WEBVTT

NOTE Housing and Fannie Mae: FDR's American Dream

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Well, if we know anything about Austrian Business Cycle Theory and what it teaches us,

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is that a depression is what clears away the excesses of the previous boom.

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And if we've had an excess in anything during the last boom, it was in houses.

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Over a million houses were lost to foreclosure last year.

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Last month, one in every 355 homes in America received either a default or an auction notice

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or were seized by creditors.

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This despite many of the moratoriums on foreclosures right now.

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So the economy is desperately trying to heal.

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It's desperately trying to clear away these excesses.

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And we've seen this very much in California where Guarantee Bank of Austin recently demolished

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16 finished homes, brand new homes, down in Victorville.

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I might add that Guarantee Bank failed last Friday, but their deposits were picked up

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by a Spanish bank.

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So I'm sure the Spanish bankers maybe know what to do a little better than the guys down

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in Austin, but these are homes that were sold from $280,000 to $350,000, brand new, never

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been lived in, and they just went ahead and tore them down.

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You may have seen the video of it on YouTube.

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But this isn't the only example.

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Here in California, there's only over 9,400 homes, projects of 9,400 homes, that have

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been stopped, have been halted, essentially at the house stage or at the finished building

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lot stage.

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250 residential developments here in California have been stopped, and the residential meltdown

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tax credit if you buy another new, redundant new home from the state of California, which

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we know how flush the state of California is at the moment.

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So we've got this tremendous overhang, the demand for homes appears to be somewhere around

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300,000 a year, yet 500,000 new homes are being started.

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Now until recently, home ownership in the United States was only a dream for most people.

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Most people didn't buy homes.

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From 1900 to 1940, fewer than half of all Americans owned their own home.

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Home ownership rates fell in three of the first four decades of the 20th century.

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And the difference was, whereas today if a young person gets a job and some steady income,

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They will immediately obligate themselves for 30 years and go out and buy a new home.

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Now their great grandfathers would have saved money for 30 years and then bought a house

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for cash eventually.

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But this has been turned completely on its head.

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And how did this all happen?

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How did this boom in housing, this subsidy for housing happen, whereas 70% of Americans

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and now own their own home.

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And Thomas Segrou, who's a history and professor at the University of Pennsylvania, puts it

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quite succinctly, we are a nation of homeowners and home speculators because of Uncle Sam.

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Before 1929, the government played very little role in the housing market.

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In fact, the only legislation there was, was in the tax code of 1913 where you were able

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to deduct your mortgage interest but other than that they didn't become

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involved if you got a mortgage it was you had to put 50% down the the loan

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would only go for three to five years and there was a stigma attached right I

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mean there was a stigma if you had a mortgage the fact when people paid off

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their mortgage there was a mortgage burning parties I don't know about you

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but I haven't ever been invited to a mortgage burning party so on top so so

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what you had was two types of homeowners the wealthy who paid cash or you had

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working people who were able to buy some land and build their own home that's

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that's the way housing was and even the rich rented because they felt like there

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was there was better uses for their cash than to tie it up in a home but this all

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It's all changed in the Depression. It's all changed. New housing starts had felled 95% between 1928 and 1933. Half the mortgages were in default.

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And no matter what you read, the truth is Herbert Hoover did not sit idly by.

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He signed the Federal Home Loan Bank Act in 1932, and that was just one of the many government intrusions into the housing market.

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In his first 100 days, FDR introduced the Homeowners Loan Act of 1933, and that was

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to extend relief to homeowners who couldn't pay their mortgages.

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There were 1,000 urban mortgages being foreclosed on a day.

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The bill created the Homeowners Loan Corporation that provided loans at 5% interest and lengthened

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repayment schedules to help out foreclosed buyers.

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I would think by now this is all sounding very familiar, right?

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The government loans were capped though, it was only for middle income or poorer people,

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so they capped these loans at $20,000, which doesn't sound like much, but when you translate

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it into $2,009, that's about $320,000.

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Now when he signed the bill, Roosevelt urged lenders to institute a moratorium on foreclosures

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According to a recent biographer, Adam Cohen, who's quite taken with FDR, by the way, he said this new law was a great success. The HOLC was soon to hold one-fifth of all urban mortgages.

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The FHA was created a year later, in 1934, to set standards for home construction and

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it instituted 25 and 30 year mortgages and cut interest rates.

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And then four years later FDR created the Federal National Mortgage Association, Fannie

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Mae, and this created a secondary market for mortgages.

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They were given the mandate to help make homeownership more available throughout the United States.

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Set up as a publicly traded company, but with a federal charter.

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And these programs all worked in a hurry.

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It didn't take long, by 1950, 55% of Americans owned their own home.

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By 1970, homeownership was 63%.

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And then beginning in 1992, Congress pushed Fannie Mae and Freddie Mac.

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Freddie Mac is kind of like Fannie's little brother.

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It was founded in 1970 to expand, again, the secondary mortgage market, and in 92, Congress

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pushed them to increase their purchases of mortgages going to low and moderate income

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borrowers.

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For 1998, the Department of Housing and Urban Development, HUD, gave Fannie Mae and Freddie

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The explicit target, 42% of their mortgages were to go to borrowers with income below the median for their particular area.

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They began means testing, who was going to be able to get a mortgage.

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That target was increased to 50% in 2000 and 52% in 2005.

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And between 2000 and 2005, Fannie and Freddie met their goals every year,

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Funding hundreds of billions of dollars worth of loans, many of them sub-prime, adjustable

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rate, made to borrowers who bought the houses with less than 10% down.

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In 1997, Bear Stearns did a first securitization of the Community Reinvestment Act loans.

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We heard a little bit about CRA loans earlier from Tom.

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These are loans made in low-income areas.

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You get a map from the government, they tell you where low income people live and you're

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to direct your loan dollars there and if you don't hit a certain threshold then banks typically

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don't do well on those type of exams and it keeps you from branching, keeps you from expanding

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your bank so bankers do the smart thing and make loans in those areas.

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So over the next ten months, Bear Stearns issued 1.9 billion CRA mortgages backed by

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Fannie and Freddie.

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And CRA was then strengthened in 1995, leading to an 80% increase in the number of bank loans

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going to low and moderate income families.

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Politicians loved the increase in home ownership and the rising home prices kept default rates

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Unusually Low. So everybody won. Fannie and Freddie were doing great. They're allies on

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Capitol Hill, thought they were great, and everybody was rolling in dough. Then as if

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this wasn't enough, Fannie Mae launched the American Dream Commitment in 2000. They were

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to provide $2 trillion in private capital for 18 million underserved Americans to own

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In 2001, over 51% of Fannie's financing went to low and moderate income households, and that was to aid them because, as one fan of Fannie Mae wrote, these people were victims of predatory lenders.

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Fannie Mae allows additional flexibility in underwriting new loans for people trapped in abusive loans.

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I don't know if you've ever been trapped in an abusive loan, but it's tough to deal with.

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2004, Fanny has expanded the American Dream Commitment pledging to help six million families become first-time homeowners over the next decade.

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Of course, rationalizing home ownership is something that Fanny May and its friends on Capitol Hill always have to do.

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And so they said one survey of consumer finances found that low-income homeowners have a net worth 12 times that of renters at the same income level.

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Other studies found that children of homeowners are more likely to graduate from high school, college.

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I mean, I don't know how you could draw a nexus between those two things, but that's what they say.

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They're more likely to go and own a home of their own.

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So, if you grew up in a household that's a renter, chances of home ownership are just

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virtually nil according to these people.

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Also shows that home ownership keeps communities attractive, safe and vital, generating higher

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property values and other economic activity.

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Of course, what they mean here is higher property taxes is what they're after.

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Of course, there's always been a problem, even when you lower rates and you make the

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In 2003, President Bush signed into law the American Dream Down Payment Act, otherwise known as the ADD Act.

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So this is the American Dream Down Payment Act of 2003, and it was to help 40,000 families with their down payment and closing costs.

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And this is to further strengthen America's housing market.

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Now when the bill was signed, the housing market was on fire.

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I mean overall starts had, in that month of December of 2003, the annual starts were nearly a million seven.

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In 2007, there had been a 17% increase in the number of housing starts since the previous year.

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So this isn't something that the housing market needed.

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But for political purposes, the American Dream Down Payment Act was put into place.

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And the administration said at the time, the strong housing market is beneficial for communities across the nation.

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And the families have been refinancing due to the lowest mortgage rates in 45 years,

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saving hundreds of millions of dollars a month in their home payments, and the U.S. homeownership

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rate was 68.4% in the third quarter.

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That was the highest level ever at that point.

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And Bush recognized that the biggest barrier to homeownership was this down payment.

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This idea that you had to actually save money, accumulate money to put down toward a house.

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So they wanted to make that go away.

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And I remember when I was in Las Vegas, I'd go to housing conferences.

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And I remember a gentleman from Countrywide.

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Remember Countrywide?

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Used to be a pretty big outfit.

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And he stood at the podium and said the biggest barrier to home ownership is down payment

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and we're going to make that go away.

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and they pretty much did.

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So then with this whole down payment thing being passe, between 1997 and 2005 we all

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know what happened to house prices.

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They doubled and the subprime mortgage market was not only born but it was nurtured and

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Fannie and Freddie played a significant role in the explosion of these subprime mortgages

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and subprime mortgage backed securities.

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Without the implicit government guarantee of the GSEs, the sub-prime market just would

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have never taken off.

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Homeownership jumped again in 1994 to 64 percent, 2004 it was 69 percent, and again the result

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was increased loans to low-income, high-risk borrowers.

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But of course Bill Clinton and George W. Bush trumpeted the rise in ownership as it occurred.

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And not only were they laid to lean out billions in cheap money, they were good corporate citizens

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at Fannie Mae.

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The Business Ethics Magazine, 100 best corporate citizens, every year contained Fannie Mae.

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In fact, they were number one in 2004 as the best corporate citizen in America.

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They also performed well in Fortune's Best Companies for Minorities, Women's Working

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Working Mothers List for Best Companies for Working Mothers. They made that list. They

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made the list for the American Benefactors List as the most generous companies in America.

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So Fannie Mae was doing everything. They were lending money to poor people, to get houses,

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live in the American Dream, and they were great corporate citizens. I mean, nothing

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could go wrong. But then, 2004, they were caught cooking the books. The Office of Federal

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Federal Housing Enterprise Oversight alleged widespread accounting errors at Fannie Mae.

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James Lockhart, the Director of the Office of Federal Housing Enterprise Oversight,

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commented that, quote, the image of Fannie Mae as one of the lowest risk and best in

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class institutions was a facade.

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Our examination found an environment where the ends justified the means.

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Senior management manipulated accounting, reaped maximum undeserved bonuses, and prevented

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the rest of the world from knowing."

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The flagrant accounting errors went back at least into the 90s, an article that Karen

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DeCosta wrote on Mises org, when the company was improperly deferring expenses in order

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to boost revenue, and it paid out huge bonuses to top executives.

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So Fannie Mae did the smart thing.

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If you're being questioned about your financials, what should you do?

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Stop filing them.

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And that's what they did.

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Stop filing financials with the SEC.

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Of course, try to be another public company and get away with that.

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So since 2004, they were constantly behind in their filing of financial statements.

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And these financial shenanigans took place despite the prestigious board of directors

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that they had.

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They had a former Reagan Chief of Staff, they had lobbyists, former aide to Nixon, a Reagan

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Secretary of Labor, U.S. Trade Representatives, top economic advisor, President Bush.

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So they had a very esteemed Board of Directors while this was going on.

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But they had friends on Capitol Hill, it's good to have friends.

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One of those friends is a financial expert, he must be because he heads up a committee

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in Washington, Barney Frank. He quoted a saying when he was talking about Fannie Mae

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and their troubles, quote, I worry frankly that there's a tension here. The more people

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in my judgment exaggerate a threat of safety and soundness, the more people conjure up

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the possibility of serious financial losses to the Treasury, which I do not see. I think

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I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios, unquote.

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Another financial expert, Maxine Waters, said during the same hearing,

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If it ain't broke, why do you want to fix it? Have the GSEs ever missed their housing goals? Unquote.

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And of course Christopher Dodd, Senate banking committee member, he said,

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I will just briefly say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time.

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And we don't want to lose sight of that and what has been pointed out by all of our witnesses here, obviously.

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The 70% of Americans who own their own home today, in no small measure, do because of the work that's been done here.

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Well, if we fast-forward today, Fannie and Freddie only exist because of the support of the taxpayer.

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Now, when I wrote this a week or two ago, the stocks were trading at a buck.

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But if you follow it, they're trading at two bucks for Fannie and Freddie.

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They had another rally yesterday, but in the local paper here, they say,

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Investors trade stocks of zombie companies.

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Of course, they're referring to Fannie and Freddie.

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And an analyst with Keith Brouette and Wood says,

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people have done well by trading them,

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but when it gets to the end of the road,

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these stocks are going to be worth zero.

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Now, Freddie announced its first quarterly profit in two years,

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but it wasn't enough to cover the dividend that it owes the government.

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Department.

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Despite the profit, besides the profit was only due because the GSC was able to revalue

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some of their assets and that created a gain of $5 billion.

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But starting next quarter they're going to go back to reporting billions in losses in

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the next quarter.

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It has serious delinquencies that have risen from 2.29% to 2.89% and Fannie's delinquencies

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has continued to rise from 3.9 from 1.36 from a year ago.

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Fannie has borrowed $46 billion from the government, while Freddie's debt to Uncle Sam is now $51 billion.

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So, meanwhile, the housing market, despite all this government intervention, has continued to sink.

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to Sink. A new report from First American Core Logic shows nearly a third of all mortgages

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are now underwater. That's 15 million loans. Now the negative equity is skewed in three

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states, Florida, Arizona, and Nevada. But a new Deutsche Bank report indicates that by

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2011, 48% of all mortgaged Americans will be underwater. And Deutsche Bank lists 10

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In cities where the projected percentage of mortgage borrowers underwater will be 90 percent

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or above, Fort Lauderdale, El Centro, California, Merced, Las Vegas, Bakersfield, Riverside,

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San Bernardino, by 2011 according to Deutsche Bank, 90 percent of their loans, mortgages

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would be underwater. But underwater is no problem for Fannie and Freddie. In July, the

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Two GSEs received regulatory approval to refinance mortgages at a loan to value as high as 125%.

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You remember when Alan Greenspan told everybody to go out and get an adjustable rate mortgage?

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Well now, in the words of Grant's interest rate observer, the government has blessed,

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subsidized and institutionalized the state of underwater home ownership.

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James Lockhart, who's running another agency now, Federal Housing Finance Agency, says,

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quote, the higher LTV refinancing will allow more homeowners to strengthen their finances

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by taking advantage of lower interest rates. But Dan Gertner at grants did the numbers,

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and he said the savings from modifications are tiny. He says you could save more money

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by switching to GEICO.

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But the GSEs can modify all they want.

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That doesn't mean distressed homeowners can or will pay.

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According to the June 30th edition of Mortgage Metrics Report published by the Comptroller

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of the Currency, 28% of all modified loans were 60 days past due within 60 days of being

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Modified, which means that more than one in four people who modified their loans because

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they couldn't pay, according to the original terms, didn't make a single payment after

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the loan was modified.

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So what has FDR's American dream given us?

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Dito Holzman explains in his book, The Ethics of Money Production, quote, the net effect

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of the recent surge in household debt is therefore to throw entire populations into financial

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dependency. The moral implications are clear. Towering debts are incompatible with financial

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self-reliance, and thus they tend to weaken self-reliance also in other spheres. The debt-ridden

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individual eventually adopts the habits of turning to others for help, rather than maturing

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into an economic and moral anchor of his family and of his wider community.

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Wishful thinking and submissiveness replace soberness and independent judgment.

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What about the many cases in which families can no longer shoulder the debt load?

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Then the result is either despair or alternatively scorn for all standards of financial sanity.

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As Hans-Hermann Hoppe pointed out in his book, Democracy, the God that Failed, savers are

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the ones who initiate a process of civilization by generating a tendency toward a fall in

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time preference. He and those that exchange with him, quote, mature from childhood to

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adulthood and from barbarism to civilization, unquote. But instead, with FDR's American

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and Dream. We have subsidized debt and in turn raised time preferences. Instead of encouraging

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savings and thrift, it has blessed, subsidized, and institutionalized personal fiscal insolvency.

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And this fiscal insolvency now threatens to lead this country to moral insolvency. Thank