The housing mess, as some may assume, is not simply a product of stock market failure and greed.
"The government helped stoke the mania," Northwoods Bank CEO Mark Hewitt explained to a group gathered for a forum on the issue.
"A housing bubble is not unusual," Hewitt said. "But this is the first time it's occurred on a national level."
Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of loans going to low and moderate-income borrowers, he said.
In 1996, the Department of Housing and Urban Development (HUD) required 12 percent of all mortgage purchases by Fannie and Freddie to be "special affordable loans," he explained. These loans are typically granted to borrowers with income less than 60 percent of their area's median income.
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That goal increased to 20 percent in 2000, 22 percent in 2005 and 28 percent in 2008.
Fannie and Freddie, which are Government- Sponsored Enterprises (GSE), met the goals every year, funding hundreds of billions of dollars in loans. Many were sub-prime loans (to borrowers with low credit scores) and adjustable rate loans, and made to borrowers putting down less than 10 percent, according to an article in the Wall Street Journal, to which Hewitt referred.
"Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run," the Wall Street Journal asserts. "It was political free lunch."
The Community Reinvestment Act (CRA) was "strengthened" in 1995, causing an 80 percent increase in loans going to low and moderate-income families, Hewitt said. The CRA encouraged traditional banks to serve both the bottom line and the common good.
The Taxpayer Relief Act of 1997 increased demand for real estate by expanding the availability and size of capital gains exclusion from $125,000 to $500,000, Hewitt said. "There was no age limit and it was no longer a one-time exclusion."
The Federal Reserve - or Fed - created easy and cheap money to combat the recession after the tech bubble. U.S. Central Banking System funds hit a 40-year low of 1.25 percent.
"Investment banks and mortgage brokers entered the market in a big way," Hewitt said. "Mortgages originated, were pooled, packaged and sold on Wall Street.
"These factors dramatically increased the demand for housing," he said. "Between 1997 and 2005, the average price of a home more than doubled in the U.S.
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"With ever rising housing prices creating a speculative bubble and the government's push to increase home-ownership rates to historic highs, the sub-prime market took off," Hewitt said.
"There was a dramatic weakening of underwriting standards for sub-prime loans," he said. "Securitization passed the risk from the originator to the investor.
"Lenders over-lent, builders overbuilt and buyers overpaid," Hewitt said.
"The hidden cost has been hundreds of billions of dollars funneled into the housing market, instead of more productive assets," the Wall Street Journal notes.
Federal Reserve Chairman Ben Bernanke has stated once the "crisis at hand" has been dealt with, a "stronger, more resilient and better regulated financial system" must be developed.
It's a sentiment echoed by Secretary of the Treasury Henry Paulson.
Community banks, like Northwoods, are mostly funded by local deposits and make loans locally, Hewitt explained. "We hold our own portfolio and don't lend to the outside market."
