The Mortgage Lending Crisis

About two years ago I moved to Long Island. At that time everyone was talking about the sky high prices of homes. The typical 3 bedroom 2 bath house in livable condition started at about $400k. I needed a house, and the prices were daunting. I came to Long Island for a pretty good job with better pay than my previous job. I knew the prices would be a lot higher than Tulsa, where we had moved from, but wow! I had sold a nice house for $150k and would have to spend over $400k for less house. The pay increase felt more like a pay-cut.

I remember talking with a friend about the "outrageous" housing prices on Long Island. We had both recently heard a news story about how young men and women were moving away from Long Island after they graduated high school and college and had to move out of their parents homes. Until you make about $120k a year, its almost impossible to buy a house here. Older families were cashing out and moving to North Carolina - younger families were simply leaving in search of something they could afford.

People were angry in many cases that they couldn't afford their homes. I spoke with a fellow pilot about his circumstances - wife, 3 kids, and a house payment that was killing him. He wanted to blame someone for how high prices were and just didn't think it was fair.

Now the lament is exactly reversed. Housing prices are "crashing! The Government must do something!" But wait - 2 years ago we were all complaining about unaffordable housing - now we're upset that housing is becoming more affordable? One man's feast in this case is another man's famine. Before it was a crisis if you were a buyer, now its a crisis if you're an owner. Hey people, its not a crisis, its the way things work.

This highlights for me a sad underlying reality. Politicians will make a crisis out of every change that makes news. If the prices are high (or rising), the politician will blame someone, propose a "solution" that increases his power while burdening the taxpayer and creating dozens of unintended consequences that hurt us all. If the prices are low (or falling), the politician will blame someone, propose a "solution" that increases his power while burdening the taxpayer and creating dozens of unintended consequences that hurt us all. See a pattern here?

What saddens me most of all is the fact that this housing/mortgage "crisis" was created by government in the first place - one of the unintended consequences of political action intended to help the victim of a previous crisis. The Community Reinvestment Act of 1977 was passed because some borrowers couldn't get home loans. They weren't credit worthy, lenders weren't willing to throw away their money. Politicians didn't think this was fair that some people could get home loans and others couldn't. So they forced banks to extend loans to a broader customer base - now people could get loans who shouldn't have had them.

This worked okay for many years because housing prices were generally increasing. Then memories faded of the risks associated with taking huge loans and lenders and borrowers alike went crazy. Principle only loans, balloon loans, ARMS coupled with huge profits with house flipping, etc - and everyone lost touch with reality. "Hey, its a party, come on in, nothing can go wrong!"

We are reminded again that there is no free lunch. Buyers could only hang in there for so long and eventually people stopped buying. Remember - high prices are meant to do that - discourage buying when supplies become limited. So the market corrected. Prices are coming back to a more affordable level, lenders are "remembering" what they knew so well before - that some people don't pay back their loans and consequently shouldn't get loans.

Ah, but what about the politician? This is his big chance to do something. "People are hurting out there! They need help!" So now they want to violate the contracts that lenders signed with borrowers and force the lenders to be more "forgiving." Isn't losing billions to bad loans "forgiving" enough? A primary moral function of government is to enforce contracts between parties - but like so many other principles that modern politicians have abandoned - they are doing the opposite of the moral function of government.

We now hear talk of stimulus packages and bailouts. Senator Chris Dodd wants the government to buy up the bad loans. Senator Clinton wants government to take a more active role to "prevent excesses of the market." Wow! The unintended consequences of government action at this time will be painful - possibly devestating. It might not be immediate, but you can bet in the long run it will hurt the very people it was intended to help - and the rest of us even more.

1 comment:

karamy3sons said...

Greetings from Texas,

My name is Kara S., my husband and 3 boys live in North Texas. My husband also is a pilot, he flies for Southwest Airlines. You have a great blog! I blog and pray that it is used for the Lord's glory. Keep up the good work!

In Christ,
Kara S. Jer. 29:11-13