5 Myths of Housing Market Crash

Several myths have circulated regarding causes of the housing bubble. Many of them deal with government mortgages and oversight regulations. Here’s a look at some of these housing market myths and what’s actually true.

1) Fannie Mae and Freddie Mac caused the house bubble.

An influential commentator presented figures that half of the 55 million mortgages that Fannie Mae and Freddie Mac wrote were subprime or inferior. These two government service agencies initially refused to invest in non-traditional mortgages and only did so at the height of the bubble. Most of the inferior subprime loans were issued by private lenders, which are now out of the business.

2) The Community Reinvestment Act was a main reason for the housing market crash.

Over half of subprime loans were made without the required federal supervision demanded by CRA policy. Nearly a third of the loans were made by private banks and thrifts without routine examination or supervision. A recent study found that 84.3 percent of loans made in 2006 that were subprime were not made by CRA depository institutions.

3) Deregulation did not cause the housing bubble.

Deregulation led to the creation of a shadow secondary banking system. This system was based on the unregulated exchange of credit default swaps (CDSs) to back up risky mortgage packages. Due diligence was relaxed, and adequate risk controls emphasizing financial instruments as social utility were shredded in favor of quick profits.

4) Regulation could have stopped the house market problem.

This is not necessarily the case, and it is not guaranteed that more regulation will not stop any future speculative bubble. Psychology such as irrational exuberance plays an important role. Importantly, self-interest and greed cannot be denied. Ancient seers have long recognized that governments were created to basically check and control human greed and avarice and that it would be an ongoing battle.

5) Speculation caused the housing bubble.

Uncontrolled speculation does cause quick rises in prices, but in the normal course of events, speculation is good. It furnishes cash liquidity in the market that enables home buyers to obtain credit. The housing market has currently settled and is now entering a more carefully paced period. Several indicators point out that this may be the time to buy:

• Foreclosures have slowed
• Banks do not want to flood the market
• Prices are climbing in many areas
• Mortgage interest rates remain low

A recent $25 billion settlement with The Big Banks bids well for the housing market. These huge financial players will not want to quickly unload batches of foreclosed or short sale properties. Good and reasonable policies for economic growth that will not depress the market will make this an attractive period for buyers.

If you’re ready to shed the shackles of myth and bad news and get back into the housing market. it’s time to begin to research. Download The HomePath Buyer’s Guide from AmeriFirst Home Mortgage to better understand this option for buying Fannie Mae-owned properties. It’s one option of many for today’s real estate market.