We all want to achieve that “American Dream” of owning our own homes. Home represents more than just a place of shelter, but a means of comfort, safety, and pride. However, not everyone has the credit to do so. In 2011, Karla Bowsher reports for Money Talk News.com that “the average American debt is more that $10,000”. Take into account student loans with that debt. Oh, it doesn't stop there; how about that nice new car you just bought yourself? No wonder it would be hard to find someone to lend you more cash for a house.
It's plain and simple: these private lenders and government-sponsored enterprises need to answer for the damage they've done to our American Dream. Due to their poor decisions, young people getting out of college will have to fight an up-hill battle in order to qualify for these home loans. This goes beyond the surface of just the housing market; this influences college students everywhere trying to get loans. It will be up to us, the freshly educated, to put back the pieces and be the one's responsible for rebuilding this torn apart market.
Sub-prime lending is one of the riskiest types of lending out there. It takes a people who don’t have the credit score and (for a higher interest rate) lend you money for a home. These sub prime loans do not fall under the category of mortgage-backed securities, so the lender takes all the risk.
Carter Briscoe, an accountant for Georgia-Pacific's Wauna Plant (one of Oregon's biggest timber mills), a business analyst well-versed in housing market and recent graduate of Oregon State, talked about his own research and studies of the mortgage market. He gave good background on sub-prime lending and how it actually made a more profitable market during its boom.
“It started with a financial instrument called a mortgage-backed security. What happens here is mortgage-owning banks will pool mortgages together, split them into even portions, and sell them as bonds to other financial institutions and investors. So when people owing those mortgages make their payments to the bank, the bank is considered a "pass through" entity because it will essentially be paying that money to the investors it sold the mortgage backed securities to," said Briscoe.
Mortgage-backed securities date back as far as the Great Depression in 1934. Part of the New Deal, Pres. Franklin D. Roosevelt was the creation of a government-controlled enterprise (commonly know as Freddie Mac) that insured people could pay their mortgages to the lender.
In 1968, Lyndon B. Johnson privatized Freddie Mac in order to ease fiscal pressures during the Vietnam War. In the process, Freddie Mac was split in two entities in order to prevent a monopoly of the secondary mortgage market. This second company is commonly know as Fannie Mae. Yet, the government still maintained a part of this company. This allowed the companies to direct access to funds from the U.S. Treasury.
So that brief history brings us the the nuts and bolts of why these institutions gave some many loans away. Once these companies realized how much money they could make on sub prime loans on securities, the banks went on a hay day of loan giving. Yet, as Briscoe explains, the repercussions were drastic:
“The mortgage backed securities were selling so fast that banks decided to increase their sub-prime lending, offering loans to individuals often without doing their due diligence to understand the true credit risk of the individual, just so they could cut them up into more securities. Then, bubble broke. People started to default on their loans, which in turn created a large inventory on the banks' books of houses,” says Briscoe.
Even so, there is are reason that sub-prime lending was because of government demands. Alan Fudge, Instructor of Business Management at LBCC, talked to me briefly about the government’s role in the lending market.
“What many people don’t know is that what happens in the lending market is dictated by congressional action. Before the Great Recession, the industry was told by Congress to give out more loans to people; this lessened restrictions on who received loans,” says Fudge.
“Eventually, after many foreclosures, the government stepped in to try and fix the situation. One of the reason the Obama Administration is doing well right now is that he is holding the interest rate to the lowest ever in U.S. History,” says Fudge.
How do we change the market today? With so many of our mistakes coming from bad loans, is there a form of oversight that we continue when the nation gets back on its feet?
“The answer is a huge possibly. If we look at what got us into the mess, a lot of it had to do with the credit agencies rating highly risky investments as low risk,” says Briscoe.
Ten years ago, you'd have contractor's build houses just to put them on the market and sell. This allowed many construction workers to capitalize and live in a higher middle-class lifestyle. The government was pushing banks to lend more money and the institutions got greedy. They realized that with these sub-prime loans, they could manipulate the numbers just enough to categorize them as low-risk assets. Then, the government comes along and buys these loans, without even realizing what has happened to them. As time continues and the default rate rises higher and higher, the metaphorical weight of lies and fraud break through the roof of one of our most established markets.
In today's market, we are experiencing dramatically low housing prices. This is all great and attractive to the home buyer, but there is a catch. Wendy Krislen-Adams, an Accounting Instructor at both Linn-Benton Community College and Western Oregon University, gives incite to the how the market has changed today, due to the collapse of the housing market.
"Now, you're seeing higher restrictions for people being able to buy houses. You have to fit a very specific profile today in order to buy one of these house. These companies can't just loan out money anymore because they need guaranteed returns. So as before where loans were relatively easy to get with bad credit, that is almost never happening now," says Krislen-Adams.
"So with the collapse of people wanting to buy houses, the demand for building is sparse. This puts a lot of pressure on those who built spec houses to be sold on completion and are now sitting empty. This influences the small business man as far as he owe for these houses and for larger corporations since they cannot continue to pull large loans from banks. Overall, the complete recovery of our market will be a very long and grueling process that will take years or decades to fix the mess that has been made," says Krislen-Adams.
With so many people finally recovering from the economic downturn, how do we go forward? A wise man once told me that you never repeat the same mistake twice. These institutions should have to answer for the lies that have been made and as we see in the news now, many are already being sued and taken to court over claims of bad lending. So as the saga continues, think about how that sweet American Dream is turning into an American Nightmare.
Sources:
Rob Alford - <http://hnn.us/articles/1849.html >
Karla Bowsher - <http://www.moneytalksnews.com/2011/02/10/average-american-debt/? Carter Briscoe - Business Analyst
Wendy Krisen-Adams - Instuctor of Business Accounting, Linn-Benton Community College & Western Oregon University
Alan Fudge - Instructor of Business Management, Linn-Benton Community College
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