We had a huge real estate boom between 2000 and 2006. We’re now paying the bill for cheap money and lack of regulation for new financial vehicles. There were so many financial innovations and so many ways to buy and sell mortgages that regulators could not keep up. Europe is socialist but it didn’t see this recession coming and they didn’t adequately regulate mortgages either.
The US thinks home ownership is as all American as apple pie and motherhood and subsidizes it to an absurd degree to the detriment of our overall economy.
The Bush administration and many members of Congress pushed for an “ownership society,” in which a larger share of people owned their own homes. One way to achieve this was to find ways to loan to people who had long been considered bad credit risks because they lived in neighborhoods where housing values were at risk or because lenders considered them to have inadequate capacity to repay the loans. Some of the efforts were designed to correct the discrimination in lending to minorities that many once perceived to be commonplace.
Fannie Mae and Freddie Mac, the government-sponsored entities established to create markets for mortgage loans, were given more incentives to purchase subprime and alt-A mortgages. The subprimes are the highest risk loans; the alt-A mortgages carried less risk than the subprimes, but were risky nonetheless because they lent to borrowers who provided minimal or no down-payments and were not required to document their incomes and assets. Fannie and Freddie eventually bought 44 percent of the subprime loans in 2004, 33 percent in 2005, and 22 percent in 2006. The plan was for Fannie and Freddie to use their rigorous standards and procedures to monitor and ensure that these risky loans did not default. The goals of the ownership society were met to some degree as home-ownership rates rose from 67 percent in 2000 to an all-time high of 69 percent in 2004 and 2006.