“The road to hell is paved with good intentions,” is certainly a thought foremost in the minds of American’s struggling to come to grips with the cause of the housing debacle that is now infiltrating the bank accounts of all U.S. citizens. Since the 1990s many lawmakers have been working out ways to increase home ownership for low to moderate income earners of the nation as a way to make housing more affordable.
Because of that, many large lenders, especially Freddie Mac and Fannie Mae have been encouraged by the government to offer a large portion of their loans to the highest risk borrowers. Because of this action backed by the affordable ownership initiative, when those borrowers defaulted on the loans the entire industry unraveled at the seams.
During the entire process, the debt of the average American grew exponentially courtesy of their mortgage. Historically lenders believed that a 30% debt ratio to income was the limit for mortgage lending, however the average American is now carrying 38% courtesy of the mortgage debt they carry. This imbalance and the struggle to manage the expenses associated with homeownership caused the default rate to rise.
Increasing home ownership is a very noble cause and affordable housing is a goal for the common good of all of society. The act of making it easier for people to borrow money did nothing to create more affordable housing, in fact it had quite the opposite affect. The efforts surrounding the Utopian goal of home ownership actually caused more problems courtesy of the costs associated with sub-prime mortgage rates.
While risky sub-prime loans were still fairly easy to get, home prices escalated in response to the availability of easy credit and when one portion of that foundation gave way, the entire industry collapsed under the burden of the situation.