Liebowitz Explains Mortgage Meltdown

Stan J. Liebowitz of the Independent Institute wrote a paper this last fall titled, “Anatomy of a Train Wreck: Causes of the Mortgage Meltdown.” He summarizes (on page 4):

[M]ortgage underwriting standards had been undermined by virtually every branch of the government since the early 1990s. The government had been attempting to increase home ownership in the U.S., which had been stagnant for several decades. In particular, the government had tried to increase home ownership among poor and minority Americans. Although a seemingly noble goal, the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise: intentional weakening of the traditional mortgage-lending standards.

After the government succeeded in weakening underwriting standards, mortgages seemed to require virtually no down payment, which is the main key to the problem, but few restrictions on the size of monthly payments relative to income, little examination of credit scores, little examination of employment history, and so forth also contributed. This was exactly the government’s goal. …

The increase in home ownership increased the price of housing, helping to create a housing “bubble.” The bubble brought in a large number of speculators in the form of individuals owning one or two houses who hoped to quickly resell them at a profit. Estimates are that one quarter of all home sales were speculative sales of this nature. … Once housing prices stopped rising, these speculators tried to get out from under their investments made largely with other peoples’ money, which is why foreclosures increased mainly for adjustable-rate mortgages and not for fixed-rate mortgages, regardless of whether mortgages were prime or subprime.

Liebowitz goes a long way in explaining the economic problems in which we find ourselves. One lesson to be learned is that “owernship” ought not be confused with a free market. Ownership via voluntary transactions is wonderful; ownership through political force is dangerous.