Why the Housing Market Bubble is About to Burst

James Bailey * Z3 News

We are being lied to. Contrary to what we are being told repeatedly by the mainstream media and our government leaders, the housing market has not recovered from the 2008 collapse. The truth is the worst part of the crisis is still ahead of us.

Any signs of life in the housing market are not evidence of a recovery, but evidence that the market is in a bubble, artificially inflated by the Federal Reserve’s purchases of $85 billion per month in treasuries and mortgage backed securities. The life support system is hiding the fact that our vital signs are failing.

The American people are being fed a steady diet of confusion over what really caused the housing market to collapse in 2008. The popular narrative is to blame it on greedy bankers and Wall Street investors. That same story has been told repeatedly in countless news reports, interviews, documentaries, and even an HBO movie called “Too Big to Fail.” In every case, the reporters have conveniently left out the key historical facts because they don’t support their flawed conclusion.

It is very hard to tolerate the baloney we are being sold. It is especially hard to tolerate it from our government leaders, because they were the real culprits behind the 2008 collapse. Instead of being honest and taking responsibility for their own failures, they blame other people. It is disgusting. There seems to be no limit to their lies and hypocrisy, whatever it takes to promote their own careers. They have become so corrupted by their own selfish ambitions that they have betrayed the people they are supposed to be serving.

All the confusion has caused us to misunderstand what caused the crisis and what we must do to fix it. As a result, we have failed to fix the problems and have even taken steps to make the problems much worse. That is why it is going to rear its ugly head again soon. When it does, many people will be surprised and even more confused. Many will then seek answers from the same mainstream media and government leaders, but they will only get more lies and confusion from them.

The goal of this post is to show how our federal government caused the housing market to collapse then failed to fix the problems, and even made it much worse. The goal is to expose the lies so we can understand what really caused the 2008 collapse and how we have failed to correct the problems that caused it. Until we fix the underlying causes, it is only a matter of time before the symptoms show up again.

While corrupt government leaders are the primary culprits behind the 2008 collapse, every American citizen must take responsibility for our leaders because they are a direct reflection of the people they represent. If we fail to take responsibility for our own failures then we are just as guilty as they are of being hypocrites. Our government leaders can only get away with what we allow them to get away with. They can only mislead to the extent that we are already confused. So while the record shows the government caused the problems, we the people are ultimately responsible. While the record shows the government failed to fix the problems and even made them worse, that too only happened because we the people failed to fix our own problems and we made them even worse. We are reaping exactly what we have sown.

When people are in right relationship with God, He blesses them with protection from every kind of evil and destruction. However, when people turn away from God and reject Him, they forfeit His blessings. Ultimately, the 2008 economic collapse is only a symptom of America’s spiritual problems. Therefore the solutions to our problems must include fixing our own broken relationships with God. That is when we will see God forgive our sins and heal our land (2 Chronicles 7:14).

So now we can begin with a summary of the historical record of events leading up to and surrounding the 2008 collapse. Finally, recommended steps are provided.

EVENTS LEADING UP TO THE 2008 CRASH

The primary cause for the 2008 housing market crisis was laws passed by our own federal government requiring banks to make home mortgage loans to people who could not afford to make the payments. Bankers are notoriously cautious and conservative with their money. They know how to assess credit worthiness of loan applicants. They don’t need the government telling them how to do that, but in the interest of “fairness” our politicians promised to force those evil bankers to make loans to low-income applicants.

Congress passed new laws attempting to turn home ownership into a civil right that could not be denied. Of course, politicians would never say it quite like that, but that is pretty much what they tried to do when they catered to the cries from racist organizations, such as the Association of Community Organizations for Reform Now (ACORN), who accused the banking industry of being racists like them. Always looking for a way to promote their own careers, representatives from Congress gave in to the pressure and passed the Home Mortgage Disclosure Act in 1975 requiring banks to report to the federal government on the race, ethnicity, and gender of every prospective borrower. Before that, banks did not ask applicants for that information because they considered it to be irrelevant to the loan process. Those racist bankers did not even think to ask people about their race until they were required to ask by people who really were racists. Race had nothing to do with the mortgage loan industry until racists turned it into a racial issue. Before that, loans were approved only on the basis of the applicant’s financial condition, which was the correct basis.

Racist organizations, like ACORN, then used the new racial data to claim that people of color were more likely to have their mortgage loan applications rejected. They ignored the real reason why fewer minority applicants were approved, which was because they had lower incomes and therefore less ability to pay back the loans. Race never had anything to do with it. Banks are in business to make money. They have no financial incentive to discriminate against any race.

After the bankers were falsely accused, corrupt politicians used the opportunity to promote their own careers. So the racists got what they wanted, and the politicians got what they wanted, and the low-income loan applicants got what they wanted. Then they looked upon all they had made and saw that it was good, until millions of homeowners defaulted on their mortgage loans and the housing market collapsed. Then the Democrats blamed the Republicans and the Republicans blamed the Democrats and millions of American people lost their homes and millions more lost their jobs.

Based on the new data collected, Congress passed the Community Reinvestment Act in 1977, which was signed into law by President Jimmy Carter. The law was designed to prevent banks from refusing to make mortgage loans in low-income areas. In other words, the law was designed to throw all good business sense out the window and require bankers to behave stupidly. Federal regulatory agencies then monitored bank activities for compliance and penalized banks for failing to lend to low-income applicants. Seeking to comply with the laws, banks abandoned tried-and-true lending practices and replaced them with politically correct, racist practices. Banks were instructed not to rely so much on the applicants credit history, but to consider their extenuating circumstances because after all, it wasn’t really their fault. Down-payment requirements were also lowered.

In the 1990’s, President Clinton advanced these misguided policies further with two big mistakes. His first big mistake was the 1995 creation of the National Partners in Homeownership, which was a cooperative effort between government and private businesses with the common goal of increasing home ownership. Clinton’s goal was to increase homeownership from 64% in the early 90’s to 70% by 2000. In a 1995 speech he told the American people, “When we boost the number of homeowners in our country, we strengthen our economy, create jobs, build up the middle class, and build better citizens.” In reality, the results achieved by Clinton’s strategy were exactly the opposite of what he promised.

Clinton’s strategy recklessly endangered the entire housing market. By giving regulators the goal of increasing homeownership, he inadvertently stopped them from doing their jobs. Instead, they teamed up closely with the people they were charged with policing. As a result, the rules for governing the relationship between borrowers and lenders were abandoned. For example, borrowers were no longer required to verify their income, make any significant down payments, or demonstrate their ability to service their debt. Abandoning these tried and true practices resulted in millions of mortgage loans getting approved for applicants who were not able to make the required payments.

Clinton’s second big mistake was signing into law the repeal of the 1933 Glass-Steagall Act. This law was put in place after the 1929 stock market collapse to protect our country from another crash. The law prevented companies from operating commercial banks and investment banks under the same roof. In 1999, President Clinton signed into law the repeal of Glass-Steagall, which removed the protective barrier. As a result, banks were allowed to put their commercial bank deposits at risk by using them to purchase investment-banking products. Banks that were already very large were allowed to become too-big-to-fail. The big banks grew bigger, swallowing up their smaller competitors. The entire financial system was put at risk by the potential failure of any of these monster-sized banks.

In both cases, the formation of the National Partners in Homeownership and the repeal of the Glass-Steagall Act, President Clinton removed practices that had protected the American people and our financial system. His actions exposed us to grave dangers. The devastating impact of his actions began immediately as millions of mortgage loans started going into default. Within eight years after he left office the housing market completely collapsed. His actions were directly responsible for putting millions of Americans on the road to financial ruin, especially lower income Americans. Today, hardly anyone in the news media talks about the disastrous results caused by President Clinton’s actions, but the truth is his administration was largely responsible for destroying the housing market.

By 2008 banks were over-loaded with toxic loans on their balance sheets. These loans could never be paid back because the borrowers were never qualified to receive them in the first place. The bad loans were bought and sold by financial institutions like Lehman Brothers, the fourth largest investment bank in America. They lost so much money they were forced to declare bankruptcy. It was the largest bankruptcy in American history. Lehman’s bankruptcy caused extreme volatility in financial markets. The stock market experienced its largest one-day loss in history. To avoid a collapse of the entire global financial system our federal government, which was already burdened with trillions of dollars of debt, kicked the can down the road, about five years down the road, by implementing a $700 billion bailout package called the Troubled Asset Relief Program (TARP).

So here we are five years later and the housing market has still not recovered. It is now evident that it is not going to recover anytime soon. The medicine we refused to take five years ago now requires much larger doses. Since we were not willing to take the smaller doses five years ago, there is no chance that we will voluntarily take the larger doses now. So we continue to tell ourselves we don’t have to do that because we don’t want to do that. Meanwhile, the required dosage grows bigger every day.

Home prices have been artificially propped up by the Federal Reserve’s $45 billion in monthly purchases of mortgage-backed securities. After five years, the Federal Reserve now owns nearly half of all mortgage-backed securities. Their purchases are designed to keep mortgage interest rates low. However, rates have risen nearly one whole point in the past few months. Home sales are already feeling the impact of the higher rates. The Federal Reserve cannot possibly suppress interest rates forever. Eventually their efforts backfire, just as they did during the late 1970’s. Ultimately, they will have no choice but to allow rates to explode higher.

The mainstream media misleads homeowners into believing the housing market has recovered because home values have stabilized, stopped dropping, and in some places even increased. However, this false narrative avoids the painful reality that the market prices are being artificially inflated. The recovery is merely an illusion. The real housing market that existed before 2008 no longer exists. It is like a comatose patient on life support equipment. It can no longer exist without being propped up by phony printed money. It is an unsustainable bubble. It should not come as a surprise to anyone when the bubble finally pops, but it will come as a big surprise to almost everyone.

THE 2008 CRASH

With a growing number of homeowners unable to make their mortgage payments, by 2008 the system became overloaded with home foreclosures and billions of dollars in bad “toxic” loans on the balance sheets of financial institutions. The cancer spread throughout the financial industry to every institution that owned any kind of mortgage based financial products. The first major casualty was Bear Stearns, a global investment bank with total 2006 assets of $350 billion. They suffered enormous losses from their investments in mortgage-backed securities in 2006 and 2007. By March 2008 the company was facing a collapse. The Federal Reserve Bank of New York stepped in to rescue Bear Stearns with a $25 billion bailout loan. The bailout was not enough to save the company, so the deal was restructured to loan $30 billion to JP Morgan Chase, which allowed them to purchase Bear Stearns. So Bear Stearns executives reaped the rewards of large salaries and bonuses during their years of disastrous practices, but taxpayers were stuck with paying $30 billion for their losses.

About six months later in September 2008 the crisis escalated with the collapse of Lehman Brothers, which was the fourth largest investment bank in America at that time. Their bankruptcy was the largest in American history. Their collapse rattled world financial markets and created extreme volatility in the stock market, including the largest one-day point drop in history. The market reaction was enough to convince government leaders the entire global financial system was in danger of collapsing. So when the news broke that another financial institution, AIG, was collapsing, the Treasury Department chose to give them a $182 billion bailout package. AIG suffered big losses on risky financial products like insurance contracts on mortgage-related securities. It was the largest corporate bailout in history.

However, even larger bailouts were required for Fannie Mae and Freddie Mac, which operate like corporations, but with the backing of the federal government. Technically, they are not corporations. They are Government Sponsored Enterprises (GSE’s). These two GSE’s took far greater risks by making far more subprime mortgage loans than any other financial institutions. By 2008 they had more than $5 trillion in mortgage-backed securities and over $1.6 trillion of that was debt. (Source: Wikipedia)

The big problem with these GSE’s is their leaders are rewarded with huge salaries and bonuses while taxpayers are forced to cover their enormous losses. Taxpayers were stuck with paying over $400 billion to bail out Fannie Mae and Freddie Mac in 2008 and 2009.

Chief Executive James Johnson led Fannie Mae’s expansion into subprime mortgage loans during the 1990’s. Fannie Mae led the way in relaxing loan-underwriting standards, and automated the lending process so that loan decisions could be made in minutes based heavily on a borrower’s credit history, rather than on a more comprehensive financial profile as had been the case in the past. Although Johnson left Fannie Mae several years before the collapse, he is largely responsible for the demise, as explained here:

Under Chief Executive James Johnson, Fannie Mae had perfected the art of manipulating lawmakers, eviscerating its regulators, and enriching its executives, all in the name of expanding home ownership… Johnson was the financial industry’s leader in buying off Congress, manipulating regulators, and neutralizing critics, former colleagues say. In 2008, however, the colossus would fail, requiring hundreds of billions in taxpayer backing to keep it afloat. Johnson claimed Fannie Mae would never cost taxpayers a dime. Fannie Mae became the quintessential example of a company whose risk taking allowed its executives to amass great wealth, but when those gambles went awry, the taxpayers had to foot the bill. (Source: Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, p. 5)

CONCLUSION

The reason why the housing market bubble is about to burst is because we did not make the necessary corrections after it collapsed last time. We propped it up with monopoly money, but never dealt with the underlying causes. America has forgotten the source of our blessings. We have mistakenly believed we can live any way we want and still have the blessings of God. Unfortunately, it does not work that way.

The 2008 crisis was a follow up warning, seven years after 9/11/2001. In both cases, America has failed to heed the warning by returning to the Lord. The warnings will continue to get more severe until we make the necessary changes. The economic collapse coming in October will be three times worse than the 2008 crisis. Hopefully, that will be enough to wake us up.

Here are three things we can do going forward:

1. First, now is not a good time to buy a home. Home prices will be dropping sharply in the months ahead. People who have liquid assets will be able to buy homes at very low prices. However, it would be wise to wait until the bottom is clearly reached before buying anything. Prophetic minister John Paul Jackson recently said a good place to buy real estate will be in rural areas due to the exodus of people moving away from downtown areas.
2. Second, all believers should pray for our elected representatives to have the fear of the Lord because that is the beginning of wisdom (Proverbs 9:10). Pray that they put aside all selfish ambition to serve the needs of the people.
3. Third, America’s problems will continue to get worse until we turn away from all sins and follow the Lord with all of our heart. There is no other way. God has not rejected us, but we have rejected Him. We must repent of our sins and turn to the Lord. Righteousness exalts a nation, but sin is a reproach to any people (Proverbs 14:34). Sin is rampant in our culture, but it has severe consequences. The wages of sin is death, but the free gift of God is eternal life in Christ Jesus our Lord (Romans 6:23).

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