April 10, 2019
How Did a 1992 Law Contribute to the Financial Crisis?
When the Federal Housing Enterprises Financial Safety and Soundness Act was passed in 1992, it was with the most optimistic and admirable goals: to increase the number of Americans who were able to achieve the dream of homeownership. Though the homeownership rate at the time was 63.9, Congress and President Clinton felt that too many Americans—particularly lower-income Americans—were excluded from the market by rigidity in the banking sector. So the Act mandated that the Bureau of Housing and Urban Development (HUD) designate goals for the major government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—regarding lower-income areas that were considered underserved by bank lending. Prior to that time, the GSEs were mainly involved in creating purchasing leverage for prime credit loans, but the goals created by HUD pushed the GSEs into the subprime market, requiring that they bringing an increased number of potential homeowners with risky credit histories and debt-to-income ratios (DTI) to the closing table.
Yet little was done to simultaneously increase the supply of housing—particularly single-family housing—in the marketplace.
This resulted in an increased demand on a grand scale over a supply that was unable to keep up. Thence the precipitous rise in housing prices, which snowballed over time, culminating in the prices we saw in 2006, 2007, 2008: the bubble.
After the bubble collapsed, home values plunged 30 to 40 percent. Homeowners who were of limited financial means and whose equity had not built found themselves unable to refinance or to sell.
Given that when Lehman Brothers collapsed a full half of existing home loans in the United States—to the tune of around 28 million—were either subprime or otherwise high risk, and that among these nearly 75 percent were facilitated through government programs (mainly Fannie Mae and Freddy Mac), it’s nearly impossible to avoid the conclusion that it was all those subprime loans fostered by the Act that that led to so many defaults. They were bound to, given the heightened risk inherent in such behavior. And, seeing so many defaults, investors began to sell off their mortgage-backed securities at a precipitous rate—and the recession began.
But sometimes a home loses its value to a homeowner in more specific ways–ways related to the property itself and issues that arise out of its past ownership. At Topouzis & Associates, P.C., we are experts at ferreting out and disposing with problems that may occur with property title in advance of closing. We take pride in the great amount and quality of experience we bring to the closing table in Rhode Island, Massachusetts, and Florida. Contact us if you want a partner in your property closing—one who makes everyone involved feel like family.