The housing boom post WWII was a huge event. We had families with baby boomer babies and as a result, increased demand for single family homes. This, along with less need for farm land due to improved farming methods and the sprawling rural roads built via the New Deal, led to suburbs. Suburbs were a practical necessity. Later, add in the race riots (which I'll get to) and the burbs was the place to be.
The government helped build this middle class, a society of land owners. One that was fairer than the "Jungle" of Upton Sinclair. One in which the average man was no longer a slave to the land owners. One in which Unions would thrive. One in which we no longer needed violent revolution since we all had some skin in the game. It was a good plan for the "haves" and the "have-nots."
The government helped subsidize the home building industry. Mortgages were "safe as houses" from a lender/banking perspective since the collateral (the house) would be there even if the loanee ran away. You as the lender would still have not lost everything since the collateral would remain. You could recoup your money if you had lent it to a deadbeat. Shylock doesn't need to ask for a pound of flesh if he has a house as collateral.
Let’s make it spicy, or racy
Now lending practices redlined African Americans. Blacks who had worked in agriculture had to find a new career. These new jobs were available in urban settings. As far as hiring discrimination and the like, I won't get into that here. The main point is that this "home ownership" party was for whites...for the average white man. There are literally walls in Detroit running along 1950s lending zones...redlines marked by physical walls. This was fuel that helped fire the race riots and white flight. We'll breeze by the Civil Rights era and say that the Civil Rights Movement won, or is winning.
Making Amends, Promises to Keep
Let’s fast forward: during the Clinton administration, HUD was asked to expand the home ownership party. To make amends for the post WWII home ownership party that had purposely omitted African Americans. Sure we called these "Urban development initiatives" and so on, but let’s call it what it was: attempted reparations.
Pressure to make loans to low income neighborhoods was encouraged by the government. Banks said OK, since mortgages are "safe as houses." The government helped Fannie & Freddie make many of these loans. I think the number is over 50%. Anyway, this wasn't a call for permissive lending or predatory lending, but permissive and predatory lending happened.
Compounding this was the repeal of depression era legislation, the Glass-Steagall Act. This deregulated banks. The firewall between investment banks and your brick and mortar commercial banks was lifted. Your local bank no longer had to maintain high levels of solvency and funded liabilities; they could now leverage their holdings...they could bet with your savings account. What's a safe bet? "Safe as houses."
We move ahead to the 2000 Commodity Futures Modernization Act, which had a provision that exempted derivatives like credit default swaps from regulation. Bingo for your average white collar employee, bundle them up, securitize them, and sell them. Instant AAA rated annuities for sale. AAA because these annuities provided cash flow from houses....and hey, it’s "safe as houses." I could make a bet in houses, sell the loan, then make another bet, and repeat ad infinitum. Heck, if I know I'm going to win the bet, I'll borrow money to bet more and win more! We all did this; house flippers, investment property trusts, and banks.
Our government was BEGGING banks to continue betting in the homeowner strategy. In fact, the government asked banks to UP their bets. The reason? To create a society of land owners. To shed our history of feudalism. To no longer have a population of slave employees. A population of uncontent serfs. And this time, we'll include everyone.
Pop goes the bubble
And so here we are. We've learned that houses can't run away, but they can sure be overvalued, and they aren't no-brainer bets. We have a major home ownership party/gambling hangover, and some of us are too hung over to make it home. We have people who purchased their home for $250,000 but is now only worth $80,000. Why not walk away from a mortgage like that? There's no equity in the home yet since it was 100% financed. The only thing that you’re walking away from is a financial ball and chain. Each time this happens, the bankers wince as they calculate their gambling losses, which is so painful since every dollar they bet was leveraged to the teeth. Lehman Brothers was leveraged 1:32. So every dollar they had, they made a $32 dollar bet with. So every dollar they lose from someone not paying a mortgage, they actually lose $32.
The biggest Epoch in U.S. history since WWII is NOW
This is a defining moment for several generations of U.S. citizens, some not yet born. The U.S. pulled itself out of the great depression via WWII. We were left with a military industrial complex, for better or worse.
We have an opportunity to define our own savior. The ARRA (i.e. "stimulus") is not a stimulus. It’s a life-line and down payment.
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