The 'Own Your Own Home' Policy: A Relatively New Thing

Next to our intuitive thirst for greed, the difficulty of keeping perspective amidst the epically long and complex evolution of the U.S. government-private sponsorship of "democratic" financialization is likely the largest contributing factor to our current and likely far larger decline.

Most individuals have, at best, a relatively brief exposure to most financial matters (somewhere between the years of household formation and household destruction) on which to base their knowledge.

And while they are mostly ignorant of the issues and controversies preceding their experience, they take the standards of their day as fact and foundation and operate by the “rules of the game” as they know them.

The problem is that the rules are ever changing and, more importantly, largely just human invention invented in that frail and ill planned manner that only humans can carry out.

For example, most today would consider the 30 year fixed rate fully amortizing home mortgage to be foundation, so important that it is almost tradition.

But yet, it is not.

It is, in fact, a relatively new invention forged during an “enlightened” period where the forces of both private and public interests united to unleash their vision of a more fair, democratic and consumption fueled American economy.

(NOTE: PLEASE please please read this 10 page article (pdf) by written by Marc Weiss in 1989 entitled “Marketing and Financing Home Ownership: Mortgage Lending and Public Policy in the United States, 1918 – 1989.)

It’s important to recognize that the practice of lowering the “barriers to entry” of home ownership, through either government legislation or private experiment represents mere policy… no more and no less.

The 30 year fully amortizing home loan was the “installment plan” for the post-depression U.S. homebuyer.

But what do we really know about the true legitimacy and soundness of the 30 year loan?

We have plenty of data since its introduction that appears to indicate that it is a sound product.

Throughout the ups and downs of the post-war period, those with interest in the metrics and performance of 30 year fixed rate home loan debt (thrifts, mortgage insurers, the feds) could, with rare interruption, rely on as fact that the overwhelming majority of these loans would perform.

But therein lies a bit of the rub.

Most, if not all, of the data originated during a period unlike the period we are now experiencing.

The booms during the post-war period always bested the prior booms particularly for job creation and though the various busts and crisis were more than incidental, brighter days were always ahead.

In fact, in a sense, brighter days were almost fundamentally ahead as households transformed from single earner to dual earner status during this period.

Now though, the trends have clearly taken a turn for the worse.

Boomer retirement is the talk of the day.

Moreover, for almost ten years experts and the media alike have accepted the notion of a “jobless recovery” without apparently stopping to wonder what the phenomena of a steadily declining participation in the workforce with a steadily increasing work-age population really means for America's future.

Even further still, we have all literally witnessed a “lost decade” in the stock market, yet not only is it not widely recognized (... like we easily recognize it when looking at Japan), our speculative spirits appear to be running as hot as ever.

We are clearly not operating in the same environment as the post-war period yet we act as though the rules are unchanging.

It’s important to understand that I am not trying to convince you that the 30 year amortizing home loan is a risky mortgage product.

I’m only trying to demonstrate that it is a relatively new product in the scheme of things and that its introduction, along with the introduction of numerous other schemes, was sponsored by a partnership between our government and private industry to promote their mutual interests many decades ago.

In all likelihood, 2005 represented the peak of this government-sponsored housing experiment and though long trending, there is a chance that this housing policy may ultimately turn out, in a larger context and with all costs considered, to be no more successful than the myriad of other failed government initiatives.

Comments

[Living4Divi...:]

Thanks for the article

The 'Own Your Own Home' Policy has been around for approximately 5 decades in the USA. Private home ownership has long been encouraged by govt policy.

I do agree with you that it represents govt tinkering on a grand scale. Govt intervention - tinkering with the economy leads to big problems. The subprime collapse and resultant recession are examples of the problems that occur.

Oct 13 07:29 AM

[Moon Kil Woong:]

I will put it more succinctly, without the government FMA or their misbegotten spawn the Mae's no bank on god's green earth would finance 30 year home loans at 5.xx anything.

That is not to say 30 year home loans are bad. But when you couple it with targeted rates by the Fed and the government you get a deadly coctail not unlike heroin where when you wake up (if in fact you do) you may find yourself in very sorry shape indeed.

In fact the nightmare has gotten so bad that the Mae's themselves, even though they continue to grow, can't contain the demand for these loans even in a recession, nor can they contain the losses. Not only has the government outright bailed them out and continue to do so, they have gotten the Treasury and Fed to buy off their book just so they can keep on making failed low interest loan after another. If in fact, the housing market is dragged further down we won't come out of our stupor until we are found underneath an economic train wreck.

Oct 13 10:26 AM

[Graham and ...:]

"Conventional" mortgage terms of 20% down and 30 years are TOO LIBERAL in our view. We believe in 35% down and 15 years ourselves.

And 50% down and ten years, if you really want to be "safe."

Oct 13 11:11 AM

[markfl:]

"Moreover, for almost ten years experts and the media alike have accepted the notion of a “jobless recovery” without apparently stopping to wonder what the phenomena of a steadily declining participation in the workforce with a steadily increasing work-age population really means for America's future."

Pretty straightforward. You have GDP potential and actual GDP. In the next few years, GDP might return to its potential, perhaps 3%. In less than ten years, however, that potential falls considerably. Waive 3% goodbye. Even when we grow, we will not grow quickly, and job growth thereafter will not be brisk. 2% growth doesn't create much at all. It means a higher rate of structural unemployment. Remember the 90s? Welcome back to 6 percent U3 if we're lucky, and 7 if we aren't . . . for maybe ten years or more.

Oct 13 11:24 AM

[Gary A:]

Wow, if FHA bombs and Fannie and Freddie mortgages are being purchased by the Federal Reserve at 100 percent, what does that say about the possibility that America will no longer be able to afford the 30 year mortgage. Then what for house prices, piggy bank equity, and economic recovery?

Oct 13 01:08 PM

[HomeEconomics:]

50% upfront is only "safe" if everyone else is held to that same standard. Otherwise, you're out of exactly that much money when house prices get clobbered. The only "safe" way to purchase a house is to have enough capital to be fully hedged in the derivatives markets. Too bad not many homeowners even know this is an option.


On Oct 13 11:11 AM Graham and Dodd Investor wrote:

> "Conventional" mortgage terms of 20% down and 30 years are TOO LIBERAL
> in our view. We believe in 35% down and 15 years ourselves.
>
> And 50% down and ten years, if you really want to be "safe."

Oct 13 02:53 PM

[Living4Divi...:]

Moon Kil,
Fannie and Freddie were part of the great experiment to prop up home ownership. When Fannie and Freddie ran into trouble, no problem, "Uncle Fed" took them over and bought up their book.

The collapse of two GSE, Fannie and Freddie show that massive government intervention on the markets has disastrous consequences.

Not dismayed by their failure with Fannie and Freddie, Uncle Sam has tasked other Federal Agencies to keep the mortgage money coming. In 2005, the Federal Housing Administration (FHA) guaranteed about 2% of all new US mortgages. In 2009, FHA guaranteed 25% of new mortgages.

Heck, even the US Dept of Agriculture (USDA) is guaranteeing loans for new construction.

On Oct 13 10:26 AM Moon Kil Woong wrote:

> I will put it more succinctly, without the government FMA or their
> misbegotten spawn the Mae's no bank on god's green earth would finance
> 30 year home loans at 5.xx anything.
>
> That is not to say 30 year home loans are bad. But when you couple
> it with targeted rates by the Fed and the government you get a deadly
> coctail not unlike heroin where when you wake up (if in fact you
> do) you may find yourself in very sorry shape indeed.
>
> In fact the nightmare has gotten so bad that the Mae's themselves,
> even though they continue to grow, can't contain the demand for these
> loans even in a recession, nor can they contain the losses. Not only
> has the government outright bailed them out and continue to do so,
> they have gotten the Treasury and Fed to buy off their book just
> so they can keep on making failed low interest loan after another.
> If in fact, the housing market is dragged further down we won't come
> out of our stupor until we are found underneath an economic train
> wreck.

Oct 13 05:47 PM

[Ponchovilla:]

20% down and a 30 yr fixed rate mortgage works. Over the history of the product sans the 2004-2007 period, I will bet most foreclosures on this type of loan are related to an extraordinary event such as a grossly overpriced hospital bill or debilitating job injury, significant job loss.

The recent problem with defaults on 20 down/30 yr is the AAA garbage stuff securitized by Wall St that fluffed home prices beyond reach of the 3-4x income "rule" and a reasonable debt/income ratio. Did anyone know how to spell housing affordability? Not the NAR version.

Amazing how a household income of $40K could buy a $400K home, eh? plus car, furniture and other trappings. Thank you credit card companies with 10 offers per month in the peak insanity period. I am sure the foreclosee has become "enlightened" and lightend in the wallet.

Oct 14 03:09 AM

[SAAverageJoe:]

Very few people own their own home.

Mostly, the banks own your own home.
---
The NewSpeak that everyone blissfully engages in drives me crazy.

Oct 14 07:39 AM

[Jethro1970:]

I love my new 15 year fixed 4.865%. Every month, balance drops. I can see the light at the end of the tunnel, the same year baby starts college.

Oct 14 11:54 AM

[beach bum ...:]

"Next to our intuitive thirst for greed, the difficulty of keeping perspective amidst the epically long and complex evolution of" your sentence structure is amazing. Take a grammar lesson!

Oct 14 10:40 PM

[SteBeven:]

Thank you PonchoVilla,

Amazing that not one of the previous comments pointed out the problems in the Loan Industry itself, which led to the overall critical negative mass. Thanks.


On Oct 14 03:09 AM Ponchovilla wrote:

> 20% down and a 30 yr fixed rate mortgage works. Over the history
> of the product sans the 2004-2007 period, I will bet most foreclosures
> on this type of loan are related to an extraordinary event such as
> a grossly overpriced hospital bill or debilitating job injury, significant
> job loss.
>
> The recent problem with defaults on 20 down/30 yr is the AAA garbage
> stuff securitized by Wall St that fluffed home prices beyond reach
> of the 3-4x income "rule" and a reasonable debt/income ratio. Did
> anyone know how to spell housing affordability? Not the NAR version.
>
>
> Amazing how a household income of $40K could buy a $400K home, eh?
> plus car, furniture and other trappings. Thank you credit card companies
> with 10 offers per month in the peak insanity period. I am sure the
> foreclosee has become "enlightened" and lightend in the wallet.

Oct 15 01:39 AM

[kcroyals77:]

"The only "safe" way to purchase a house is to have enough capital to be fully hedged in the derivatives markets. Too bad not many homeowners even know this is an option."

Such a scheme as advocated by another in here would not work either because those that sell the derivatives (like AIG) would not have enough capital to pay the homeowners since most that sell derivatives are very highly leveraged.

Currently the Fed is treating the housing market like the market is too big to fail. FHA, FDIC, the Mae's , the Fed;s own balance sheet have so many trillions in mortgages that they will do anything to avoid collapse. Of course the result is going to be inflation and ultimately alot slower growth but I guess they figure that is better than a collapse.

What I wonder is if an early collapse would be cheaper than one that continues underwriting poor loans? I guess we will find out.

Oct 15 05:04 AM

[Stephen Kanitz:]

No one mentions Mortgage Interest Tax Deductions ? Dont they realise that allowing NOMINAL interest rates on mortgages to be deducted from taxes, is a double incentive and has made America most indedted nation in the world, with the lowest downpayment financial system in the world. And it seems not one is learning from governments mistake. Another disaster 20 years from now.

Oct 17 02:17 PM