort would easily eclipse the savings-and-loan bailout. It would also, in all likelihood, puncture the housing and mortgage refinancing bubble supporting our economy--assuming, of course, that the bubble hasn't already burst of its own accord by then.