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Dry Rot

"You know what Al Qaeda hate? They hate the idea that you can go buy a home..."

YOU GOTTA HAND IT to George W.Bush. He really does have the biggest brass neck in history.

   "Problems that originated in the credit markets and first showed up in the area of subprime mortgages have spread throughout our financial system," the US President said last week, like he was talking about dry rot.

But where did the moisture seep in, wetting the timbers and spreading fungus to all the other beams and struts?

   Wednesday 23rd September, live on TV from the White House, Dubya told all.

   "For more than a decade...a large influx of money to US banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time...

   "Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.

   "Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

   "Optimism about housing values also led to a boom in home construction. Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell..."

   To recap, the 43rd President of the United States – in setting the scene for a $700bn rescue of the US and global financial system – says new lending became too available, home-builders created too much supply, and risk assessment standards got too lax.

   And behind it all, "in today's mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities," Dubya went on.

   "These securities were sold to investors around the world. Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

   Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

   The looming indictment of Fannie and Freddie's senior management aside, pointing the finger of blame in this way is truly remarkable. Because Bush himself knew all along just how important "innovation" in home loans would prove to a key plank of what's laughably called his "economic policy".

   See, the President himself has repeatedly demanded just these same changes to the US housing market since 2002. He made the shift a key plank of his 2004 re-election campaign. His administration – now scrambling to try and clean up the mess with tax-payers' money and fresh Dollar bills – set it as core objective.

   And now "the decline in the housing market [has] set off a domino effect across our economy."

   So maybe politicians don't know best after all...?

   "The United States is fortunate in that our homeownership rate is at an all-time high," announced Dubya back in June 2003. "Low interest rates continue to encourage millions of Americans to become first-time homeowners."

   But cheap money and record-high numbers of debtors just weren't enough – not in 2003. And so that month marked not only the (first) final victory in the War of Terror; it also saw the Bush administration declare June 2003 to be National Home Ownership Month.

   It wasn't the first such real-estate jamboree. The month of June has in fact been National Home Ownership Month in the United States every year since 2002. Because capitalist America's march of progress since the Depression – back when the typical home-loan matured inside 10 years, on a loan-to-value ratio of 50%, and with a balloon payment due at the end – could be measured in Bush's philosophy by the range, variety and free availability of its mortgage products.

   Widening that range and availability would surely prove an unalloyed good. Right?

   "By a significant margin," the Decider went on in June 2003, "minority families are less likely to own their own homes..." And so "the goal," as Bush had explained 12 months earlier to the Department of Housing & Urban Development (HUD), "is everybody who wants to own a home has got a shot at doing so."

   Hence the term "subprime" – meaning mortgages lent to people who, without the US state on hand to help them buy what the home-lenders would not otherwise fund, couldn't previously raise a loan. Maybe that was an issue of race, racism, opportunity or education. Some 40 million Americans remain "unbanked" today on one estimate. Lacking the very simplest financial service – a place to receive their pay check – they also represent a key market for check cashers, pawn brokers, and local loan sharks.

   Either way, Bush made it a political point. For here was a problem, a social problem. And what's the point of government if not to fix problems?

   "The problem is...three-quarters of Anglos own their homes, and yet less than 50% of African Americans and Hispanics own homes," Bush had reported when launching the first National Home Ownership Month in June 2002. "That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it."

   During that same speech in '02, Dubya also promised he would "make sure America is secure from a group of killers, people who hate – you know what they hate? They hate the idea that somebody can go buy a home..."

   Housing, therefore, was not merely any old social issue; it was the very biggest of issues the United States could ever address. Here, inside the four walls which a record 68% of American families got to call "home", the War on Terror collided with race, immigration, liberty, inclusion, opportunity and the American Dream.

   Maybe again it was just coincidence that the Federal Reserve was then on its way to slashing interest rates to a five-decade low, delivering the first negative real interest rates (after inflation in the cost of living) since the super-soaraway '70s. Either way, Bush wanted "the entire housing industry to help at least 5.5 million minority families become homeowners by the end of this decade."

   His plan...? To remove the three barriers to increased home-ownership – barriers now rebuilt and raised despite (and indeed because of) Bush's idiot plan:

High Down Payments – "probably the [greatest] single barrier to first-time homeownership," as Bush noted. "People take a look at the down payment, they say that's too high, I'm not buying..."

   Hence the American Dream Downpayment Initiative (ADDI), signed into law in Dec. 2003. It authorized some $800 million in home-buyer assistance between 2004 and 2007 – small beer compared with bailing out the No-Money-Down madness it accompanied, with homebuilders and their finance divisions literally giving away homes on 100% credit and more, only to get the keys posted back as the debtors began fleeing in summer last year.

  
But lacking hindsight, along with the sense they were born with, what was to stop mortgage lenders growing their business in line with the White House's stated ambitions?

   "Innovations in the mortgage market [have] lessened down-payment requirements," concluded a study for the St.Louis Fed in early 2007. And so it wasn't just minority groups who got to "buy" homes (i.e. raise their gross debt), if at all.

   In the decade to 2005, this same Fed study found that the home-ownership rate amongst US citizens aged 35 and below rose from 37% to 43%. Unsurprisingly, "loans with minimal down-payment requirements tend[ed] to be the contract of choice," because if you've got little or no money, buying a home with little or no money down sure beats the alternative, especially when house prices – as if by magic – are rising ten, twenty or even 30% per year, as they did between 2000 and 2006 in New York, Miami, L.A., San Diego, San Francisco and inside the Beltway.

   "The long-run importance of new mortgage products," the Fed research says, "ranges from 56% to 70%" of the change in US home-ownership rates. So nor was it only younger home buyers upping their game. Home-ownership rates also rose sharply across all age groups and income bands. Because moving in for free makes moving in a whole lot more attractive, even to die-hard rental tenants.


Lack of Affordable Housing
– Rather than building lower-cost housing, or trying to cap the price of privately-built homes (both applied here in the United Kingdom since 2003, but with little impact on our own record home-ownership rates), "the best way to deal with that problem," said Bush, "is to set up a single family affordable housing tax credit to the tune of $2.4 billion."

   In other words, over-priced housing needed more people to get more money so they could start buying more houses. Home prices in the most densely-populated US cities promptly doubled between 2002 and mid-2006. Yet falling prices then undid Bush's aims even faster than the boom, despite the Hope Now initiative claiming to stall more than two million foreclosures over the last 14 months.

   Already by the start of 2008, the US homeownership rate had sunk back to 2001 levels. Here in autumn '08, the Census Department says that almost 3% of owner-occupied units are vacant, almost twice the historical average. RGE Monitor reckons some four or five million extra housing units stand empty compared with the long-term level.

   Average home prices across the top 20 metropolitan areas have meantime fallen by one-fifth from their 2006 peak. And yet sales of both new and existing homes are running one-third below their peak rate of 2005-06.

   Why won't anyone buy, even with housing now so "affordable"? See barrier No.1 above; there simply aren't any no-money-down deals anymore.


The Fine Print
– "The third problem," said Bush in 2002, "is the fact that the rules are too complex.

   "People get discouraged by the fine print on the contracts. They take a look and say, well, I'm not so sure I want to sign this. There's too many words. (Laughter.) There's too many pitfalls..."

   No, really – that's just how it played when George W.Bush launched his first National Home Ownership Month in June 2002. He blamed the small print lurking at the bottom of home-loan and sale contracts – all those boring warnings about interest-rate risk, late payments, foreclosure orders, repossession, buyer beware and so on – for locking minority and first-generation American families out of home ownership.

   Perhaps he was right. Who can say? Either way, Bush got his people "to simplify the closing documents and all the documents that have to deal with homeownership." Why? Because back in 2002, "it [was] essential that we make it easier for people to buy a home, not harder."

   Whereas today? Would-be home buyers and anyone facing foreclosure might wish the government would try to make things harder, not easier.

   Given its record, that might actually help. Which hardly bodes well for the government's $700bn rescue of mortgage-backed bonds, now about to receive the approval of Congress.

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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