An important part of the idea was to extend the grasp of millions of Americans, getting them over the initial hurdle of scraping together the cash to pay all the upfront stuff: brokers, lawyers, title insurance and abstract companies (whatever they are), and of course the down payment:
For many potential homebuyers, the lack of cash available to accumulate the required [down payment] and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income [to] make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.
Again, for emphasis: Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.
If we are to believe Peter Coy of Bloomberg Business Week, writing in February 2008, five months before it all hit the fan, this report advancing the ideals of Father Knows Best home ownership did appear on the HUD web site at one point, but was later expunged.
Coy also wrote:
The very worst idea in the plan, which fortunately never gained approval, was to let first-time homebuyers freely tap their IRA and 401(k) retirement-savings plans with no penalty to scrounge up a downpayment. That, HUD estimated, would have "benefited" 600,000 families in the first five years.Actually, having their retirement income on the line might have made some of those people think twice. Instead, they were at the mercy of mortgage bankers and the likes of WaMu and Goldman Sachs.
Here's what happened: home ownership rose by about five percentage points from 1995 to 2005. With a population of 300 million, and three people per household, that's about six million extra houses.
With all that extra demand, here's what happened to prices -- as if you didn't know. The graph is a few months out of date, because the S&P web site is busted, but what counts is the period of 1995 to 2005.
House prices were pretty much flat from 1988 to 1998, and then took off. The Case-Shiller index was about 80 for most of that time, peaked at about 225, and now stands about 150. As they say in the tv weight loss adds, no case is typical and your experience may vary.
The boom and bust stand to reason: the population only grows at about one percent per year, and without some big shift in circumstances, so would the number of people who can afford to own a home, according to the time-tested criteria.
But the volume of mortgages rose by six times from 1996 to 2005. I grant that these measures are not of refinancings, but that also applies to the data from 1986 to 1996, and refinancing was not a new idea then.
Trying to cram in an extra six percent might lead to "excesses," that is, a housing bubble. Lending to subprime borrowers, and the fraud behind that, was a secondary aspect, which I will consider in another post.
According to the Fed, who stood behind most of that issuance? It was the U.S. government (via Fannie Mae and Freddie Mac). In 1995 through 1997, those agencies issued about $100 billion per year; by 2001 through 2003 their volume was about $300 billion annually. Private mortgage issuers took the lead in 2004 through 2006, but started to back off, giving Fannie and Freddie the lead in 2007 through 2009, with new issuance of $400 billion to $600 billion each year.