The catastrophic effect of government sanctioned home ownership

The catastrophic effect of government sanctioned home ownership

You’ll always remember your first market crash’, a former co-worker told me in September 2008.

Every morning we’d come in, turn on Sky News, and listen quietly as the presenter relayed what had happened in the US and European markets overnight.

Then we’d spend the rest of the day watching the Aussie market tick down.

My screens were a sea of red.

Day after day. For months on end…

Back then, we knew the markets were crashing.

We understood major US banks were going bankrupt.

We accepted that subprime debt and reckless derivative trades were to blame.

Rampant banking greed was to blame.

But the true causes of the subprime financial crisis were much deeper than that…

Built in five years

It took years for the real catalyst behind the subprime crisis to be revealed. 

When the markets had settled down in 2009, and the worst was over, the analysis begun.

Things weren’t as black and white as the headlines led us to believe.

I’ve written about the actual trigger here.

A succession of calculated steps by the US government, and opportunistic Wall Street players exploiting those policies, is responsible for the US property bubble and subsequent crash.

It all began with a well-meaning government thought bubble in the early 2000s.

Then US President George Bush announced that he would do what it takes to get more Americans into home ownership.

He created a bunch of policies that would make home buying easier — especially among minority groups. On 15 October 2002, he said:

We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.

And so he did.

Tax incentives for home ownership were created.

Bush put pressure on Fannie Mae and Freddie Mac to reach new targets for low-income mortgages.

Once it became obvious that rising property prices were preventing people from saving a deposit for a new home, Bush wanted more incentives.

He convinced Congress to come up with some US$200 million per year to help first home buyers save a deposit towards their first home.

Bush also pushed harder on the banks. Next minute, ‘no payment down’ mortgages were a thing.

New entrants, more credit and blatant optimism drove US property prices.

And when that wasn’t enough, Bush said, ‘Corporate America has a responsibility to work to make America a compassionate place.’

Bush then encouraged mortgage brokers and other lenders to get creative with their offerings to potential mortgagors.

Don’t get me wrong. As Bush pushed for more debt to be lent, he was also concerned that financial regulations were getting a little too loose.

However, when he pressed Congress to toughen up the regulations, Congress pushed back, stating things were fine.

While Bush grew increasingly worried about the risky debt held by Fannie Mae and Freddie Mac in 2006, his concerns were dismissed by his advisers. The guy in charge of overseeing them, and other banks, said the companies were sound.

This all happened less than 12 months before both Fannie Mae and Freddie Mac went bankrupt, and the government was forced to bail them out.

To compliment all of this loose lending and ill-conceived government planning, bankers did what bankers do best.

There was a Wild West vibe among the banks.

They could lend to anything with a heartbeat and a property title.

Interest-only and NINJA (no income, no job and no assets) loans flourished in a way no politician ever expected.

All these questionable debts were then repackaged, resold, and broken up and leveraged further by other banks…

..which then tweaked them into unrecognisable forms and placed them in creatively named high-yielding investments for unsuspecting retail investors.  

Wall Street seized on this opportunity to make a buck.

Their clients got rich and banking CEOs got richer.

This entire US property bubble and catastrophic market crash was built in five years…and undone in one.

All thanks to genius financial engineering and a political push for property ownership.

Australian government coerces banks

Why bring this up now?

The subprime story is done and dusted.

We’ve moved on, haven’t we?

Perhaps not.

Because it seems Australian politicians are hell-bent on recreating the exact steps the US government took.

In the final weeks of the lead-up to the Australian election earlier this year, Prime Minister Scott Morrison announced that he, too, would do what it takes to get more people into the property market.

The Liberals retained power.

Earlier this week, Australia’s newly appointed Governor–General David Hurley said the following in his maiden speech:  

My government believes in home ownership and seeing more Australians in their own homes.

My government will use the dividends of a strong economy to make it easier for more Australians to buy their first home.

It will introduce the First Home Loan Deposit Scheme to help people who want to buy their home to access finance without having to save a 20 per cent deposit, so they can get into the market more quickly.[2]

Meanwhile, Assistant Treasurer Michael Sukkar has said he will ‘press’ both APRA and ASIC — our financial regulators — to loosen up bank lending.

Sukkar told The Australian Financial Review that it’s more important to ‘get credit flowing’ to potential home borrowers than take prudent steps to reduce lending. He also wants to ‘bring together’ the banks, APRA and ASIC to streamline the mortgage process.[3]

Subprime Down Under?

APRA was late in taking steps to enforce interest-only lending restrictions.

Despite putting in place investor loans and interest-only caps in 2014, APRA only began enforcing this in 2017.

Even though property prices began to slip in the second half of 2017, Aussie banks didn’t show concern about their property loans until the Banking Royal Commission put the spotlight on them last year.

Effectively, the Australian government is pressuring our financial safeguards and private banks to support its agenda.

To make matters worse, the latest moves from the Aussie government have uncanny parallels to the events that led to the US subprime financial crisis.

The biggest difference between the two?

The US$400 billion in written-off subprime loans almost crippled the entire global financial system.[4]

Australia’s mortgage debt will only cripple us.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia