Clearly the U.S. financial markets are in trouble. Over the past nine months, we have witnessed the failure of Bear Stearns, AIG, Washington Mutual, Lehman Brothers along with the GSEs (Government Sponsored Enterprises) Fannie Mae and Freddie Mac. Most of the rhetoric has focused on the lack of regulatory oversight as the culprit. However, I will assert that the real villain in this fiasco is a Congress and Administration that have pushed home ownership to those that end the end could not afford a home.
For example, between 1995 and 2005 the rate of U.S. home ownership rose from 64.8 to 68.9. The factors driving this rate were an overly aggressive Congress, Administration, Fannie Mae and Freddie Mac pushing and encouraging lending institutions to put more and more folks into homes that in many cases they could not afford. In most cases, these new home owners committed to higher mortgage payments resulting from variable interest rates that trended upward. All went well as long as home prices were rising. Between 1995 and 2005, housing prices in the U.S., as measured by the Case-Shiller index soared by 153.2 percent. Since January of 2005, this same measure of housing prices has plummeted by 7.3 percent. Thus, all of those individuals that were benefited from rocketing housing prices via refinancing, home equity loans and actual home sales found themselves holding assets there were decreasing in value just as their payments were advancing at an alarming rates.
Thus mortgage defaults began to elevate. In 1995, total U.S. mortgage payments were 9.6 percent of take home pay. In 2008, mortgage payments represented 11.6 percent of take home pay. This produced mortgage defaults rates to record levels with the rate of home vacancies in the U.S. rising to their highest level since record keeping began in the early 1960s. This meant that lending institutions that engaged in this aggressive lending now held mortgages of questionable value or even worse homes that were not salable.
Now Congress wishes to increase regulation. This is the classic case of the fox keeping watch over the hen house. They caused this mess. Can we really trust them to fix it.