Homeownership in the U.S. is typlically a goal for most Americans- the so-called American Dream. Under the Bush Administration the goal to increase home ownership had become not just a campaign slogan but a full fledged priority.
The Administration had set itself on a course of no return when it had set its goal to increase home ownership. A worthy goal no doubt; homeownership has its own reward. Noble ideas in this Administration are easy to come by. Freedom for the Iraqi people was one of the Presidents stated goals. Who can argue with that? As it is in Iraq with no clear plan in the aftermath of war so it goes in the United States. The President had taken a position to free the American people from the status of rentership to one of ownership; a noble cause no doubt. It is in the aftermath of the President's goal where the wheels come off, despite ample warnings of the potential for massive mortgage fraud and abuse.
Now, from sea to shining sea in urban and suburban neighborhoods the American Dream for many is becoming a foreclosure, bankrupt nightmare. Is it any wonder why the banking industry sought to rush through Congress banruptcy reform?
Of the many challenges to obtaining a home the most common is the lack of a down payment. The typical loan in the old days was known as an 80/20. A borrower with the 20% down payment and a good credit rating (and other minor factors) could obtain a standard conforming loan, that is a loan that conforms to Freddie Mae and Fannie Mae (aka GSE government sponsored enterprises) guidelines. This lending practice was typical but there were excpeptions; VA loans, HUD guaranteed loans, USDA and other loan products were available; but the bulk of loans were conforming.
Conforming loans are for the most part very successful with on average a 98% success rate. One of the principle reasons for success in these loans is the borrower had risked his own cash thereby creating an incentive to pay back the debt, to maintain a home in good care and so forth. However, somewhere along the yellow brick road to home ownership the rules had changed. In order to meet the goals of the President the rules of 80/20 must change. As down payment requirements are reduced so the numbers of available borrowers increase. This represents opportunity for the mortgage industry.
The typical conforming qualification process certailny has its shortcomings- for want of a cash down payment many potential homeowners are simply out of the loop. The question for the outsiders then is one of fairness; should the American Dream be out of reach for those Americans who simply do not have the required down payment? It is a legitimate question, especially in an economy that experiences a decentralizing of its work force from good paying factory jobs to low paying service industries.
The Administration set out to change that. One of the answers to a cash strapped renter was the American Dream Downpaymen Act. President Bush’s aggressive housing agenda to dismantle the barriers to homeownership by providing down payment assistance through the American Dream Downpayment Fund. The borrower under this Act had not to ante up a single penny towards the purchase of a home. This borrower typically would not qualify for a conforming loan.
In addition there is Homeownership Voucher Program from the Department of Housing and Development. The voucher program allows recipients of public subsidies (aka Section 8 rental assistance) to use taxpayer funds to not only buy a house, but to use funds to meet homeowner expenses.
According to the White House the aforementioned downpayment assistance act had achieved a level of success noteworthy for the fact that for the first time in the nations history minority ownership had crossed above the 50% level. A celebrated event that had become a A Proclamation by the President of the United States to name June 2006 National Home Ownership Month.
It was not just an initative for the Federal Government to provide incentives for Americans to own homes. President Bush also issued America's Homeownership Challenge to the real estate and mortgage finance industries to encourage them to join in the effort. Happy to oblige the private mortgage and finance groups did just that by pledging in excess of $1.trillion dollars for the cause.
The funds mentioned were derived from the subordinated bonds created and sold to institutional buyers. Hungry for higher rates that were not available due to the weakness in the equity markets the demand was huge. Subprime mortgages grew from a few billion in 1996 to a trillion dollar industry. With no oversight the sky was (is) the limit. It is these funds that are the chief contributers to the frothiness and irrational exuberance in the real estate markets.
However, there were ample warnings of the potential of massive mortgage fraud cited by the GAO . On February 24, 2004 the GAO released a report .'Consumer Protection: Federal and State Agencies Face Challenges in Combating Predatory Lending.'
While there is no uniformly accepted definition of predatory lending, a number of practices are widely acknowledged to be predatory. These include, among other things, charging excessive fees and interest
rates, lending without regard to borrowers' ability to repay, refinancing borrowers' loans repeatedly over a short period of time without any economic gain for the borrower (referred to as "loan flipping"), and committing outright fraud or deception.
On a case by case basis the Administration certainly did not paricipate in manipulation of the mortgage market. However, there could be an arguement that the loose lending policy of the present state of affairs may have had its roots in the President's agenda.