Commercial Real Estate Restructuring Revolution E-Book

Stephen B. Meister

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 484

Veröffentlichungsjahr: 2010

Beschreibung

How to plan for the commercial real estate collapse Encompassing apartment, office, retail, hospitality, warehouse, manufacturing, and flex or R & D buildings, commercial real estate (CRE) investment in the U.S. totaled $6.4 trillion at the end of 2008. As noted in the February 2010 Congressional Oversight Panel Report, $1.4 trillion of CRE debt is coming due by 2014 and half of the CRE projects securing such debt are underwater. Commercial Real Estate Restructuring Revolution: Strategies, Tranche Warfare, and Prospects for Recovery looks at how we got into this mess-impacts of the housing crisis, debt structures, lender-borrower collusion, and bankruptcy abuses-and offers possible solutions to the CRE crisis. Along the way, author Stephen Meister: * Discusses how CRE value losses are being driven by investors' risk adjusted cap rates, not just poorer market fundamentals * Discusses strategies and emerging trends in CRE foreclosures, including forced lender fundings, lender attempts to chill bids and UCC foreclosure tactics and pitfalls * Proposes legislative solutions and explains how any rebound will require federal spending cuts, a vast deleveraging and a market clearing process With a crashing CRE debt market and the hundreds of CRE-heavy regional banks destined for failure, getting out ahead of the curve is essential. Commercial Real Estate Restructuring Revolution addresses how we got here and how you can plan for the impending crash.

Leseprobe

Table of Contents

Cover

Table of Contents

Half title page

Series page

Title page

Copyright page

Dedication

Preface

Acknowledgments

CHAPTER 1 The Housing Bubble

THE U.S. AFFORDABLE HOME OWNERSHIP MANDATE

THE BIRTH OF THE GOVERNMENT-SPONSORED ENTERPRISES

THE U.S. AFFORDABLE HOME OWNERSHIP MANDATE IS RADICALIZED AND RACIALIZED

THE COMMUNITY REINVESTMENT ACT

RACIALLY BASED LENDING QUOTAS ARE IMPOSED IN THE NAME OF THE CRA

A TRIANGLE OF INFLUENCE PEDDLING AND CORRUPTION—LAWMAKERS, FANNIE AND FREDDIE EXECUTIVES, AND PRIVATE MORTGAGE LENDER EXECUTIVES

LAWMAKER LAPDOGS OBEY THEIR MASTERS

FHA MORTGAGE INSURANCE

SO, HERE’S WHAT HAPPENED

CHAPTER 2 The Bubble Implodes

THE PRIVATE SECTOR’S ROLE

THE BURSTING OF THE BUBBLE

THE POLITICAL BLAME GAME

THE PAULSON SEIZURE

THE CURRENT STATE OF AFFAIRS

THE CURRENT REACTION

THE MORAL HAZARD

OBAMA’S HOME AFFORDABLE MODIFICATION PROGRAM FAILS

THE GSE BAILOUT

CHINA AS GSE BONDHOLDER

A MERRY CHRISTMAS FOR THE GSEs

WHAT WILL HAPPEN?

CHAPTER 3 Capital Markets Supporting U.S. Commercial Real Estate

SCOPE OF THE U.S. COMMERCIAL REAL ESTATE MARKET

CRE LEVERAGE

SPECIAL-PURPOSE ENTERPRISES

BANKRUPTCY REMOTENESS

CRE DEBT STACK COMPOSITIONS

THE MARKET FORMERLY KNOWN AS THE CMBS MARKET

MASTER AND SPECIAL SERVICERS AND THE HARD LOCKBOX

INTERCREDITOR AGREEMENTS

PREFERRED EQUITY

INTEREST RESERVES

MATURITY DEFAULTS

JUDICIAL, NONJUDICIAL, AND UCC FORECLOSURES

LENDER LIABILITY CLAIMS AND DEFENSES, AND DEBT NULLIFICATIONS

VALUE DECLINES

THE CRE BUBBLE BURSTS, WALL STREET CONSOLIDATES, AND TARP IS ROLLED OUT

CHAPTER 4 CRE Values and Loan Defaults

MARKET FUNDAMENTALS AND CAP RATES

CRE LOAN DEFAULTS—PRE- AND POSTMATURITY

CHAPTER 5 Putting Off the Day of Reckoning

DEFERRAL OF LENDER LOSS-TAKING

HARMFUL EFFECTS OF LENDER LOSS-DEFERRAL STRATEGIES

FASB 157-4

LONG-TERM HOLD BY CMBS TRUSTEE—SPECIAL SERVICER CONFLICTS

IRRATIONAL RESISTANCE TO BORROWER DPOs

PROTECTION EFFORTS BY MARGINALLY OUT-OF-THE-MONEY MEZZANINE LENDERS

THE MOTHER OF ALL LOSS-DEFERRAL STRATEGIES—THE BARCLAYS-PRADIUM TRANSACTION

PUTTING OFF JUDGMENT DAY

CHAPTER 6 Tranche Warfare

EXTENDED STAY—A CASE STUDY

A LONG STANDOFF

OTHER CASES

TRANCHE WARFARE HITS PUBLIC PENSIONS

CHAPTER 7 Loans to Own and Chilling the Bid

LOANS TO OWN

TURBO-CHARGING THE LOAN TO OWN STRATEGY—BUYING THE REPO LINE

THE FORGOTTEN DEFENSE FROM THE MIDDLE AGES—CHAMPERTY

CHAPTER 8 Funding Cessations and Extension Fights

FUNDING CESSATIONS

THE DESTINY CARD

EXTENSION FIGHTS

CHAPTER 9 Bankruptcy Considerations

GENERAL GROWTH PROPERTIES—A RECENT TEST CASE FOR THE BAD FAITH FILING STANDARD

NONRECOURSE CARVE-OUT GUARANTIES

TRANSFER TAX EXEMPTIONS

COMPLEX DEBT STRUCTURES

CHAPTER 10 Multifamily Market

GSE SUPPORT OF THE MULTIFAMILY SECTOR

RENT CONTROL

CHAPTER 11 Governmental Actions Caused the Affordable Housing Crisis

GOVERNMENTAL MUNCHAUSEN BY PROXY

NANTUCKET—A CASE STUDY IN THE DEATH OF COMMON SENSE

IT’S NOT AS GOOD AS IT SEEMS

CHAPTER 12 Governmental Reactions to the Housing Crisis

FEDERAL SUBSIDY OF HOUSING MARKET BENEFITS YIELD-HUNGRY INVESTORS

THE SEC SUIT AGAINST GOLDMAN SACHS

WE ARE AT A CROSSROADS

A CRUCIAL MOMENT .  .  .

CHAPTER 13 Assessing Blame for the Financial Crisis

WHO’S TO BLAME?

WALL STREET

THE FED, THE RATERS, AND THE APPRAISERS

THE MAINSTREAM MEDIA

COMMERCIAL REAL ESTATE LOANS

CHAPTER 14 The Centerpiece for Real Reform

FANNIE AND FREDDIE

THE FEDERAL HOUSING ADMINISTRATION

REPEAL THE COMMUNITY REINVESTMENT ACT

CHAPTER 15 Other Areas Requiring Reform

CAPITAL RESERVE REQUIREMENTS AND LEVERAGE LIMITS

COMPENSATION REFORM AND RISK RETENTION

DERIVATIVES

CREDIT RATING AGENCIES AND APPRAISERS

TOO BIG TO FAIL

EXPANDING WHISTLEBLOWER LAWS

THE NEXT BUBBLE: BIG GOVERNMENT

TAXATION WITHOUT REPRESENTATION

About the Author

Index

Commercial Real Estate Restructuring Revolution

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Copyright © 2011 by Stephen Meister. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Meister, Stephen B.

 Commercial real estate restructuring revolution : strategies, tranche warfare, and prospects for recovery / Stephen B. Meister.

p. cm.–––(Wiley finance series)

 Includes index.

ISBN 978-0-470-62683-2 (cloth); 978-0-470-94430-1 (ebk); 978-0-470-94429-5 (ebk)

 1. Commercial real estate–United States. I. Title.

 HD1393.58.U6M45 2010

 333.33'870973–dc22

2010032274

To my wife and partner, Melissa, who endured many weekends and several holidays with a husband in absentia so that this book could be written.

Preface

Owners of office and apartment buildings, and retail and hotel properties, draw upon both consumers and businesses as their customers. The businesses that occupy our office buildings and book our hotels, and our retailers, in turn, depend largely upon consumers, whose spending accounts for over 70 percent of our gross domestic product. One way or the other, commercial real estate is dependent upon consumers.

The financial health of U.S. consumers was decimated by the bursting of the housing bubble, while American businesses, particularly small businesses, were ravaged by the abrupt curtailment of credit following on its heels. The credit freeze itself was triggered by the subprime mortgage crisis.

To understand where our commercial real estate markets are headed, we must gauge the health and future prospects of U.S. consumers. This, in turn, requires an understanding of the subprime mortgage crisis, the building and bursting of the U.S. housing bubble, and where the housing sector is headed—matters covered in Chapters 1 and 2. Consumer purchasing power and sentiment are largely driven by the relative health of the housing and equities markets.

During the first half of the 20th century, the U.S. home ownership rate hovered in a tight range—roughly 45 to 48 percent. After the end of World War II, however, the percentage of home ownership began a steady climb, reaching 55 percent in 1950 and from there up to 66.2 percent at the turn of the millennium. By 2004–2005, the U.S. home ownership rate had skyrocketed to 69 percent.

The stunning post–World War II increase in U.S. home ownership rates—going from about 47 percent to 69 percent (representing a 47 percent increase in the home ownership rate)—was not brought about by laissez-faire market forces, but rather by aggressive government intervention designed and driven by a liberal vanguard so blinded by the political correctness of marching toward the American Dream for America’s minorities that they could not foresee the devastating consequences to both the supposed beneficiaries of their intervention, as well as to all other Americans (and really, people the world over). Regrettably, however, good intentions are not enough; as Oscar Wilde said, “All bad poetry springs from genuine feeling.” And as the late neoconservative publisher, Irving Kristol, added, “The same can be said for bad politics.”

Empowered by the powerful influence of Congress over the government-sponsored enterprises and the corrupt influence of mortgage lenders like Angelo Mozilo’s Countrywide Financial over Congress and Fannie and Freddie; assisted by mortgage originators, who, courtesy of Wall Street’s securitization prowess, retained no stake in the loans they originated and therefore no reason to underwrite them soundly, and the appraisers they controlled; aided and abetted by an oligopoly of credit raters who, protected by our government from the pressures of free-market competition, had fallen asleep at the switch; and enabled by the swollen supply of cheap and easy money put into place in the years preceding the bursting of the housing bubble by the Greenspan Fed, there was no stopping the mainstream-media-praised racial lending quotas established under our affordable home ownership mandate. The results, given the scale of the U.S. housing market, were nothing less than cataclysmic.

Trillions of dollars were loaned to homebuyers who put little or no money down on homes they purchased, and to existing homeowners who used their appreciating homes like ATM machines by taking ever larger cash-out refinancing loans. In both cases, the borrowers lacked the income and other assets necessary to repay those loans.

A massive housing bubble resulted from trillions of dollars in government-subsidized and mandated affordable housing loans. That bubble began imploding in 2006, as unfit borrowers, many of whom were granted loans well beyond their means to repay, started defaulting in droves.

In order to comprehend the impact of the collapse of the housing markets on commercial real estate (“CRE”), Chapter 3 traces the history of the CRE capital markets, so that the reader has an understanding of the required structures and concepts before delving into more detailed aspects of CRE financing in later chapters. I explain the composition of modern complex CRE debt stacks, including securitized mortgage loans and junior loans, now known as mezzanine loans, and recurring issues such as maturity defaults, value declines, and extension rights.

At the end of 2008, nominal investments in U.S. commercial real estate totaled $6.4 trillion, composed of $2.9 trillion of equity investments and $3.5 trillion in debt. CRE assets are held by a diverse group of investors—individual entrepreneurs, including multigenerational “real estate families,” publicly traded and private real estate investment trusts (REITS), real estate private equity firms, hedge funds, banks and savings and loan associations, privately held real estate holding companies, publicly traded and private businesses, not-for-profit corporations, foreign, federal, state and local governments, and a whole plethora of foreign investors, including foreign individuals, banks, and sovereign wealth funds.

In Chapter 4, I address CRE values, which are a function of both underlying fundamentals and the yields demanded by CRE investors—capitalization (cap) rates. This chapter explains why increases in market cap rates, more than eroding market fundamentals, are responsible for CRE value reductions. A corollary of this observation is that once rental and vacancy rates return to their prerecession levels, CRE values will likely still lie behind their prerecession levels due to increased cap rates.

In Chapter 5, I describe a process that began unfolding in the last two quarters of 2009 and that will continue to unfold for the next five to eight years, as several hundreds of billions of dollars of CRE loans mature annually in that period. While lender reactions have varied—even within the participants owning a single loan—one consistent lender-driven theme has already emerged: putting off the day of reckoning until a better market arrives.

The deferral of lender loss-taking can take different forms. Where the real property is encumbered by a single mortgage loan (i.e., there are no mezzanine loans or junior lenders), the decision about what to do at maturity—from the lender side—is simplified in that one lender makes that decision, at least where that single mortgage loan is not owned by multiple participants or securitized. In such a case, assuming the loan is partly underwater (i.e., the loan balance exceeds the property value), the lender has essentially four options:

1. Sell the loan at a discount to a third party.

2. Take a discounted payoff (DPO) from the borrower (or sell the loan to a borrower affiliate at a discount, the economic equivalent of a DPO).

3. Take back the property either by way of a deed in lieu of foreclosure or through the prosecution of foreclosure proceeding (whether judicial or nonjudicial).

4. Enter into a modification and extension of the loan with the borrower, usually involving three elements—an increase in term, an increase in interest rate, and a cash payment from the borrower, some of which may be applied to reduce the principal balance of the loan and the balance of which may be held as reserves for future costs not otherwise fundable from property cash flow.

In Chapter 6, I discuss the intramural battles among lenders in complex debt stacks, colloquially referred to as “tranche warfare.” As CRE debt maturities and payment defaults hit on individual properties or portfolios encumbered by commercial mortgage-backed securities (CMBS) or whole mortgage loans coupled with hierarchical mezzanine debt stacks, tranche warfare has erupted between subordinate and senior lenders, as well as between lenders and borrowers.

No better example of the “tranche warfare” phenomenon is presented than by what happened on David Lichtenstein’s massive 2007 Extended Stay Hotels acquisition. In June of 2007, developer David Lichtenstein purchased for $8 billion the more than 75,000-unit Extended Stay Hotel (ESH) portfolio—an enormous portfolio of some 683 extended stay hotel properties located in 44 states and Canada—from Blackstone (not to be confused with BlackRock, the co-investor in Peter Cooper Village/Stuyvesant Town). Blackstone had purchased the ESH portfolio (then 475 hotel properties) for less than $2 billion in March 2004, three years before it sold the expanded 683-hotel chain to Lichtenstein. In 2004, the ESH portfolio traded for $4.2 million per hotel property while just three years later it traded for $11.7 million per hotel property—a nearly threefold price increase in just three years. The Bank of America and the other original lenders attempted to take the hotel properties back from Lichtenstein in a “transfer-in-lieu-of-UCC-foreclosure” transaction that would have wiped out $2.6 billion in junior mezzanine lenders. I represented one of these mezzanine lenders and obtained a temporary restraining order blocking that transaction. As a result, Lichtenstein put the entire portfolio into bankruptcy. Eventually, Centerbridge, Paulson and Blackstone bought the portfolio out of bankruptcy for $3.88 billion—about $5.7 million per hotel property.

As the CRE crisis has deepened, a host of hedge funds, real estate private equity investors, publicly traded and private REITs, and foreign and domestic investors have sought to buy distressed commercial real estate. Unfortunately, the distressed CRE owner is rarely in a position, alone, to convey title at a market price. Given the 40–60 percent decline in CRE values since the height of the market, and the far greater leverage levels offered in the frothy refinancing markets CRE investors tapped into during the 2003–2008 period, it is a rare CRE asset that is not leveraged beyond its current value. As a result, CRE investors must resort to indirect methods of acquiring commercial real properties—buying a “loan to own” or a short-sale by the deed holder with the consent of the lenders. I discuss these acquisition strategies in Chapter 7.

CRE investors anxious to acquire overleveraged properties have taken to purchasing either at or below par, depending on the situation, one or more mortgages or mezzanine loans encumbering the target property and thereafter foreclosing against the collateral. In states where mortgage foreclosures must take the form of court proceedings, strategic buyers of “loans to own” will often purchase both the first mortgage and senior mezzanine loan, so they can avail themselves of the streamlined (nonjudicial) UCC foreclosure proceeding available to the foreclosing mezzanine lender. The trick is identifying and buying the loan or participation in the control position.

Once a lender, whether the whole loan owner itself or the servicer for a CMBS loan, determines that the loan is underwater—that the CRE asset has a market value less than the balance due on the loan—a series of obvious economic motivations set in. These economic motivations have spawned two recurring themes in lender-borrower conflicts: funding cessations and extension fights. I discuss both these trends in Chapter 8.

For one thing, the lender does not want to get in any deeper—it does not want to advance any more money. Second, if the property is income-producing, the lender is loathe to allow net cash flow (even after debt service) to leak to junior stakeholders (whether junior mezzanine lenders or equity participants in the borrower). Such excess net cash flow, from the perspective of the senior lender, ought to be applied toward reduction of the principal balance of the senior loan—thereby reducing the senior lender’s eventual loss—instead of going to any subordinate stakeholder. However, typical loan documents do not permit the senior lender (prior to maturity, including an extended maturity date) to trap all net cash flow available after servicing the senior debt interest, provided the borrower is not in default.

I discuss key bankruptcy considerations for CRE assets in Chapter 9. Bankruptcy filings are infrequent, relatively speaking, for commercial real estate. For one thing, the vast majority of CRE assets are held by single-purpose entities (SPEs). These SPEs generally do not directly employ management or building personnel, who, more often, are employed by a separate management company, even if that management company is controlled by the same principals who own the SPE. In consequence, the majority of CRE-owning SPEs are not operating companies in the true sense of that term, but rather are dedicated legal vehicles for maintaining CRE ownership in an isolated format, offering protection (via liability immunization) to the SPE’s equity holders and their other assets (including other CRE assets).

As a result, commercial real estate–owning SPEs are not well suited to classic bankruptcy reorganization, which contemplates a leaner going concern exiting the bankruptcy process, though bankruptcy reorganization can be used to force the deleveraging of an overleveraged CRE asset through a cram down (debt restructuring).

There are, of course, exceptions to this generalization. CRE assets held by public and private real estate investment trusts and hotel chains, for example, do present true operating companies capable of benefiting from the bankruptcy reorganization process. Recent examples of CRE-based going concerns that have entered the bankruptcy process include Extended Stay Hotels and shopping mall giant General Growth Properties. In addition, while debt cram downs sometimes do occur within the context of Chapter 11 reorganization, the ubiquitous nonrecourse carve-out guaranty—making a principal, fund, or holding company liable for the loan in the event of a bankruptcy filing—make such cram downs relatively rare.

The multifamily sector, discussed in Chapter 10, presents unique considerations not affecting other CRE asset classes. First, multifamily lending is the only category of CRE asset lending supported by government-subsidized loans—multifamily properties are financed by Fannie Mae and Freddie Mac. Second, the multifamily sector is the only CRE asset class subject to price controls, the most severe restriction on the free market possible, short of a government takeover. For these two reasons, the multifamily sector presents both risks and benefits not found in other CRE asset classes.

According to its website, “Fannie Mae provides multifamily financing for affordable and market-rate rental housing. We operate nationally, in all multifamily markets and under all economic conditions. Every day, Fannie Mae delivers economical, flexible, and tailored financing for investors. In 2008 Fannie Mae invested over $35.5 billion in the multifamily affordable housing market. Eighty-nine percent of the homes and rental housing financed by Fannie Mae lenders are affordable to families at or below the median income of their communities.” Likewise, Freddie Mac boasts that its “multifamily division supports the acquisition, refinance, rehabilitation and construction of apartment communities across America.”

Fannie and Freddie dominated the multifamily lending market in 2009. According to the Co-Star Group, a commercial real estate information company, Fannie Mae and Freddie Mac overwhelmed private-sector multifamily financing in 2009: “The two federal government sponsored entities financed 81% of multifamily activity based on Freddie Mac’s accounting. Their combined activity totaled $36.4 billion. Fannie Mae, through its lender and housing partners, provided $19.8 billion in debt financing for the multifamily rental housing market in 2009.”

While the vast majority of the approximately 17 million rental apartments in the United States are priced by the free market, some major U.S. cities (like New York, the District of Columbia, and San Francisco), as well as some smaller towns in New York, California, New Jersey, and Maryland, have chosen to fix rents through rent control laws. Few legislative efforts in our history have proved as misguided or resulted in more damage than our rent control laws, though it remains to be seen whether Obamacare gives rent control a run for its money on the worst-legislative-idea-ever list.

Oddly enough, universal condemnation of rent control has been advanced by economists on both the right (Nobel Prize winners Milton Friedman and Friedrich Hayek, for example) and on the left (Nobel laureate Gunnar Myrdal, an architect of the Swedish Labor Party’s welfare state). In fact, Myrdal said, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.” Another Swedish socialist and economist, Assar Lindbeck, bluntly put it that “in many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

As with any price control, rent control—by mandating prices below the level dictated by a free market—inevitably creates a shortage of the price-controlled commodity—here housing. Said differently, in a price-coordinated or free market economy, suppliers furnish more of a given commodity as the price goes up while buyers do the reverse—buy more as prices go down. The market price, always in a state of flux, tentatively sets where buyers’ and sellers’ desires are optimized, resulting in the most efficient allocation of scarce resources (with alternative uses) possible.

Since the core function of any economic system is the allocation of scarce resources with alternative competing uses, housing (a commodity like any other) must nevertheless be allocated—only with price control, the market can no longer perform that function. In a rent-controlled housing market, cronyism, succession rights, gamesmanship, and luck replace price as the resource allocator. In the end, no serious economist quarrels with the notion that rent control results in a reduction in both the quality and quantity of housing, and to boot creates crushing inequities to market newcomers.

In New York City, for example, while rent control laws have kept rents down for a fortunate few—long-standing in-place tenants—it has increased the rents for others—themselves often low-income renters—and on balance have driven rents up on average. By protecting in-place tenants, older (often dilapidated) tenement buildings from the turn of-the-century dot the city’s streetscape. They would have been replaced with new, larger apartment buildings absent rent control laws. The result has been a constriction in the city’s housing supply. Prices of free-market apartments are driven up and new entrants to the market are forced into overcrowded conditions (often three or four roommates per apartment), while older rent-stabilized empty nesters whose children have grown up and moved out continue to hoard three- and four-bedroom below-market rent-controlled units.

No place is more notorious than New York City for the cronyism infecting the allocation of below-market rent-controlled apartments. Stories about the wealthy elite occupying vastly below-market rent-regulated apartments abound. Actors Mia Farrow and Dick Cavett, for example, held rent-regulated apartments in New York City.

As for cronyism, nothing can match Congressman Charles Rangel’s four rent-stabilized apartments in Harlem’s Lenox Terrace. Imagine a public servant hoarding four different below-market rent-regulated apartments in a city with the lowest vacancy rates and greatest housing shortage of any major U.S. city. That’s what rent control enables.

In 2007, Rangel paid about $4,000 per month for all four apartments, easily half the market rate, and one of them was located on a different floor than the others and used solely as an office, even though rent-stabilized apartments in New York City must be used solely as primary residences. Worse, Rangel took a homestead tax break on his Washington, D.C. house during the same years he occupied his four Manhattan rent-stabilized apartments, thus simultaneously claiming a primary residence in two different cities (while he was the chief tax-law writer).

In Chapter 11, I explain how government inflicts us with a disease and then rushes to our aid with a supposed cure. The “affordable housing crisis” was really brought about by earlier misguided governmental actions. Regrettably, the cures the government has offered in response to the disease of its own making are even worse than the disease itself.

Named after the 18th-century Baron Munchausen, the psychologi­cal disorder Munchausen syndrome describes someone who intentionally harms himself in order to gain medical attention and sympathy. In a different form of this awful syndrome—called Munchausen by proxy—the afflicted individual, a parent, secretly harms his or her child, so that the child is hospitalized and treated, thereby achieving the clandestine object of the mentally ill parent—self-aggrandizement for his or her excellent caregiving. In extreme cases, afflicted parents have poisoned their children in order to be lavished with praise for their ensuing dedication to the care and welfare of the poisoned child.

Munchausen by proxy offers an instructive analogy to various gover­nmental actions. Examples abound in which government initially takes some action that causes great harm to society and then later responds with some (supposed) legislative “cure” for the societal ill brought about by the original ill-advised governmental intervention. Though the examples are legion, for our purposes, a good starting place is the congressional reaction to the so-called affordable home ownership crisis—a situation that, though hardly qualifying as a crisis at all, was brought about largely by earlier misguided governmental actions.

Land cost is a very substantial component cost of all housing—be it multifamily rental housing or individual homes. Laws and regulations reducing the yield of land—the square footage of gross building area that may be built upon a lot (whether by bulk or zoning restrictions or overlaying conservation restrictions, which curtail building footprints)—drive the price of housing up. So do rent control laws, because they inhibit the demolition and redevelopment of more efficient housing accommodations.

This inability to see the true long-term costs of governmental policies and who bears them is one of the greatest shortcomings of our political system. Although, in Chapter 11, I use Nantucket as a handy example, this story repeats itself in thousands of communities throughout the United States. In fact, wherever housing is exorbitantly priced, development-thwarting (and/or rent control) regulations are likely to be found. While affluent communities from Puget Sound to Nantucket concern themselves with recreating endangered habitats for earthworms and other species of “special concern,” without regard to the costs imposed by that effort, I tend to doubt these lowly creatures generated as much concern among those in charge of inner city planning in the Detroit neighborhoods about to be bulldozed.

In this way local governments throughout the United States created pockets where home ownership (and for that matter, rental housing as well) was no longer affordable. They did this by taxing home buyers and using the proceeds to buy and place undeveloped lands in permanent protected trust and by enacting a labyrinth of common sense-defying zoning restrictions and conservation rules, many of which became powerful weapons in the hands of “Not-In-My-Back-Yard” neighbors or not-for-profit collectives funded by NIMBY neighbors.

Our federal government then came to the rescue—governmental Munchausen by proxy—via forced lending to low down-payment mino­rity buyers (the Community Reinvestment Act) and explicit quotas on Fannie and Freddie buying those low down-payment mortgage loans. Local government created the affordability crisis—the disease—and our federal government came to the rescue with the cure—subprime mortgage loans. Unfortunately, the cure turned out to be far worse than the disease.

This analysis raises a critical threshold question—should government concern itself (at all) with the form of ownership of its citizens’ housing? Said differently, isn’t the proper role of government ensuring the decency and quality of housing and not whether it is owned by the housed citizen or the landlord? Governments have a place making sure their citizens’ housing accommodations are safe, well equipped, sanitary, heated, perhaps air conditioned in some areas, and free of vermin and pests, but why should our government concern itself with a citizen’s decision whether to own or rent housing?

In Chapter 12, I discuss the Obama administration’s efforts to combat the housing crisis and why they have been worse than tragic failures—they have only compounded the crisis, as the White House insists on printing more and more subprime paper. The administration’s efforts at financial reform are really nothing more than a power grab and do little to mitigate the risks of a repeat crisis. In order to get “reform” passed without even mentioning the real culprits—Fannie and Freddie—Obama waged and won a propaganda war against business.

The Obama administration’s multiple past attempts to fix housing have been both frighteningly expensive and miserable failures. First, through his Home Affordable Modification Program (HAMP), Obama tried to pay both delinquent homeowners and their banks to modify defaulted loans—an attempt to stop foreclosures (and the resulting resetting of housing prices). It failed miserably.

Next—call it HAMP 2.0—Obama tried to pay the banks holding second mortgages—the piggyback home equity lines—thinking they were getting in the way of the modifications. That failed too.

He attacked the demand side of the equation as well, hoping to stimulate buying—only at the lower end, of course—in an apparent realization that his attempts to stop foreclosures would not work. Through the First Time Home Buyer’s tax credit, we ended up paying $8,000 apiece to 1.5 million people who would have bought homes anyway, borrowing sales from the future, inviting billions in taxpayer fraud, and chasing out of the market middle and upper price bracket buyers who waited in the wings, astutely fearful of a double dip in housing prices once the unsustainable government supports fell away.

It all failed. We got 10 percent of the 4 million modifications Obama promised us; handouts to first-time homebuyers resulted in billions of dollars being paid to those who would have eventually bought houses anyway; and foreclosures, while delayed, continued to stack up in the legal pipeline. Housing prices will remain flat for years, or, more likely, double dip in foreclosure-rich regions, as the foreclosed homes finally hit the market.

Meanwhile, to stimulate demand for purchases and refinancings, we’ve pumped $1.4 trillion into the mortgage market (through Fed and Treasury purchases of mortgage-backed securities), taking rates to the lowest level in decades. Yet neither has occurred in a meaningful way: Middle- and upper-market buyers continue to wait in the wings for the bottom that has yet to come, while overleveraged homeowners found themselves unable to refinance.

In Obama’s desperate last-ditch effort to help housing—call it ObamaHome 5.0—instead of subsidizing delinquent homeowners, this program benefits homeowners who are underwater on their mortgages but continue to pay.

Obama has subsidized upper-income homeowners (folks owing mortgage balances up to $729,750) by paying their banks if they reduce the principal balance to 97.5 percent of the home’s value and payments to “affordable” levels—31 percent of the homeowners’ income. For homeowners who owe second mortgage loans, the balance need only be reduced to 115 percent of the home’s value. Obama will pay billions of taxpayer dollars to the principal-forgiving banks—from 10 to 21 cents per dollar of principal forgiven, depending upon the overall percentage of principal forgiven.

Even so, banks would never take the principal hit, unless they were getting cashed out on the unforgiven principal balance. After all, the redefault rate on Obama’s prior modifications has been abysmal. And the amounts at stake are huge: One in four homeowners is underwater—around $2.75 trillion of loans.

So the administration declared that the Federal Housing Administration would insure refinancings of qualifying underwater loans. Where first and second mortgages are reduced to 115 percent of the home’s value, Obama will use additional TARP money to insure the portion of the reduced principal balance exceeding the 97.5 percent FHA limit.

Mind you, the FHA is now insuring one in three home mortgage loans, up from just over three in one hundred in 2005. Plus, it’s running at one-quarter of the required minimum capital reserves, before taking into account the additional loans insured under this new program. Lenders will seize the one-time chance to shed their riskiest nondelinquent mortgages by laying them off on the taxpayers. It’s a bailout of lenders who’ve refused to do short sales or work things out with borrowers.

And it will never end up costing the taxpayer only the incentives paid up front to get those lenders to reduce principal balances. The real bill will come down the road when the FHA-insured refinancings default, and the homes are foreclosed and sold for less than the new loan balance. And it still can’t stop home prices from falling.

In normal times, 15 million homes would turn over during the three-year period 2010 to 2012. But the market will also have to absorb likely another 10 million foreclosed homes over the same period—which means we need to draw in two new buyers for every three we would normally have to find. Only a price drop will attract those additional buyers. Housing values will have to drop further.

All Obama’s efforts can’t stop this inevitable free-market adjustment; at best, he’ll delay it—at the price of shifting the risk of hundreds of billions in losses on underwater loans from lenders to taxpayers.

Maybe he sees that as a worthwhile price for kicking the can down the road. (With elections coming up in November, 2010, maybe that’s the plan.) But it’s not worth it for the rest of us. The sooner we take the pain, the better off we’ll be.

In Chapter 13, I assess blame for the financial crisis. Doing so is not as complicated as it is often made out to be. Far more complex is the task of concealing the true causes and politicizing the process of fault attribution.

The financial contagion that set off the financial crisis was subprime (and Alt-A) mortgages. Given the success of the RMBS market, Wall Street began bundling up commercial real estate mortgage loans to back collateralized debt obligations. Thanks to a robust CMBS market, commercial real estate owners found themselves awash in money. Whole-loan lenders were forced to lend to second-tier commercial properties as CMBS loans pushed rates lower. Cap rates were driven to new lows and CRE prices skyrocketed. A widespread failure to appreciate risk in both residential and commercial real estate permeated the marketplace.

As $1.4 trillion of commercial real debt comes due over the five-year period 2010 to 2014, several trends will emerge. CRE lenders who seek to put off taking loan impairments will come under increasing pressure. Many will prefer to sell their notes and collateral as “loans to own” to opportunistic real estate owner-operators—frequently real estate private equity firms and publicly traded REITS—who will then commence or continue the foreclosure process.

Mezzanine UCC foreclosure sales, where available, will become the preferred enforcement mechanism due to their ease, speed, and low cost structure. Where borrower workouts occur, they will frequently be forced into short-term extensions where additional equity is posted, and little or no net cash flow is leaked to the borrower or underwater junior lenders.

Where extensions occur and junior lenders are deprived of cash flow, or where one lender in a multilender debt stack seeks to take over the property from the borrower and wipe out junior lenders, tranche warfare will be waged.

All this will play out over the next five years, much of it in our courts. Fortunes will be made and lost. Regrettably, due to delays in residential foreclosures brought about by Obama’s policies, much of the CRE losses will occur simultaneously with a double dip in housing. This will place our banks, particularly our regional banks, with high concentrations of CRE exposure, often to lower tier whole-loan collateral, under increasing and sometimes insurmountable financial pressure.

It remains to be seen whether our politicians will demonstrate the political will to bail out the hundreds more banks that will inevitably fail as residential and commercial real estate foreclosures peak in unison.

Here is my scorecard for those at fault for the housing crisis:

Congress, past administrations, the GSEs, and the liberal mainstream media:70%Wall Street and mortgage loan originators:15%Rating agencies:10%Greenspan Fed:5%

In Chapter 14, I discuss the centerpieces any genuine financial reform effort must address:

The failed policy underlying the housing bubble—pushing home ownership ratesFannie and FreddieThe Federal Housing AdministrationThe Community Reinvestment Act

In Chapter 15, I discuss other areas in need of financial reform including:

Raising capital reserves for banks and lowering leverage limits for investment banksInstituting across-the-board risk retention requirements for both residential and commercial real estate loansCompensation reform for residential and commercial real estate loan originatorsPutting credit default swaps and interest rate swaps and caps under control of a clearinghouseFinally breaking the control of residential and commercial real estate lenders over appraisersUsing our tried and true bankruptcy laws instead of creating an altogether new and dangerous class of “too big to fail” rulesExpanding whistleblower laws to cover political malfeasanceSlashing federal spending and adopting across-the-board tax cuts

Excluding the current recession, the 10 since WWII have lasted on average 11 months—the longest lasting 16 months. At 32 months and counting, this one appears radically different. That has prompted pundits to ask, “What’s different this time?” Many have answered: President Obama’s economic policies.

But pundits are missing one crucial piece of the puzzle—Obama’s housing policies. They have stunted the spending of tens of millions of consumers who continue to pay high interest rates on unsecured mortgage balances, which, absent those policies, would have been compromised and written off long ago.

Obama’s housing policies have greatly reduced consumer spending—as a vast population of consumers has been denied lower housing costs as a result. Also, because these consumers continue to be shackled to homes they cannot sell—their mortgage balances exceed current home values—they are unable to relocate to other areas of the country offering better job opportunities.

Consumer spending accounts for 70 percent of GDP, and we are trapped now in a vicious negative feedback loop. Though housing got us here, it now is alternately effect and cause of our economic woes. Without jobs, housing continues to falter; and with housing faltering, consumers don’t spend, so businesses are afraid to expand and hire.

At the height of the bubble, affordable home ownership policies pushed the homeownership rate to 69 percent. Today, due to foreclosures, it has fallen back to 66 percent. Given a population of 310 million, that means that 205 million live in homes they own.

Previously 1 in 5 and now, due to foreclosures, still more than 1 in 4 households are underwater. Their mortgage debt exceeds the value of their house. Likely 60 to 70 million consumers live in houses whose owners have no recoupable net equity after brokerage commissions and closing costs.

Millions of consumers are paying far more in housing costs than they would had they lost homes to foreclosures, given their banks deeds in lieu of foreclosures, or closed short sales—and then rented or even repurchased comparable housing at reduced market prices and interest rates.

This population of negative or zero-equity homeowners cannot realize the benefits of vastly lowered housing costs brought about by market declines in housing prices and interest rates, because they are trapped paying loans they took out before the bubble burst.

Pundits speak of the “moral hazard” created by our bailout mania. We hear about “strategic defaults” by homeowners who have the money to continue to pay their mortgages but choose not to. But what about the reverse—strapped homeowners hanging on longer than they normally would?

Creditors experience collection problems all the time. They work through a process of rational compromise based on market realities. Free markets clear away uncollectible debt and collateral is sold. And it normally happens quickly.

But Obama’s modification program, by giving underwater homeowners false hope, has delayed free-market clearing processes. They believe that if they just hang on and keep paying interest, even on the portion of the debt exceeding the value of their house, Obama will rescue them.

But Obama’s program failed. While he promised 3 to 4 million modifications, he has produced less than 10 percent of those, and even more program dropouts. Yet the failure of Obama’s program does not stop people from continuing to hope . . . and pay.

The program also gives banks false hope. They won’t take short sales or accept deeds in lieu of foreclosure and have delayed foreclosure proceedings because they, too, hold out false hope for bailout-subsidized modifications. And, because Obama has been a vocal critic of banks that don’t work out modifications, they fear regulatory reprisal if they take back the homes.

While the program has delayed inevitable free-market clearing processes by giving false hope to lenders and borrowers alike, 60 to 70 million consumers with no recoupable home equity have depleted their savings and continued to pay housing costs far higher than they needed to, in a desperate effort to preserve “their home equity.” But they lost their equity long ago—that happened when the bubble burst.

By delaying free-market clearing processes, Obama’s housing policies have siphoned off into our banking sector vast amounts of consumer spending power that otherwise would benefit other sectors of the economy.

If households containing 60 to 70 million consumers continue to pay $500, $750, or even $1,000 per month in above-market housing costs as a result of Obama’s program, that means that by killing the program we would see a stealth stimulus of tens of billions of dollars annually. The vast majority of those cost savings would get spent on dinners out, vacations, cars, furniture, clothing, and electronics—a recurring stimulus at negative cost to the taxpayers (we would be spared the current giveaways).

Also, by keeping underwater homeowners in their homes longer, the program prevents the unemployed from relocating to find employment. Although unemployment rates remain high throughout the country, rates vary widely. In June, North Dakota had an unemployment rate of only 3.6 percent while Nevadans suffered with 14.2 percent. By delaying market clearing processes, jobless homeowners in regions with high unemployment rates cannot relocate to regions offering more jobs. They continue paying interest on their unsecured mortgage balances because they can’t possibly sell their houses for what they owe.

That means much of the extended unemployment benefits are going directly into the pockets of lenders who hold unsecured debts they refuse to write down, as jobless homeowners use their benefits to pay interest on unsecured loan balances, instead of relocating to seek job opportunities.

Free-market clearing process can be delayed but not avoided—Obama’s housing policies only kick the can down the road. But we pay for that dearly in the form of reduced consumer spending, depleted consumer savings (which means future increases in savings and reductions in spending), slower growth, and greater unemployment.

Regrettably, HAMP is not the only Obama policy thwarting recovery. Obama’s out-of-control spending has brought our publicly held national debt from $5.4 trillion on August 1, 2008 to $8.8 trillion by August 1, 2010. While it took the first 232 years of our country’s existence—1776 to 2008—to accumulate $5.4 trillion in publicly held national debt, under Obama, we accumulated another $3.4 trillion in the following two years. That means we went from accumulating $1 trillion of public debt every 43.3 years to accumulating $1 trillion of public debt every seven months—an apocalyptic debt trajectory that threatens all Americans.

And at $142 billion per month the public debt is accumulating seven and a half times faster than our economy is growing ($3.4 trillion divided by 24 months) as of the second quarter of 2010. Far worse, though, are our unfunded entitlement liabilities for Social Security, Medicare, and prescription drugs. These unfunded liabilities total a mind-bending $109 trillion. Together, our national debt and unfunded entitlement liabilities come to nearly $400,000 per citizen (not per taxpayer). The United States, the greatest borrower in the world, is insolvent.

In 2010, President Obama spent nearly 25 percent of U.S. gross domestic product. But when one adds in state and local spending (including sales and real estate taxes), total government spending is more like half of all U.S. economic output (depending on the state). No economy can withstand such a high level of economic output being siphoned off by punitive taxation for too long. Much of this government spending, of course, is being financed with borrowed dollars. The Congressional Budget Office estimates that in 2011 the federal deficit will be 10.3 percent. That’s not that far from the Greek deficit, which is estimated to be 13.6 percent. CBO estimated that the portion of our national debt held by the public would more than double from 40 percent in 2008 to 90 percent by 2020.

Most of our state governments are insolvent with California leading the charge. The states are going broke because public sector unions are bribing “management”—elected officials—with millions in campaign contributions. We cannot afford to go on granting our police officers, firefighters, and teachers gigantic defined benefit pensions (versus the defined contribution pensions more popular in the private sector) based on a huge percentage of their last few years’ work including overtime.

Career politicians who have never run a business, never refrained from paying themselves in order to make a payroll, or ever really created a single job in their lives may think they can tax the private sector into oblivion—and equalize wealth no matter what the losses are in terms of overall prosperity—but they can’t.

Back in 1993, Hoover Institute scholar and economist W. Kurt Hauser published a paper making a remarkable assertion: Federal tax revenues since World War II have always been equal to approximately 19.5 percent of GDP, regardless of wide fluctuations in the top marginal tax rate. Said in reverse, individual and corporate taxpayers somehow always find a way of not paying more than 20 percent of gross economic output to the federal government. Whether that’s done by tax cheating, the economy going underground (which is what happened in Greece), or by clever tax avoidance techniques, the empirical data over many decades reveal what is now known as “Hauser’s Law” because of its inviolate nature.

No matter how high the highest marginal tax bracket has been, the Feds have never collected more than 20 percent of GDP. Einstein taught us that matter can approach but never reach the speed of light, and Hauser taught us that the federal tax receipts can approach but never reach 20 percent of gross domestic product.

What this means is that unless federal spending is brought below the Hausian limit (20 percent), federal spending will of necessity be funded out of borrowed funds. But deficit spending cannot go on forever. Given that public debt is now accumulating more than seven times faster than the economy is growing, the public debt will eventually reach proportions not tolerable to the lending community. Lending will be curtailed and the government’s cost of borrowing will skyrocket.

Sooner or later the massive federal spending will stop—the only question is, will it stop before it’s too late for the United States to recover? Tragically, profligate federal spending and the prospect of the vastly increased taxes that must necessarily follow, far from stimulating the economy, ensure economic stagnation.

As the private sector is crowded out and punitively taxed into abandoning or deferring expansion plans, job growth is stultified. And of course jobs are exactly what we need to break the vicious negative feedback loop in which we now find ourselves. People lose their jobs, can’t find new ones, and go into default on their home mortgages. That triggers bank losses, reductions of capital reserves, and less bank lending and more bank failures. And that in turn triggers lower rents and higher vacancy rates at apartment buildings (people without jobs can’t pay rent), office buildings (job growth directly affects office vacancy and rental rates as each office worker takes up about 200 square feet), and retail projects (as retailers depend on consumers). With businesses hurt by the weakened consumer and restricted credit, more businesses fail and we see more job losses.

The problem of stagnant job growth caused by profligate spending and taxation is particularly pernicious in the current recession because now, unlike prior recessions, nearly half of the 8 million unemployed have been unemployed for a long time. The long-term unemployed eventually burn through their savings or simply give up hope, and mortgage defaults follow.

The only way to break this tragic negative feedback loop is to slash government spending, disenfranchise public unions—I suggest flat out illegalizing the unionization of any federal, state, or local governmental workers—and cut marginal tax rates across the board. Doing that would unleash the awesome power of free market capitalism. Businesses would prosper and the job growth engine would begin firing on all cylinders.

On July 4, 1776, when our Founding Fathers signed the Declaration of Independence, they explained to the world the justifications for their actions. The oppressions of King George were so numerous and so punitive, revolution was their only course. In listing their grievances, the signers of the Declaration had this to say about the king’s expansion of government and taxation: “He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance.”

The similarities of the present situation to the circumstances leading to our War of Independence do not end there. Cries of “taxation without representation!” led to the iconic Boston Tea Party, which now bears the name of a newly emerging and powerful grassroots movement.

While it is easy to say that in the present day all voters get a vote and therefore there is no taxation without representation, the statement rings hollow, because nearly half of all American taxpayers pay no tax whatsoever (or get checks in a disguised welfare/redistribution system). Those tax-filers are entirely decoupled from bearing any responsibility for our federal government and in consequence have no earthly reason to vote for politicians who seek to restrain federal spending.

Worse, with so many tax-filers freeloading, there is little political profit in trying to get voted in by the real taxpayers. In the end, the real job of a politician is to get reelected, and the easiest path to reelection is to promise more spending to the freeloaders.

So there really is taxation without representation, as any politician in favor of big government who captures even the even the smallest percentage of the real taxpayers is bound to get elected when he or she adds in 100 percent of the votes of the freeloaders. This has prompted some to propose that we grant an exception to the one person, one vote principle by granting voting rights that reflect tax burdens.

In an April 20, 2010, op-ed article appearing in Investor’s Business Daily, Walter Williams, economics professor at George Mason University, proposed that each citizen get one vote plus one additional vote for every $20,000 of federal tax he or she pays. It would be fascinating to see how many adherents the neo-Keynesians would lose upon the passage of law making that fundamental change to our voting rights.

However it is done, we must break the spend-and-tax mentality and the conspiracy between politicians and public unions. Perhaps we should grant Wall Street–style bonuses to all federal lawmakers for delivering a balanced budget. We could give everyone in the Oval Office and every senator and congressman a million-dollar bonus if the budget is balanced, and we would still save hundreds of billions of dollars.

When that good work is done we must slash marginal rates across the board. With those steps taken, ironically, federal revenues will increase; but we must use the surplus tax receipts to amortize our vast debts in order to restore growth and prosperity. We must not let well-intentioned but misguided notions of economic justice destroy our country and economy.

As Winston Churchill said more than a half century ago, “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

Stephen B. Meister

August 16, 2010

Acknowledgments

Great thanks to my brother-in-law, Michael Mogavero, CFA, for countless fact checking and edits, and most of all for being able to make sense of Fannie and Freddie’s otherwise indecipherable financial statements. Thanks go out as well to my assistants Tara Gremillion and Gissel Arias for keeping this project organized; my colleagues Stephen Lerner, for his help on bankruptcy matters, and CPAs Mark Bosswick and Grace Singer, for their help on financial accounting standards; my associates Stacey Ashby and Kevin Fritz, for cite and fact checking; and family members Jason Meister, for market data, and Gerard Meister and Ellen Meister, for general editing.

CHAPTER 1

The Housing Bubble

Owners of U.S. commercial real estate, comprising principally office buildings, multifamily rental properties, retail properties, and the hotel and hospitality sector, draw upon both consumers and businesses as their customers. The businesses that occupy our office buildings and book our hotels, and our retailers, in turn, depend largely upon consumers, whose spending accounts for over 70 percent1 of our gross domestic product. One way or the other, U.S. commercial real estate is dependent upon the U.S. consumer.

Consumer spending was decimated by the bursting of the housing bubble, which began unfolding in 2006, while American businesses, particularly small businesses, were ravaged by the abrupt and unprecedented curtailment of credit following on its heels. The credit freeze itself was triggered by the subprime mortgage crisis.

The sudden seizure of our credit markets in August 2008 was preceded by the sale of Merrill Lynch to Bank of America,2 was followed by the Lehman bankruptcy and then–Treasury Secretary Paulson seizing government-sponsored enterprises Fannie Mae and Freddie Mac and placing them under federal conservatorship.3

To understand where our commercial real estate markets are headed, we must gauge the health and future prospects of the U.S. consumer. This, in turn, requires an understanding of the subprime mortgage crisis, the building and bursting of the U.S. housing bubble, and where the housing sector is headed. Consumer purchasing power and sentiment are driven in large measure by the relative health of the housing and equities markets.

The systemic risk to our banking sector created by trillions of dollars worth of defaulted securitized subprime (and later prime) residential mortgages spread like a wind-fueled brushfire throughout our worldwide banking system, and as well to the myriad other investors attracted to diverse pools of U.S. home mortgages. Real estate private equity firms, life insurance companies, public and corporate pension funds, and hedge funds, to name a few—really, a cadre of investors, which had become, by virtue of the securitization process, a shadow mortgage banking system unto itself—were drawn to home mortgages, then thought to be a bullet-proof asset class.

THE U.S. AFFORDABLE HOME OWNERSHIP MANDATE

To understand the subprime mortgage crisis, we must roll back the clock. For the first four decades of the twentieth century—prior to the onset of World War II—the percentage of home ownership in the United States hovered in a tight range—43.6 percent to 47.8 percent, a spread of only 4.2 percent.4 Discounting the 1940 figure as an aberrational low brought about by the Great Depression, the range tightens further—45.6 percent to 47.8 percent—a spread of a mere 2.2 percent over a span of four decades. (See Figure 1.1.)

FIGURE 1.1 U.S. Homeownership Rates, 1900–2008 (in percent)

Source: U.S. Census Bureau

After the end of World War II, however, a dramatic change took place. The percentage of home ownership jumped to 55 percent in 1950 and then began a steady climb from there up to 66.2 percent at the turn of the millennium. By 2004–2005, the U.S. home ownership rate had skyrocketed to over 69 percent.

The stunning post–World War II increase in U.S. home ownership rates—going from about 47 percent to 69 percent (representing a 47 percent increase in the home ownership rate)—was not brought about by laissez-faire market forces, but rather by aggressive government intervention designed and driven by a liberal vanguard so blinded by the political correctness of marching toward the American Dream for America’s minorities that they could not foresee the devastating consequences to both the supposed beneficiaries of their intervention, as well as to all other Americans (and really, people the world over). Regrettably, however, good intentions are not enough; as Oscar Wilde said, “all bad poetry springs from genuine feeling.” And as the late neoconservative publisher Irving Kristol added, “the same can be said for bad politics.”