Anatomy of the Mortgage Meltdown
Sloppy press coverage about the financial crisis has spawned a host of widely believed myths. Take, for example, one of the popular names for it--the subprime mortgage meltdown. This is a misnomer: houses financed by subprime and prime mortgages were foreclosed upon at equal rates and at the same time. Instead, the crucial distinction is between adjustable-rate mortgages and fixed-rate mortgages, according to University of Texas at Dallas economist and Independent Institute Research Fellow Stan J. Liebowitz.
"The main driver of foreclosures was adjustable-rate mortgages, both prime and subprime" writes Liebowitz in his new Independent Policy Report, "Anatomy of a Train Wreck: Causes of the Mortgage Meltdown," an adaptation of his chapter in a forthcoming book on housing in the United States.
Adjustable-rate mortgages (and mortgages requiring very low or no down payments and no income verification--so-called "no doc" loans and "liar loans") were the highly combustible raw ingredients that served as kindling for a financial meltdown ignited by the end of the housing price surge. Lenders promoted these "innovative" loans ceaselessly--but not without a big push from the federal government. At the behest of Congress, Fannie Mae and Freddie Mac conducted a profitable but risky scheme to promote increased homeownership. Unsurprisingly, the status of Fannie and Freddie as government-sponsored enterprises sent a false signal to borrowers, lenders, and investors that these loans were safe, and so the usual precautions were tossed out the window.
"Since the housing and regulatory establishment consisted of mighty government agencies and highly educated academics," continues Liebowitz, "it was not unreasonable for the lenders to assume that the claims made for flexible underwriting standards were correct. Unfortunately, the claims were not correct although most of the housing and regulatory establishment continue to argue otherwise."
"Anatomy of a Train Wreck: Causes of the Mortgage Meltdown," by Stan J. Liebowitz (10/3/08)
And to add some moral perseptive, this is another example of the immorality of governmental attempts at social engineering. The government wanted to loan money to people who couldn't afford to buy a house. Now those who paid their house bills are expected to pay to clean up the mess made by those governmental social engineers. It was the long way around to something that is best met with the cry "Stop, thief!"