I’m reading this new book by economist Thomas Sowell — The Housing Boom and Bust.
Dr. Sowell notes that it was government intervention and regulation that pushed lenders to reduce their standards before extending mortgage loans. These riskier loans aka subprime loans created a financial house of cards that came tumbling down, sending the world into recession.
Behind all the esoteric securities are monthly mortgage payments from millions of home buyers. When those payments stop coming, no government intervention can save the investment structure built on those payments.
So why did so many mortgage payments stop coming? Because mortgage loans were made to more people whose prospects of repaying them were less than in the past. Political pressures to meet arbitrary lending quotas led to riskier lending practices.
Land-use regulations that caused rocketing home prices led politically to crusades for “affordable housing” through mortgage lending quotas and risky lending practices. Solving one problem here leads to more problems.
What would be the results of a ceiling on interest rates? Lenders would then only have an incentive to lend to those whose prospects of repayment are sufficiently high to make lending profitable at the imposed interest rate.
Loan applicants are rarely “qualified” or “unqualified.” Risky borrowers at 5% interest may be worth lending to at 10% interest. Those extra interest rates would cover the increased risk of default.
Thus interest-rate ceilings make it more difficult for poor people to get loans. If certain racial and ethnic groups are disproportionately poor they will be disproportionately represented among those who are turned down for loans.
The free market responded quickly to the housing bust by dramatically reducing interest-only loans, liar loans, no-down-payment loans and the like, but politicians are still peddling the same stupid ideas that got us into this mess.
Nothing — not even home ownership — is a good thing categorically. Home ownership has benefits but it also has costs.
Why did banks go broke in such massive numbers in the 1930s? Because most of them were in states with laws that prevented these banks from having more than one location. A bank with branches in different parts of the economy is more likely to ride out problems. Politicians created this problem, then created the FDIC to make sure no depositors (up to $100,000) lost money when a bank went bust.
Canada did not have one bank failure because it has big banks with locations across the country.
In the early 1980s, Americans spent 30% of their income on housing. In 1998, that figure was 17%. In 2005, it was 22%. What created the illusion of a nationwide problem of affordable housing was skyrocketing home prices in areas such as coastal California with multiplying land-use regulations.