William R. Collier Jr. An American Freedomist

 

The present crisis is wholly rooted in the original intervention by government, through laws and policies and the personnel chosen, which was designed to “make home ownership more accessible to low income families.”

 

This sounds great, but of course if you really want to make home ownership more accessible to families the real issues include the artificial costs created by regulations, building codes that favor expensive methods by “contractors” (who often support these codes) instead of extremely cheap but perfectly safe and environmentally sound methods that require far less “skilled” labor, issues of real estate and land speculation, and, of course, the problem with the Federal Government “owning” over 30% of all American land.

 

Instead of actually empowering local people and local free markets to produce affordable housing and come up with alternative methods of home ownership, including rent to own and property tax breaks for the poor (or, even better, ending property taxes) the government created giant corporations that came to dominate the mortgage market and that were tasked with issuing loans to low income individuals who in reality could not afford the house they were buying.

 

This started a process that led to the myth that “low income” or “sub prime” loans were suddenly a good idea and the Federal Reserve started to create what’s called “easy money”, by lowering interest rates and opening up that “Discount Window” to make it easier to access new Federal Reserve Notes. The government owned corporations, Fannie Mae and Freddie Mac, had unlimited access to federally supplied money, moreso than their competitors, and their dominance of the mortgage market influenced other mortgage providers setting the tone and making it seem as if, suddenly, all the old rules about how you lend money were suspended.

 

Recall that in the 90’s people were seduced by these ideas that history had ended, that major wars were a thing of the past, and, incredibly, that the old boom-to-bust business cycles were gone forever.

 

Very few of us were saying that this was nonsense, very few were saying that the real problem in terms of affordable housing was not the availability or mortgage loans but federal, state, and local policies, laws, regulations, and codes as well as land and real estate speculation that turned a $50,000 house that MOST people could afford with a low interest loan on a rent to own basis into a $150,000 house that had so many fees and so much interest that it would end up costing the buyer $400,000.

 

I wrote an article back in 1993 in The Cibola Courier saying that real estate speculation, present regulations and building codes, and a financing structure based on high interest loans rather than a rent to own scheme along with high property taxes and insurance costs were the real problems and simply making more money available to low income buyers would only hurt the people it was meant to help.

 

As low income people default, encumbered by rising interest on their loans, rising property taxes and insurance, and a high monthly payment that prevents them from having anything to spare when hard times hit, they lose all the money they invested, they lose their home, and if the house is sold at below what they original buyer paid, they STILL have debt hanging over their head.

 

As this is happening we see the mortgage companies being bailed out by taxpayers, so far well over $1,000 dollars for every man, woman, and child in America ($300 billion) is being “loaned”, and guaranteed, by you and me to bail these companies out.

 

If indeed we chose to stop this collapse we could have provided very low interest loans on easy terms to refinance those individuals who are the most vulnerable on a rent-to-own program, we could have given a break to low income buyers and the elderly for property taxes, and we could have broken the companies that we are thus “saving” into state and local companies that are, at least temporarily, accountable to local voters.

 

What is happening is that these companies are being saved but not the buyers and any plans to help the buyers are more or less the same thing: they do not address the real reason why what should be a $50,000 home with a $400 monthly mortgage bill on a rent to own basis becomes a $150,000 home with high interest that costs over $900 per month and that the buyer will end up paying $400,000 for.

 

Government regulation and intervention is the original, first cause of the artificially high cost of buying a house and for creating a financial system that gives more power to lenders than to borrowers and more power to expensive contractors than to low cost building methods while failing to deal with land and real estate speculation or the high cost of property taxes.

 

This regulation caused a housing “crisis”, low income people who in the past COULD buy their own home, back when the government was not involved in the process to any great degree, and the “solution” was to mandate that mortgage lenders loosen their lending practices and create programs for low income buyers.

 

What programs did they create? Mortgage lenders sought to offset their risks by raising interest for low income lenders in the belief that if some defaulted and the mortgage lender suffered a loss the higher interest paid would offset that loss. They wanted to get these people “on the books” so they started them with lower payments at a lower interest but raised the interest later and they structured a lot of these loans so that in the first few years the borrower was only paying the interest.

 

For lenders the risk SEEMED low: the Federal government had tacitly agreed to guarantee these loans and the lenders would own the property if the borrower defaulted giving them an opportunity to resell that property in what was then a real estate crisis few people saw as a crisis, a “booming housing market” in which the “boom” was for the builders and sellers in terms of rising prices and demand. East money meant that low income people could get into homes they could not afford, which meant that builders and developers were very busy meeting this new demand which then put upwards pressure on ALL housing.

 

This price increase was artificial and once the money tightened and we started to see defaults, which was bad enough, we started to see the prices fall. Lenders thought that they were safe because they could resell the homes they foreclosed on: they would have made money on the interest only payment already paid and STILL have a $150,000 house to sell but even if they only got $140,000 they could still go after the original buyer for the balance, including all the other fees and etc. they had tacked onto the original loan.

 

It is not just the default of the buyers that was the big problem. The lender may have invested $150,000 in the original loan, the buyer may have already paid $12,000 or more, and the reposed house would have a value of $150,000. The “balance” for the lender would still be positive and there would be no “crisis”.

 

When the land speculation and real estate speculation started to turn negative, as investors, buyers and builders started to believe that real estate was “over valued” (never mind that THEY had over-valued it for psychological and not logical reasons) money started to “tighten” and values started to fall. Now, that $150,000 home was worth $85,000 and the balance for that defaulted loan was very negative. Additionally, the balance for non-defaulted loans was turning negative.

 

A typical scenario involves a $150,000 home in which the borrower has been paying $900 per month for around 2 years.

 

The lender had put out $150,000 and the buyer, still paying their monthly bill, had paid around $20,000 which is going to interest. The new value of the home, however, is only $85,000.

 

So here’s what the lender has: they paid $150,000, they have received $20,000 so the balance was an asset worth $150,000 plus $20,000 received minus their investment of $150,000- a POSITIVE balance of $20,000.

 

Now the same house is worth $85,000: the lender paid $150,000, they received $20,000 and the asset is now worth $85,000. We add the value of the asset, $85,000 to the amount of money received, $20,000 and we have a negative balance of $45,000.

 

As this began to happen CEO’s and managers, whose pay was tied to the balance sheets, and we are talking millions of dollars, jiggered the books, shifted money around, inflated the value of assets, and just kept kicking the can down the road a bit, hoping to save their hides just long enough to create their own golden parachutes, conspiring with elected officials, such as Barack Obama and other Democrats who refused to support a 2005 Bill (cosponsored by John McCain) that would have exposed this in 2006 and may have allowed us to manage things to prevent a sudden break down in the market.

 

The “collapse” of the “sub prime” market was a foregone conclusion as soon as this “market” was created without dealing with the REAL reasons why low income people were being priced out of the market by speculation, building codes, regulations, union contracts, property taxes, and a finance system that includes loans that double or triple the actual cost for the home.

 

This is not a free market, it is an artificial market initially created by government policies at all levels, including property taxes, pro-contractor/builder building codes, quotas for loan types imposed by government, two massive government agencies with deep pockets that effected the market artificially, and a heavy dose of corruption as top executives donated millions of dollars to their “friends” in congress, including Barack Obama and Democrats, who receive 70% of such money, and Republicans who received 30% of that money.

 

We have a market, artificially controlled and influenced by government regulation, in a crisis that has its root in government actions and policies. The real problem is that governments at all level think THEY can centrally plan the market: they can decide how much money is available, they can decide who gets the money, they can set artificial quotas for economic outcomes, and they prevent anything bad from happening with detailed regulations ad building codes that favor expensive building solutions and by regulating the market to prevent abuse.

 

A planned housing economy simply does not work. Central planning, which is setting up outcome quotas (e.g. “a certain percentage of loans must be to low income people” or “we will increase home ownership by such and such a percentage”) and trying to prevent anything bad from happening through detailed, burdensome regulations that are essentially “over kill” and that rarely, if ever, include any kind of cost-benefit analysis.

 

What did John McCain say about this crisis back in 2006?

 

Here’s what John McCain said in May of 2006 about Fannie Mae and Freddie Mac:

 

Mr. McCAIN. Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.

 

The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

 

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

 

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

 

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S . 190 , to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

 

I urge my colleagues to support swift action on this GSE reform legislation.

 

http://thomas.loc.gov/cgi-bin/query/D?r109:1:./temp/~r109HuNFER::  (Senate - May 25, 2006)

 

In July of this year, John McCain continued to beat this drum.

 

John McCain July 24, 2008 St Petersburg Times

 

“Americans should be outraged at the latest sweetheart deal in Washington,” writes McCain. “Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It’s a tribute to what these two institutions — which most Americans have never heard of — have bought with more than $170-million worth of lobbyists in the past decade.”

 

“Fannie and Freddie are the poster children for a lack of transparency and accountability. Fannie Mae employees deliberately manipulated financial reports to trigger bonuses for senior executives. Freddie Mac manipulated its earnings by $5-billion. They’ve misled us about their accounting, and now they are endangering financial markets. More than two years ago, I said: ‘If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose.’ Fannie and Freddie’s lobbyists succeeded; Congress failed to act. They’ve stayed in business, grown, and profited mightily by showering money on lobbyists and favors on the Washington establishment. Now the bill has come due.”

 

This addresses the Fannie/Freddie debacle but is does no address the root problem. Barack Obama is now saying that it is bad that home values are falling. Since WHEN does the consumer want to pay MORE for housing, and who is Obama trying to help here except the lenders?

 

Now what is happening is that there is a domino effect: the real negative balance of mortgage lenders, who were invested in by major corporations, including insurance giant AIG, is so bad that these corporations are failing and the availability of private investment capital which would enable them to “invest their way out of debt”, is not available.

 

The psychological mood may be shifting, with the active connivance of politicians and media who have partisan reasons for seeing a crisis they can blame on the other party, namely the Republicans, and as this happens these markets fall.

 

The present economic system, based on debt currency and a planned economy in which the most powerful investors (1% wield over 90% of influence) collude with their friends in Congress, who are now receiving 70% of all donations (the Democrats) and Republicans who are more guilty of simply not opposing the Democratic led policies that led to this situation, hence them receiving 30% of this legal bribery cash, is in control of all the major resources.

 

Housing, energy, food, education, and healthcare are all being effected by this government-corporation-planned economic system and what a very few people do, and we now know these very few people are corrupt and greedy, effects your very livelihood and the prices you pay for necessities.

 

Housing, food, energy, education, and health care presently are artificially expensive and the prime mover in this process of raising these costs is this government-corporation collaboration in “planning” this economy all for their own interests.

 

Even as the Democrats, who are the leaders in this effort, and the Republicans, who have gone “squishy” on their free market principles, promise to “help those who cannot afford…housing, health care, education, food..”  they also continue to support policies, quotas, regulations, and etc. that directly cause these price increases and that line the pockets of the very rich the Democrats now speak so ill of, the very rich who continue to donate most of the money they “invest in government support” to Democrats.

 

We are on the fast track to a nationalized system, as we “bail out” corporations that abused the system, while ignoring the People, which means the public will pay for the billionaire’s mistakes and the government will gain more and more control over the economic system, which will continue “upward pressures” on prices.