Su Casa . . . Mi Casa

You might think I have that backwards, but I don't. You might think that's about Arizona's current immigration issues, but it's not. You might think it's about Cinco de Mayo, but no.

No, this rant is about the current housing crisis. It's about what's considered "your house" and what's not.

If you buy a house that's bigger than you need, that's fine as long as you can pay for it. We've bought three houses in our 30+ years of marriage, and we're in our last one, hopefully. It's bigger than we need, but the excess capacity is for company. I love having family and friends over, and we've often had extended family or friends-of-family living with us for months. That's one reason we bought a big house this time, for visitors, possibly for an aging parent, and for future visits of grand kids . . . hint, hint. (I have relatives reading this who take in "boarders," bless you, you know who you are :) In the picture above, my six-year-old daughter drew her mom, dad, brothers and COUSINS in our house. :)

Let me tell you about the first little house we bought (1300 sq ft). We had just moved to a new town, and the waiting list for on-base housing was 2 1/2 years, for a 3-year assignment! There was nothing to rent, and we were homeless . . . so we were forced to buy. We had three small children and one income, so we couldn't afford much. We bought a VA Repo ("as is") for $50,000. Here's a list of what was wrong with it: it had water damage from broken pipes in the walls where they had frozen. We didn't know they weren't fixed until we had the water turned on and it came running out. We should have suspected something . . . there was mold growing waist high on the walls inside one room. The hot water heater was busted, which we also found out with water-flow commencement. The toilet backed up from tree roots growing in the drainage pipes. The furnace had a gas leak and could have killed us. The air conditioner didn't work either (in Louisiana!) The house had aluminum wiring, and one evening as I was putting the baby to bed, an outlet with a loose wire (in her room) sent me a smoke signal, thankfully it was before I had gone to bed! And last, but not least . . . when it rained, the roof leaked . . . we moved there the RAINIEST year in Louisiana history, no less. (Footnote: my husband was away on TDY for over 100 days that year, one son developed asthma, and I had health issues that required surgery and caused hemorrhaging, but that's a story for another day.)

If you borrow money to pay for a house, YOU don't own it . . . the BANK does. (If I borrow my neighbor's lawnmower, I'm not the "owner" even if I promised I WOULD pay for it.) The bank as every right to take the house back if you don't repay. People shouldn't buy more house than they can reasonably afford. Many don't realize the huge expenses AFTER moving into a house . . . furniture, drapes, carpets, maintenance and REPAIRS! If that means a smaller house, so be it (but don't buy a REPO, unless you love living dangerously, fixing constantly, and you don't have small children!)

Back to the housing crisis. First, understand what sub-prime lending is: it's making loans in the riskiest categories. This risk is a combination of factors, including but not limited to, the size of a loan relative to collateral, lack of documentation on the borrower, or a borrower's low credit score (below 650).

Now to the time line:

1977
The Community Reinvestment Act, from the Jimmy Carter days, required federally insured lenders to make extra effort to loan to low income borrowers. Additional changes were made between 1993-2000, and banks loaned more than $800 billion to borrowers covered by the law. This amounted to well over 90% of all loans made in the 23 years since.

1995
The Clinton Administration and the Democrats in power added massive new provisions to REQUIRE sub-prime loans be made. The revisions went further, by allowing the securitization of CRA loans containing sub-prime mortgages.

1999
Fannie Mae eases the credit requirements to encourage banks to extend home mortgages to individuals whose credit is not good enough to qualify for conventional loans.

2000
Fannie Mae buys $600 million and Freddie Mac buys $18.6 billion worth of sub-prime mortgages and guarantees another $7.7 billion .

Fannie Mae commits to purchase and securitize $2 billion of Community Reinvestment Act eligible loans.

Fannie Mae announces that the Department of Housing and Urban Development will soon REQUIRE it to dedicate 50% of its business to low- and moderate-income families and its goal is to finance over $500 billion in Community Reinvestment Act related business by 2010.

Commodity Futures Modernization Act of 2000 (signed into law by Clinton) defines interest rates, currency prices, and stock indexes as “EXCLUDED commodities,” allowing trade of credit-default swaps by hedge funds.

2000-2003
The Federal Reserve lowered interest rates from 6.5% to 1.0% Translation: this puts money "on sale" and leads people to buy more of it (when you get a loan you are "buying" money, the interest is its cost). People bought more house than they needed, or borrowed on the their "HELOC" (Home Equity Line of Credit), or bought houses to "flip."

2001
The Bush Administration first red flagged Fannie and Freddie stating that “financial trouble of a large GSE could cause STRONG repercussions in financial markets, affecting Federally insured entities and ECONOMIC ACTIVITY.”

2006
That year, 22% of homes purchased were for investment purposes, with an additional 14% for vacation homes. So . . . close to 40% of homes purchases were not intended as primary residences . . . a record level. (The law of unintended consequences.)

1963 to 2006
Home values increased 157% faster than inflation. CRA caused home prices to rise too fast. Economic fundamentals didn't support this growth. Government regulation-mandated credit did.

So, let's summarize . . . the government thought home "ownership" was a good idea for everybody. (It's really a "mortgage ownership," but I digress). They passed laws to encourage, and then to FORCE, banks to make loans to risky borrowers. The government lowered interest rates and subsidized risk. Economic laws happen, just like gravity. Everyone wanted to "get in on the good deal" and the bubble grew. Throw a few monkey-wrenches on the economy, like high gas prices, a terrorist attack, and a war or two and POP! the bubble burst. Hot air can't support growth, only real structure can.

Today, Fannie and Freddie, along with the Federal Housing Authority FHA represent more than 90% of all mortgage activity.

Unless you've paid your mortgage off . . . the bank owns the house. Fannie, Freddie, and FHA are taxpayer-backed, so . . . it's not su casa . . . it's mi casa.
. . . or it might be su dueda, mi dueda (debt).

_____________________________

"The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'"
~Ronald Reagan

Read more about Fannie Mae and Freddie Mac history here and scandals here.

5-6-10 a.m. News Flash: The CBO estimates the American people will spend $389 billion bailing out the Fannie and Freddie by 2019. (And we're potentially on the hook for the TRILLIONS they have "guaranteed" with taxpayer dollars).

Image courtesy of my daughter who was six when she colored it and drew in the people.