US Mortgage Market 2000–2008 – Follow the Money

The following is a chart that shows the growth of total US mortgage debt as percentage of GDP (“MD/GDP") for the period 1985 - 2008. From the end of to 2000 to 2007 the rate of MD/GDP rose from 67% to a peak of 106%.


The increase in the percentage of MD/GDP coupled with the aggregate growth of GPD created an explosion in the total value of mortgages outstanding. From 2000 to 2008 mortgage debt rose from $6.9 trillion to $14.6 trillion, an increase of 110%.

The dramatic change in the relationship between mortgage debt and GDP was a significant contributor to the economic expansion during the period. The doubling of mortgage credit fueled the building boom. It was the gasoline that led to the rapid rise in home prices. It is the source of the bubble in both housing and the broader economy. It is the reason that we are in such a mess today.

This chart shows the holders of mortgages in 2000.


The following chart updates the information for 2008. Only the percentage for the Pool category is significantly increased. The total government share of the Pool increased 120% to $5 trillion. It is difficult to conclude from this data that the private financial institutions were responsible for the over leveraging that took place.


This final chart shows the components of the Securitized Pool in 2008. 66% of the $7.6 trillion Pool has been issued and or guaranteed by either, Ginnie Mae, Fannie Mae or Freddie Mac. The increase in the Federal Pool category totaled $2.5 trillion during the eight-year period.


These charts and related information clearly demonstrate that the DC side of the mortgage mess is a much bigger component than the private sector. Expansion of the Government's roll in the mortgage market by this level of magnitude could not have been accomplished without the ‘Official Guidance’ of the White House.

Mr. Bush was clear in his mind on the issue of expanding home ownership.

President Bush, May 2002:
“I believe when somebody owns their own home, they're realizing the American Dream. I want that pride of ownership to extend all throughout our country. The goal is, everybody who wants to own a home has got a shot at doing so. We want 5.5 million more homeowners by 2010.”

While his goals appeared admirable the consequences will prove costly. Before this housing crisis is over it is likely that we will lose 5 million homeowners rather than gain that amount.

Mr. Bush understood where the money was coming from to support his housing goals. He knew how to unleash the power of the Federal Mortgage Agencies. He refers to Fannie Mae as the ‘Private Sector’ in the following comments. His Treasury Secretary in 2002, Paul O’Neill, was arguing for restraint in the Agencies role in the mortgage market. O’Neill was sacked six months later.

“I called upon the private sector to help us and help the home buyers. I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital.”

Mr. Bush connected his zeal for expanded home ownership with his thinking on homeland defense:

“Economic security at home is just an important part of -- as homeland security. And owning a home is part of that economic security.”

With the benefit of hindsight it is easy to conclude that the absence of regulations and guidelines by Federal regulators contributed to the explosive growth of credit during the last decade. Mr. Bush set the tone for the lax regulatory framework with these words:

“The problem is the fact that the rules are too complex. People get discouraged by the fine print on the contracts. There's too many pitfalls. The Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with home ownership.”

The $3.1 trillion increase in the Federal Housing Agency extension of credit during the seven years commencing in 2000 should be compared to the $800 billion two year stimulus bill that was recently signed by President Obama. The ‘stealth’ housing stimulus that occurred from 2000 onward came to an average of $400 billion per year, exactly equal to the 2009 ‘emergency’ stimulus program. Of importance was that this stimulus was not on the Federal budget, it was masked as the private sector.That mask came off when FRE and FNM went into Conservatership.

The expansion of mortgage credit has been a powerful engine for economic growth for sixty years. That engine was red lined for the last seven years. Now we need a new engine for growth. It is unlikely that it will be from an expansion of easy credit. The aggregate amount of mortgage debt outstanding actually declined $100 billion over the last nine months. If we were to return to the 2000 level of Mortgage Debt/GDP = 70% it would imply a reduction of credit in excess of $4 Trillion. The return to historic debt ratios will take many years. The outlook for a return to sustained economic growth of 3% while the debt market is contracting as a percent of GDP is unlikely. An extended period of sub-par growth is a more probable outcome.


Sources:

http://www.federalreserve.gov/econresdata/releases/mortoutstand/mortoutstand20090331.htm

http://www.federalreserve.gov/Pubs/supplement/2004/01/table1_54.htm

http://www.hud.gov/news/speeches/presremarks.cfm