Don't Blame Subprimes

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The truth is that subprime lenders, by responding to demand, were the finger in the dike for the whole housing market. The real problem is affordability and the incongruity between incomes and home pricing.

Forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income.

But in most major economic centers, typical families haven't been able to buy a home for anything near the national median price for decades. Try to find a single-family home in the D.C. area for the national median of $221,900. In the major markets, there is tremendous dependency on alternatives to the standard 30-year fixed-rate mortgage, which in turn has created a dependency on the least scrupulous mortgage companies and lenders.

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Without mortgage options that provide lower monthly payments than traditional 30-year mortgages, a majority of families cannot afford homes in our nation's major population centers.

Today's crisis differs greatly from previous housing downturns. In past downturns, the housing market was influenced by and was an indicator of other economic issues. This time, millions of homes have been built around the country during the past few years using a financing option that no longer exists. There may never be enough capacity to absorb all of these homes and other existing homes using 30-year mortgages, because there simply aren't enough people with the incomes to meet the requirements. Prices could not roll back far enough without damaging the economy irreparably.

The solution is not to be found in a short-term stimulus nor in waiting things out. What is needed is a new standard mortgage product, something as revolutionary today as the 30-year fixed-rate loan was when it was introduced.

So many people bought into subprime loans because that was all they could afford. Subprime and Alt-A lenders exposed the market demand. Now it is time for more trustworthy capitalists, more focused on long-range outcomes, to meet this demand and reopen the door to homeownership to millions of Americans.

Washington Post

The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture; home finance; and education.

The residential mortgage borrowing segment is by far the largest of the borrowing segments in which the GSEs operate. Together, the three mortgage finance GSEs (Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks) have several trillion dollars of on-balance sheet assets.

The GSEs have created a secondary market in these loans through securitization so that the primary market debt issues can be bought and—most importantly—traded by investors. Demand for debt securities drives up their trading price, which lowers their interest rates. Proponents say that this secondary market in consumer loans gives household borrowers cheap fixed rate loans (low fixed rates on long term loans), removes credit risk from banks' balance sheets and provides standardized instruments (securitized securities) for investors.

Wikipedia