ALL MORTGAGES ARE NOT CREATED EQUAL
It's clear that many people want the 411 on what exactly happened with the housing crash. This explanation in no way implies I even know what I'm talking about, after all I am not an economist. But somehow the economists don't seem to know very much about it either so I figure I'll give it a try!
We all have an idea in our heads of what our dream house looks like. If you're lucky enough to be living in it, good for you. But most of us are losing that dream. We live in a country where most of us don't worry about basic necessities on a daily basis, like so many others around the world. But that's starting to change. Is this what Obama meant by "hope & change?"
Freedom and capitalism are the reasons we're blessed with this lifestyle. However, our liberties disappear with each program, policy, or government employee our government puts into play. This continual growth of government power threatens to eliminate the prosperous dreams Americans have enjoyed for decades, leading us down a road towards third-world living where many of us will worry daily about our next meal or rent payment. Here's just one of thousands of examples of how government's attempts to control our lives has blown up yet again.
THE GOVERNMENT'S GUIDE TO CREATING A HOUSING CRASH
Step 1 - Government decides every American should have a house. Even the poor or those with bad credit.
Step 2 - Government tells Americans that they all deserve a house and will make it easy to get one. Those politicians who made said promises get lots of votes.
Step 3 - Government creates a plan to ensure that everyone can get a loan by mandating ultra-low interest rates with very low down payment requirements
Step 4 - Banks don't want this because most likely they won't get their money back if just anyone can qualify, so government promises that they will back the loans and pay the bank back if the borrower can't
Step 5 - Government creates Fannie Mae and Freddie Mac to help this process along and buy the housing loans from the banks. Borrowers would then pay Fannie Mae and Freddie Mac
Step 6 - Banks immediately get back their principal from the agencies which they use for new loans right away.
Step 7 - Government guarantees make banks reckless because they know they're covered no matter who defaults. So they drop interest rates even more because it's almost risk-free.
Step 8 - Americans are happy because they no longer have to save most of their lives to buy a house. Almost everyone qualifies and TONS of Americans are buying properties they can't afford.
Step 9 - The housing industry is on fire, that includes house decorating and other industries as well. America gets lots of new houses but less savings and not very many new businesses that produce things to bring new money into the market.
Step 10 - Other countries start investing in Fannie Mae and Freddie Mac loans, bringing even more availability of credit to Americans and driving interest rates down even more. More people buy houses.
Step 11 - A new type of loan comes out where people can borrow MORE than their houses are worth, to spend on other things, like design & decor, creating lots of luxury homes
Step 12 - Housing prices spiral crazily out of control because of a distorted credit market and demand, creating bidding wars for even the ugliest, trashiest houses. Home prices surpass common sense.
Step 13 - People buy houses they know they can't afford because of the belief that housing prices will always rise and they can sell in a few years for profit
Step 14 - Buyers (big and small) start realizing the market is peaking and decide to sell their properties.....all at the same time because they're all realizing it at the same time
Step 15 - The market turns and everyone wants out causing a glut of sellers and very few buyers. Prices start crashing and owning a house all of a sudden becomes very risky.
Step 16 - They can't sell and many people's high loan payments become impossible for them to pay, especially ARMS, so they default, and walk away, letting banks foreclose on them.
To understand more of the story, a really good story teller of all this is Peter Schiff. Check out his book, How An Economy Grows And Why It Crashes, for an amazingly fun story.
The lesson in all this is that government needs to not get involved in free markets. They do so to manipulate them and make promises to us to get more votes. What we need is freedom from government to make money and afford houses on our own in a responsible and sustainable way.