The collapse of the housing market was inevitable and no surprise to those of us who were paying attention. It has its seeds in government intervention in the free market (as do most financial crises).
In the Clinton years, government eager beavers discovered that people who could not afford homes could not get home loans. This, they suspected, was the result of discrimination as many of the people who could not get loans were other than white in complexion. Now, the fact is, some folks are simply not credit-worthy and have a history which proves it. Others are simply not able to make the payments due to their income.
Mortgage lenders have been tuning their formulae for a long time and know a bad risk when they see one. Nonetheless, with talk of discrimination charges in the offing, they had little choice. They were required by the feds to count as “income” (for purposes of getting a home loan) welfare payments and unemployment income. That’s right. That’s right, the egalitarians among us thought it wasn’t fair that unemployed people couldn’t get mortgage loans.
And so it was that mortgage lenders were “encouraged” to make loans available to people who could not afford them and to those who were poor credit risks. The mechanisms used included interest-only loans and other mechanisms to get the early payments down in size, but which required paying larger payments — sometimes including a balloon payment — later.
This had the desired effect of getting people into homes but it was inevitable that many of these loans would become delinquent at some point in time.
Of course, housing was booming for a while as millions of families that could not previously afford homes suddenly were in the market. But when you lend money to people who cannot afford to pay it back, the result was as predictable as it was inevitable.
The failure of Fannie Mae and Freddie Mac are Bill Clinton’s chickens coming home to roost. But you can bet the Democrats are going to blame this on Bush’s free-wheeling economic policies or some such and demand tighter regulation of the housing market — though it was federal interference in the market which set it upon its disastrous path in the first place.