When trying to analyze what brought about the current decline in property values in recent years, one has to examine a lot of different factors. I recently created a video called the ‘Battle Creek Market Report Chapter 2’ and I covered some of the aspects of the cause of these changes in the last several years.
If you have lost your equity on your home, you are not alone. Millions of Americans have as well. The housing crash was brought out by not just the out of control loan industry, as many media ‘experts’ would have you believe. The truth is there were a number of factors.
A great deal started the Community Reinvestment Act which was passed in 1977 by the 95th Congress during the Jimmy Carter administration.
The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and savings and loan associations to offer credit throughout their entire market area. It also prohibits them from targeting only higher end or wealthier neighborhoods with their services, a practice known as “redlining.”
The purpose of the CRA was to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses. Over the years it has been subjected to regulatory revisions.
The CRA was passed by Congress following national grassroots pressure for affordable
housing, and despite considerable opposition from the mainstream banking community. The CRA mandated that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution’s application for deposit facilities, including mergers and acquisitions. This legislation was the first sweeping government hand into the mortgage industry.
The bill encouraged the Federal National Mortgage Association, commonly known as Fannie Mae, to enable mortgage companies, savings and loans, commercial banks, credit unions, and state and local housing finance agencies to lend to home buyers. It also encouraged the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, to buy mortgages on the secondary market and sell them as mortgage-backed securities on the open market.
In 1995, the Bill Clinton began implementing changes to the regulations for the CRA with revisions starting January 31, 1995. These revisions included radically increased CRA loans to low- and moderate-income borrowers for home loans, which was controversial when it was approved.
Following this time in history, lending institutions became more efficient with the advance of computer technology, and the internet. Lending institutions were born like Countrywide which embraced the subprime loan industry, and made them widely available to consumers creating a 39% increase nationwide from 1995 to 2002. By 2006, subprime loans became the standard for most first time home buyers in the low to moderate income range.
However, personal financial discipline had fallen out with this new generation of borrowers
indoctrinated into the easy spending habits promoted by the credit card industry, and the tangle became even more complex. Renters with poor credit history were able to buy homes with zero money down, and because of the lack of personal investment into the home, began walking away from homes as they would a rental home. Rising interest rate loans such as the ‘Adjustable Rate’ mortgages were utilized broadly, with the sales pitch to the homebuyer to re-finance in 2 years once your credit improves into a fixed rate mortgage.
However, financial discipline being lost with many among this new group of borrowers, a greater percentage did not improve their credit in the two year period. Thus, the refinancing options became to refinance into another adjustable rate mortgage or struggle with the new increased payments.
The home buyer lost money with each new transaction, and the lending industry appeared to prosper. The bubble that was said to have popped was essentially when the increase of foreclosures finally crossed the line with a majority of these loan companies into massive insolvency. The point of too many borrowers defaulting on loans became something that reached new heights, never before seen.
During this same period a great deal of energy in the buying and selling of homes was directed at ‘For Sale by Owner’ companies that promoted buyers and sellers to not use a Realtor, and ‘save money on paying commissions’. What essentially happened with this is that many home buyers bought homes that were over priced due to no professional representation to advise them, and sellers sold homes without the legal disclosures creating long term problems for the buyers.
The loser would appear to have been the home buyer, but in actual fact when the homes went into foreclosure, and were taken back by the banks the financial institutions lost their investment. However, when this became too excessive, they lobbied Washington, and persuaded Congress, the Senate and the President to pass a ‘Stimulus’ and financial bail-out bill to offset their losses. So who really lost out in the end? : The American tax payer.
Is it any wonder that in the past few years we have seen rapidly rising inflation?