There are both Donkey Clan and Elephant Clan partisans who try to make every problem that citizens face into something that is the fault of the other Clan. Most despicable are those who fain intellectual and academic objectivity in determining blame.

Blaming the Donkey Clan for causing the mortgage crisis and triggering the financial meltdown because they connived to loan mortgage money to unqualified home buyers is a prime example.

The rhetoric makes for superficially alarming partisan arm waving but has no substance. The core reasons for the financial meltdown are the responsibility of those in both Clans. The basic rules to achieve a sustainable economic trajectory are spelled out in IT IS ELEMENTARY.

First to clear the air:

Yes, lowering the loan standards for home buyers to qualify was done for political purposes. It was done by both parties and has grown worse in recent years with no Agency oversight

Yes, governance practitioners were trying to beef up home ownership on the assumption it was good for those at the bottom of the Ziggurat and was good politics.

Yes, ACORN and others may have undertaken illegal activities (See note on this topic in IT IS ELEMENTARY)

But get real:

If a prospective buyer got a loan that they could not afford and the dwelling is sound when it is foreclosed is a personal / Household tragedy.

But what happens? The bank / Fannie / Freddie resells the dwelling to someone else. If the dwelling and its Dooryard, Cluster, Neighborhood, Village and Community have real value the financial system takes a hit for administrative costs and moves on. This happens all the time.

If there are a lot of those foreclosures in any one component of a Community it can pose a significant problem because there is a problem with the Dooryard, Cluster, Neighborhood or Village.

What is a nation-state tragedy is that from the start Fannie and Freddie did not set standards — as FHA (and later VA) have done since the 30s — for the quality of the dwelling and its location, design, context and services.

There has been much that was not good about the cumulative, Regional impact of those old FHA standards but there were standards. By the time Fannie and Freddie came along there should have been real standards that supported functional human settlement patterns at the Unit, Dooryard, Cluster, Neighborhood, Village and Community scales.

Standards were imperative because of the amount of money pumped into the housing market. Without standards, those billions of dollars leveraged dysfunctional settlement patterns. The lack of standards and intelligent regulation resulted in massive “Wrong Size House in the Wrong Location” problems.

Call it subsidy, call it bad investment, call it what you please, this vast oversupply of money distorted the market and resulted in dysfunction at the Community, Subregional and Regional scales.

Now add bundling, derivatives, no oversight, greed, and global trading – the result is an InterNational disaster.

Since 1973 Agency and Enterprise leadership in the US of A – aided and abetted by both political parities – has been moving toward an economy based on burning up natural capital, importing energy and cheap labor and borrowing from foreign lenders.

In “IT IS ELEMENTARY,” we noted that if a nation-state wants to expand dwelling ownership then:

1) The Houses need to be near Jobs and Services and sized for those who need shelter rather than encouraging the Wrong Size House in the Wrong Location.

2) Agencies, Enterprises and Institutions must discourage speculation on home value.

Both 1) and 2) are directly related to that fact that there is too much land held for urban land uses and that which has been developed is dysfunctional.

Over the last 60 years owner occupied dwellings have increased in value at about the rate of inflation. When the current wave a write downs is complete the values will be below inflation.

It is worth repeating that the internal rates of return on many investment strategies are much higher than on real estate, especially owner occupied dwellings. Depending on ones Household circumstance it may be wise to buy a dwelling for living.

From a financial perspective, it is almost never wise to buy an owner occupied dwelling as a speculative investment. Speculating on ones dwelling degrades the living experience, encourages Abandonment (See Wild Abandonment” 8 Sept 2003) and most speculators end up losing money. One hears about the bonanzas in house speculation hyped by real estate agents not from careful analysis of regional data.

It is important to note that the excuse that impudent loans were created as a way to break “red lining” is a red herring. Almost every upscale component of urban fabric was at one time a place that could be “red lined” — Georgetown, College Hill, Society Hill, Old Town, Vieux Carrie, the list is endless.

What is needed to enhance residential settings is a Regional strategy to improve settlement patterns Region-wide.

Implementation of this strategy may entail making loans to some who would not normally qualify for a mortgage but the loan decision must be made within the context of a strategy to ensure that the Unit, Dooryard, Cluster, Village, Community is a good investment.

The mortgage crisis did not arise because of loans made to prospective home owners with a high risk of defaulting. A foreclosure of someone who had poor credit may be a risk worth taking and if they default it can be a Household tragedy, it is not a banking Enterprise tragedy. If the dwelling is in a functional location, is well built and not too big there are many of potential buyers who desire shelter.

We have pointed out for years that the real problem with Fannie and Freddie is not the bad accounting or insane compensation but rather that they pumped billions into dwellings that were held to no settlement pattern standards beyond municipal controls.

The first stage of the mortgage problem is tens of thousands of bad loans on dwellings that cannot be resold for anywhere near the loan amount. This is compounded by fraud induced by front line lenders who do not have to worry about the loan going bad because Fannie and Freddie would buy it and roll it into a package to sell to gamblers. Add to that the fabrication of definitives to ‘spread the risk’ and you have the first leg of the financial ‘meltdown.’


Note to Jim Bacon: Swift Boating the Mortgage Crisis is a Commonwealth of Virginia issue because:

1) This is a prime example of a case where the logical Community and Regional responsibility has been overwhelmed by federal action

2) Part of the Commonwealth is in the National Capital Subregion where these policies are made

3) A lot of the Swift Boating is coming from partisan Institutions with addresses in the Commonwealth.

4) The governance of the Commonwealth has done nothing to help citizens address reality.

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  1. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake


    FHA is an agency that Insures mortgages. They have loan standards to ensure the properties are worth the insurance value. Unfortunately they have thrown those standards out the window with Hope for Homeowners.

    Fanny and Freddie are corporations that act as a middleman between mortgage issuers and mortgage investors. They bundle and distribute in bulk but do not guarantee value. Their problems started when they decided to expand into melamine laced mortgages.

  2. Groveton Avatar

    “It is worth repeating that the internal rates of return on many investment strategies are much higher than on real estate, especially owner occupied dwellings. Depending on ones Household circumstance it may be wise to buy a dwelling for living.”.

    Well … sort of.

    It’s all about leverage. Let’s say I have $100,000 of “cash money”. What can I invest in?

    I can get $200,000 worth of stock assuming that the margin percentage is set at 50% (usually as high as it goes), I can qualify for margin from my broker and I am willing to take on margin. Let’s say my investmenst go uo 10% per year. At the end of 5 years I would have $322,102. Now. let’s say I buy a house for $1,000,000 with 10% down. Only the house is going up 5% per year. At the end of five years my house is worth $1,276,821.

    I have made a profit of $122,102 on the stock. At 10%.

    I have made a profit of $276,821 on the house. At 5%.

    And … I lived in the house – indtesd of payimh rent.

    And … the interest on the home loan was deductible.

    Mr. Risse – you can get what you want. But you have to do some things:

    1. Downpayment percentage on homes the same as margin percentage on stock accounts.

    2. No deduction for home loan interest.

  3. I still do not see the linkage between the mortgage crisis and wrong size/wrong location.

    and.. further.. I see nothing in the reporting to indicate that the reform effort will address wrong size/wrong location either.

    How can it be that virtually no one has made this point?

    Is it a MM / Paulson / Frank / Bernanke conspiracy?

  4. things you should know about your Congressmen:

    In addition to them having guaranteed access to health insurance regardless of pre-existing conditions…

    their 401K is known as the Thrift Saving Plan – and one of the nifty things that Federal Employees including your Congressmen can do is – within, 24hrs, a request to move all of your 401K funds from the stock market to Government Securities.

    Now.. wouldn’t it be nice to see a list of all Congressmen who moved their funds – and when?

  5. “and one of the nifty things that Federal Employees including your Congressmen can do is – within, 24hrs, a request to move all of your 401K funds from the stock market to Government Securities.”

    That’s a relatively new feature (within the past 5 years) and probably most of congressmen would end up using it to lock in the loss by moving funds after the S&P index fund has dropped. The current benefits package pales in comparison the old CSRS system.

    I too see no evidence of anything in this post. Just the usual a collection of random speculation that all leads to "functional settlement patterns."

    I could provide evidence of (1) ACORN and Democrat caucus members pimping zero-down, no credit mortgages (with a few notable GOP accomplices) for years (evidence). (2) The assets have lost value because loose monetary policy and interest rate manipulation (blame the white house here) inflated the dollar value of the homes beyond what was sustainable — which fed problem #1. It has absolutely nothing to do with square footage or the desirability of the homes themselves.

    You have an asset that, say, was bought zero down for $500,000 but after the bubble burst is worth $300,000. That $200k loss is leveraged into a far greater loss by being packaged and sold as a security — multiplying the real dollar loss. It’s pretty obvious that the ultimate cause of the mess was the first sale at zero down, and the blame for that can be assigned with certitude.

    The zero-down stuff is 3/4 Democrat and 1/4 GOP. The only people who properly identified the problem and yelled STOP while this was going on were: (a) the Wall Street Journal editorial page and (b) Rep. Richard Baker (R) (evidence).

  6. I forgot to add: the same unsustainable bubble profit mentality fuels the houses of cards that are Transurban and Macquarie.

    Please refer to this note in ten years when the Commonwealth is forced to bail out the Aussies.

  7. Anonymous Avatar

    “What is needed to enhance residential settings is a Regional strategy to improve settlement patterns Region-wide. “

    So much for the free market.


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