Sunday, November 10, 2019
Collapse of the Housing Market.
Collapse of the Housing Market. The purpose of self-governing is to make government work better by allowing people to help govern themselves. And the people do that by electing Representative to talk for them, to protect life, liberty and personal properties. Ã¢â¬Å"The absolute rights of individuals may be resolved into the right of personal security, the right of personal liberty, and the right to acquire and enjoy propertyÃ¢â¬ ¦ and that consists in being protected and governed by laws made, or assented to, by the representatives of the people, and conducive to the general welfareÃ¢â¬ (James Kent, Commentaries on American Law, Lecture XXIV).Yes I believe that the congress lived up to protect life, liberty and personal properties, because they used Ã¢â¬Å"Ã¢â¬ ¦Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consiste nt with the safe and sound operation of such institutionsÃ¢â¬ ¦Ã¢â¬ (Community Reinvestment Act, October 12, 1977) They did this so everyone could get a house. They also wanted to get more people into house so the economy could move.Because of that the demand for houses increased and so did the prices and most people were not able to afford and could not get a loan form the bank. Because of that the government Ã¢â¬Å"Ã¢â¬ ¦in 1995 gave the CRA serious teeth: regulators could now deny a bank with a low CRA rating approval to merge with another bankÃ¢â¬âat a time when the arrival of interstate banking made such approvals especially valuableÃ¢â¬âor even to open new branches. Complaints from community organizations would now count against a bankÃ¢â¬â¢s CRA rating. Ã¢â¬ (Lawrence H. White, Ã¢â¬Å"How Did We Get into This Financial Mess? Ã¢â¬ Cato Institute, November 18, 2008). HUD also Ã¢â¬Å"actively pushed Fannie Mae and Freddie Mac into backing the enormous expansio n of the nonprime mortgage marketÃ¢â¬ ¦. To fund their enormous growth, Fannie Mae and Freddie Mac had to borrow huge sums in wholesale financial markets. Institutional investors were willing to lend to the government-sponsored mortgage companies cheaply Ã¢â¬ ¦ because they thought that the Treasury would repay them should Fannie or Freddie be unable. Ã¢â¬ (Lawrence H. White, Ã¢â¬Å"How Did We Get into This Financial Mess? ,Ã¢â¬ Cato Institute, November 18, 2008).Congress tried to help the people by putting out more funds like The American Dream Down payment Initiative (ADDI). ADDI helped first time house buyers by paying their down payment or the closing cost. This helps more people to buy a house. Ã¢â¬Å"The American Dream Downpayment Assistance Act authorized up to $200 million annually. Funds were appropriated for fiscal years 2004-2008Ã¢â¬ ¦. ADDI helped first-time homebuyers with the biggest hurdle to homeownership: downpayment and closing costsÃ¢â¬ The original pu rpose of the president was to carry out any decisions that congress made, but the president was not independent of Congress.Congress still remained completely in charge of how their decisions were carried out. The president is part of the executive who was to look up to congress so there is not a person making all the decision. All the powers of government, legislative, executive, and judiciary, result to the legislative body [in the Virginia Constitution of 1776]. The concentrating these in the same hands is precisely the definition of despotic government. It will be no alleviation that these powers will be exercised by a plurality of hands, and not by a single one. 73 despots would surely be as oppressive as one. Ã¢â¬ (Thomas Jefferson, Notes on the State of Virginia, Query 13, 1784). But when it came to the housing market the president/ executive department and agencies did not live up to their purpose in their actions in the area of housing. For example Ã¢â¬Å"President Bill Clinton's HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. Ã¢â¬ (Carol D.Leonnig, Ã¢â¬Å"How HUD Mortgage Policy Fed the Crisis,Ã¢â¬ Washington Post, June 10, 2008). In 1999 the Clinton administration viewed Fannie Mae as a hazard trying to prevent the housing bubble and collapse. Ã¢â¬Å"Treasury Secretary Lawrence Summers issued a warning, saying, Ã¢â¬Å"Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly. Ã¢â¬â¢ It was a signal moment. An administration official had said in public that Fannie Mae and Freddie Mac could be a hazardÃ¢â¬ (Ã¢â¬Å"How Washington Failed to Rein in Fannie, Freddie,Ã¢â¬ Washington Post, September 4, 2008).The Clinton administration really didnÃ¢â¬â¢t like Fannie because they tr ied to Ã¢â¬Å"discouraged Fannie and Freddie from buying predatory subprime loans. Department of Housing and Urban Development called for Congress to enact legislation to Ã¢â¬Å"prohibit the purchase by each of these entities of predatory loans. Ã¢â¬ Fannie Mae was designed to help people. The sole purpose of them were to get banks to sell loans to people that would not always be able to get loans and then Fannie and Freddie would buy those loans form the bank giving back the money back to banks. The U. S. government had created Fannie Mae in 1938 to buy mortgages from banks that loaned money to homebuyersÃ¢â¬ ¦. It was a Depression-era creation designed to ease financing costs for borrowers still recovering from the economic devastation of the 1930sÃ¢â¬ (Gretchen Morgenson, Reckless Endangerment, 13). To bring compotation and have verity the government created Freddie Mac so more loans could be bought and more people would invest. Ã¢â¬Å"Ã¢â¬ ¦from an agency of the governme nt into a partially private entity that issued common stock to public investorsÃ¢â¬ ¦.The presidentÃ¢â¬â¢s idea was to get the companyÃ¢â¬â¢s liabilities off the governmentÃ¢â¬â¢s balance sheetÃ¢â¬ (Gretchen Morgenson, Reckless Endangerment, 13). To get Fannie and Freddie get going on it own, they would sell stock where people would be able to by one of loans that Fannie and Freddie would buy form the banks, but the good thing was if the person was not able to pay back to Fannie and Freddie, the person who bought the loan would get paid back form the government. That got more people to invest in Fannie and Freddie. To fund their enormous growth, Fannie Mae and Freddie Mac had to borrow huge sums in wholesale financial markets. Institutional investors were willing to lend to the government-sponsored mortgage companies cheaply Ã¢â¬ ¦ because they thought that the Treasury would repay them should Fannie or Freddie be unable. Ã¢â¬ (Lawrence H. White, Ã¢â¬Å"How Did We Get into This Financial Mess? ,Ã¢â¬ Cato Institute, November 18, 2008). Around 1999 Fannie and Freddie became so big that the government was losing more money then making money.The treasury did not like that they had to pay back to the people who invested in Fannie and Freddie. They went in public saying that they are Ã¢â¬Å"hazardÃ¢â¬ . Ã¢â¬Å"In the fall of 1999, Treasury Secretary Lawrence Summers issued a warning, saying, Ã¢â¬Å"Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly. Ã¢â¬â¢ It was a signal moment. An administration official had said in public that Fannie Mae and Freddie Mac could be a hazardÃ¢â¬ (Ã¢â¬Å"How Washington Failed to Rein in Fannie, Freddie,Ã¢â¬ Washington Post, September 4, 2008).After this one could see how strong Fannie and Freddie has become and more people decided to investigate but were never able to bring it up and who did were sued and lost a lot. Ã¢â¬Å"Gensler and ot her Treasury officials feared the companies had grown so large that, if they stumbled, the damage to the U. S. economy could be staggering. Few officials had ever publicly criticized Fannie Mae and Freddie Mac, but Gensler concluded it was time to urge Congress to rein them inÃ¢â¬ ¦.The bill failedÃ¢â¬ (Ã¢â¬Å"How Washington Failed to Rein in Fannie, Freddie,Ã¢â¬ Washington Post, September 4, 2008). When the economy downturn in 2001 due to lots of mortgages not paid and more foreclosed houses, the Federal reserve tried to bring it up by expanding the U. S. money supply the goal was to bring up the economy by putting money into the economy and people start spending. Ã¢â¬Å"In the recession of 2001, the Federal Reserve System, under Chairman Alan Greenspan, began aggressively expanding the U. S. money supplyÃ¢â¬ ¦.The expansion was accompanied by the Fed repeatedly lowering its target rate for the federal funds (interbank short-term) interest rate. The federal funds rate began 2001 at 6. 25 percent and ended the year at 1. 75 percent. Ã¢â¬ Ã¢â¬ (Lawrence White, Ã¢â¬Å"How Did We Get into This Financial Mess? ,Ã¢â¬ Cato Institute, November 18, 2008). But this did not help, low interest rates affect the behavior of investors. They stopped buying bonds and The Federal Reserve BoardÃ¢â¬â¢s decision to slash interest rates to propel the economy was hurting investors who lived on the income generated by their holdings. In 2001, mortgage lenders Ã¢â¬ ¦ understood that the low interest-rate environment was driving investors to securities that yielded more than Treasury bonds and other relatively conservative fixed-income instruments. Ã¢â¬ Due to less people-buying bond, the federal reserve made the interest rate low but they had to raise the house price to balance it. That way people saw this as in opportunity to buy a house with low interest rate. Example form 26D. In 2005 federal reserve desperately made the discount form 4. to 6. 5 to help get the house market rolling again. Ã¢â¬Å"In August , the Federal Reserve Board increased its discount rate to 4. 5 percent, up from 2 percent the summer before. The Fed was finally trying to tap on the brakes of a runway real estate marketÃ¢â¬ (Gretchen Morgenson, Reckless Endangerment, 286) What the feds tried to fix by getting more blacks to buy because of people getting on them form being racist kicked them in the butt when more than half had there house foreclosed. In October 1992, Ã¢â¬Å"Mortgage Lending in Boston: Interpreting HMDA DataÃ¢â¬ was published by the Boston Fed. Its authors were [Alicia H. ] Munnell, Lynn E. Brown, and Geoffrey M. B. TootellÃ¢â¬ ¦. Racial bias by mortgage lenders, Munnell and her colleagues wrote, not only existed it was pervasive. The HMDA data showed that black and Hispanic loan applicants were far more likely to be rejected by banks than were whites. The rejection ratio for minorities was 2. 8 to 1 compared with white applicantsÃ¢â¬ ¦ . There was only problem.The methods used by the Boston Fed researchers to prepare their report were flawedÃ¢â¬ ¦. The analysis did not consider whether an applicant met a lenderÃ¢â¬â¢s credit guidelinesÃ¢â¬ I was happy that congress wanted to help anyone who wanted a house, there intensions were good by creating Fannie and Freddie but when people figured out that they can buy loans form Fannie and Freddie will be payed back when they know the owner of that mortgage will never be able to pay back. More community lost there value due to this.