The Natural Rate of Home Ownership and Solving the Foreclosure Crisis Essay

The Natural Rate of Home Ownership and Solving the Foreclosure Crisis Essay

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The subprime mortgage crisis was triggered by several factors. There is a “natural” rate of home ownership which has held up statistically for many decades, it hovers around 63%. Both political parties, for widely differing reasons, over the period of almost two decades, pushed for relaxation of qualifying standards to try and elevate the percentage of Americans who qualified, which pushed the percentage of owners up to over 68%. Lenders for both risk and liquidity management, insured and repackaged loans for sale to third parties. This gave them back most of their capital to make additional loans. The lenders weren’t pushed to hold a portion of the risk and over an extended period the standards became more and more relaxed. This was based on a widely taught statistical model that if you spread the risk across many parties, the risk was diminished to the point of being negligible. The fallacy of this thinking is that the risks in the debt crisis were proven to be more correlated than originally thought. The level of subprime loans rose from under 5%, meant to be exceptions to the processing, to over 20% of all mortgages originated and in certain high-price submarkets such as California, Arizona, Nevada and Florida the percentage was much higher. This additional 5% rise in home ownership drove many sub-markets and the material supply and construction industry nationally, which created linkage to the national economy for finance, materials, construction and services.
As the crisis unfolded, it became a negative financial feedback loop in areas which had higher percentages of this type of job creation. Construction slowed down, the construction worker lost his position, which affected his ability to repay, which hurt his...


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...ays benefitted by emigration and as a result had a positive growth rate. An even quicker fix is to stimulate foreign ownership of US real estate and loosen immigration standards and legalize many who are already here, have no intention of going back, and outside of much of the flow of normal US society. Both of these would quickly increase the pool of buyers, increase population and more quickly speed absorption. It would also expand the tax base. Both of these are politically thorny but effective methods for altering the mathematical relationship.
After all, the supply and demand equation is just two lines, and changing the level of family formation and legal population would rapidly alter the demand side of that equation. It was also have the greatest impact across the south, from Florida to California in many of the hardest hit communities of the country.

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