Jason starts the show discussing the upcoming Pandemic Investing event. He gives a list of 6 tsunamis that are transforming the housing market. In the show’s interview segment, he hosts Barry Zigas, Senior Fellow at Consumer Federation of America. Barry starts the interview by sharing a brief, descriptive history lesson on how Fannie Mae and Freddie Mac came to be. Later Barry and Jason start a conversation and a housing crisis in low and middle-income families. They look at the factors that go into homeownership rates.
Jason Hartman 0:02
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multimillionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day, you really can do it on Now, here’s your host, Jason Hartman with the complete solution for real estate investors. Welcome to Episode 1572 1572. Our guest today will be Barry zycus, the former senior vice president of community lending for Fannie Mae and the head of the National Low Income Housing Association, I believe, forgive me if I got that wrong, might be group or Association. Anyway, he’ll be here in a few minutes. And he will be discussing the massive low income housing crisis actually low and middle income housing crisis, meaning that there’s just so little inventory of the housing to satisfy these people at this segment on the economic spectrum. It’s just really a national crisis. It really is. I think it’s sadly only going to get worse. And by the way, on Saturday, we will be exploring some of these issues at our pandemic investing event. So I hope you’re ready to join us for that. And that’ll be on Saturday. Now, one of the things that I think is is really fascinating, is I’ve always loved to read futurist books, books by futurists, and four of them really had a big influence on me, dating way back to 1989. JOHN Nesbitt wrote a book called mega trends. And he had actually a series of books out of this. And he talked about 10 new directions, transforming our lives. And that was fascinating to me. Because, you know, as Yogi Berra said, the future ain’t what it used to be. And, and that’s always been true. But then into the mid 90s, I read a book by faith popcorn, called the popcorn report, and she is also a futurist. That book was an international bestseller. It was quite fascinating and both Nesbitt and popcorn, both john has been in faith popcorn talked about these two big technologies, if you will. And I’ll be talking about that on Saturday at our pandemic investing virtual event. What’s interesting about it, as you look at that, from, you know, a long time ago in the context of how we think today, and during the pandemic, during these times of crisis, as we’ve seen, just almost everybody shift to home based work to remote working. Certainly, this was happening. It’s been happening for decades. But again, COVID, just the mass accelerator of COVID, right. And then another book that I thought was fascinating was a book called power shift that was also maybe around 1990 or so I can’t remember exactly. And then another one called the fourth turning. Now, power shift was by Alvin and Heidi Toffler. And the fourth turning by William Strauss and Neil Howe. In the fourth turning, a lot of people now are talking about how the predictions in that book are coming true right now. And basically, it describes these generational shift and in their case, really a multi generational shift. They call the fourth turning, saying that we are entering the fourth turning right about now, and all of these futurists and I consider myself to be somewhat of an amateur futurist. Because it’s just fascinating to me, how things will change in the future, and what will happen and what will turn out. So again, we’ll talk about those four big futurist influences that I had and the technologies they cited, that would really change the world in terms of where people live and work. And that is so, so relevant to today’s happenings. It is so so relevant, today’s happenings. Also, I’ve talked before about this, but we’re going to take a deep dive into this on Saturday. And that is the six tsunamis. That are changing the housing market. So dramatically. One roommates, two couples, three urban dwellers for remote workers five remote working out. I’m talking about fitness. Yes, that is a big part of the trend. Have you looked at peloton stock lately? Have you looked at these home fitness companies? I mean, business is booming for them. It’s absolutely crazy. And number six, multi generational living, popular in many areas around the world, but certainly not popular in America. And I say these things are undergoing a massive transformation. We are in the midst, potentially, of the biggest wealth transfer that has ever ever happened. So it is fascinating. And I just can’t wait to dive into these questions on Saturday. So bring your questions, bring your skepticism. Bring your thoughts, bring your comments. If you’re not joining us yet, and you didn’t get a ticket, go to pandemic investing calm and make sure you do. Because this is a very exciting event. And I’m just really, really looking forward to it. So looking forward to seeing you all there. Okay, a couple other things. Before we dive into the interview with today’s guest, I thought this was interesting. It isn’t a surprise to me. If you’ve been listening to the show for any length of time and following my work. It’s not a surprise to you either. But again, it validates what we’ve been thinking and what we’ve been saying really since February. And so this article talks about, it says rent is plunging in high priced US cities and tech hubs. Example San Francisco, New York, San Mateo. Okay. And increasing in fast growing cities, Rochester, Colorado Springs, and you know, so many others. All right, and then spillover markets like Tacoma, Washington, right. So there are many others. And again, those markets mostly are too expensive for us as investors, but there’s a lot more spillover than that. Okay. And it’s just really fascinating. And like I said in that example, a couple of weeks ago, just think about what happens when a typical California sells their $600,000 property in California. And they move to one of these more affordable suburban markets. And again, in many California markets, 600,000 isn’t much, okay, not at all. But they get a much better home, they get a much better lifestyle, and they have only half the debt burden they had previously. So now that their money is spending so much better in just take my own example, I’m ahead of the trend. A lot of times, everybody now is talking about leaving California, but I left nine years ago, and I think I was too late, I should have done it, you know, 1215 years before that. But when I left, my mortgage payment was about $11,000 a month living in, in Southern California. Yes. And my house wasn’t that big a deal. Now it did have a nice view. I had the city lights, I had the ocean off in the distance in the sunset. But my house was only like 1800 square feet. It was brand new, had a nice big yard for Orange County, which nobody has a big yard there. But relatively speaking, it was a very big yard for that area. And I was paying $11,000 a month, I moved to Arizona rented a place that was twice the size. And in my opinion, much better. My lifestyle just massively improved. And I did rent when I was in Arizona, and I prefer renting a high end property. I think that’s the best deal. As you’ve heard me say many times, unfortunately, in Florida, I had to end up buying a house because, you know, just couldn’t find any good high end rentals. And again, I’ve explained my theory about that, that so many of them were converted to Airbnb s and they entered the short term rental market. And that’s what sucked up a lot of that good inventory of long term rentals. But obviously, that’s changing too. So things are changing, big wealth transfer going on right now mega mega wealth transfer. And what do I mean when I say wealth transfer. So it means the wealth is moving? It’s moving geographically. It’s changing asset classes. And it’s also changing its preferences and its taste and its risk tolerance. And it’s also changing generationally. Inflation is transferring wealth, people passing on is transferring wealth, right. So there are all of these wealth transfer aspects, but I’d say the biggest one has to to do with COVID-19 84. Okay, that has just accelerated so many trends, and it’s created new trends, which, again, little teaser here, we will take a deep dive into that on Saturday. So join us go to pandemic investing.com. Get your ticket. So again, imagine this California selling their $600,000 property, leaving California moving to one of these more affordable markets, which is most of the country frankly, imagine a New Yorker, they might be renting in New York, or they might have owned, they might have owned or rented a, you know, a 1.5 to $2 million value property there. And they might have been paying 40 $500 a month, or they might have just had the equivalent mortgage for a one and a half million dollar plus property in New York City. So they move to one of these other areas. A little bit similar to my example, moving to Arizona in 2011, leaving my $11,000 a month mortgage payment, crossing the state line, and having my state income tax drop by 69%. Think about that, a 69% reduction. Now Arizona has state income tax, and I think the highest bracket there was or is 4.6% versus California 13.3. And now they want to raise that to like 16.3% in California, absolute disaster. And what I noticed after living better in Arizona, and having a 30 $600 a month rent payment for a much better property was the tallest all residential building in the entire state of Arizona. great views, brand new 10 foot ceilings floor to ceiling glass, absolutely beautiful place that I had there. But I wanted to get out of Arizona to live in a no income tax place. So I moved to Nevada. And you know, I lived in Las Vegas for a year and a half. And definitely not a Vegas guy. Not much of a fan of Vegas. But no state income taxes in Nevada. So a four hour drive from Los Angeles, you can live in Nevada, and you can take your tax rate from the highest marginal tax rate in California 13.3%. Massively more expensive housing cost massively more expensive. Everything cost you can live in Nevada, zero state income tax, and, you know, much lower housing cost and much lower cost of everything else. So imagine the wealth effect this creates this is the point I’m making the wealth effect created by all this new discretionary money people have or disposable money, right, they call it disposable income. So I noticed in Arizona, when I you know, my first out of state move when I finally left the Socialist Republic of California, my ability to save and invest and create wealth and accumulate wealth, just it was just so much faster. And you know, the old joke in Newport Beach, where I used to live is that, you know, you’ve got the guy in the $90,000, Porsche now adjust for inflation that Porsche is $130,000 or so. But anyway, you’ve got the guy in the $130,000, Porsche, and you go out for a night on the town. And when it’s when it’s his turn to buy a round of drinks, you can’t find him anywhere. It’s this story of so many people being house poor. And suddenly, now they’ve got all this disposable money to invest, to start a business to buy more rental properties. It’s a tremendous wealth transfer we are witnessing right now, right now, a tremendous wealth transfer. So if you want to take advantage of that, if you want to position yourself to win through this wealth transfer, then keep listening to our podcast five days a week, check out our YouTube channel, join us on Saturday, and really get Take a deep dive into pandemic investing. pandemic investing.com. You can get Your FREE Mini book and register for Saturday’s event. Without further ado, let’s get to our guest. And let’s explore this low income housing crisis. Again, this is where you are providing a lot of workforce housing to people. So Pat yourselves on the back investors, that’s what you’re doing. You’re helping solve this problem. Maybe it’s not at the lowest end of the scale. Hopefully not we don’t recommend that that segment of the market. But you are part of the solution. So congratulations to you. And thank you for being part of the solution. And here is our guest it’s my pleasure to welcome Barry’s egoscue As founder of z ascent associates a consulting firm, He is a former senior vice president for community lending at Fannie Mae from President and CEO of the national Low Income Housing Coalition. And that’s got an acronym I won’t bother to mention. and former chairman of the board at mercury housing, he created the low income housing tax credit, the H O me or Home program and affordable single family mortgage products at Fannie Mae that helped to significantly expand affordable homeownership and rental housing opportunities for low and moderate income Americans. Barry, welcome. How are you? Fine, Jason, thank you very much. One quick correction. I was chair of the board of Mercy Housing, not mercury housing. Ah, okay. Yes, I was. Yeah. Okay.
Barry Zigas 15:46
It is one of the largest social housing providers and operators in the country. Excellent, excellent.
Jason Hartman 15:51
So nothing to do with the ancient Greek god or the planet, 4k monitors, thermometers. Good stuff. Well, he Barry, I’d like you to just explain for our listeners and viewers, kind of a broad strokes on, you know, Fannie Mae and Freddie Mac, these are these sort of I mean, are they NGOs? Are they government, their government sponsored entities for sure. Their role changed somewhat during the Great Recession. And now it changed again, just maybe several months ago. Talk to us about that. And then the relationship between that, that entities and the government, the FHFA, etc.
Barry Zigas 16:29
So Fannie Mae and Freddie Mac, both were created by acts of Congress, Fannie Mae dates back actually, to the New Deal, right was a full government agency that raised money by issuing government bonds and use that money to buy mortgages primarily from savings and loan and thrift Association.
Jason Hartman 16:49
And before that, before that New Deal, created Fannie Mae, really, there was almost no mortgage market, right. It was like a lot of foreign countries where, you know, you could get maybe a five year mortgage, and one of the things that really hurt during the Great Depression is that they could recall those loans somehow.
Barry Zigas 17:06
That’s exactly right. The mortgage finance system pre new deal was very highly localized dependent on what were then called thrift institutions, savings and loan associations, building societies, and some insurance companies. And mortgages, then were typically five years in duration. And we’re doing payable and balloons at the end of five years. And the way the system worked was that loans would be refinance every five years during the Great Depression. And of course, banks ran out of money and people were out of work and couldn’t refinance. The mortgages couldn’t pay the ones they had, and they were very widespread. defaults. Congress created the homeowners loan corporation which purchased a lot of those mortgages and tried to stabilize the system that led to the Federal Housing Administration in 1934. And the 1938, Congress created the federal National Mortgage Association or Fannie Mae, the Federal Home Loan mortgage Corporation, Freddie Mac, actually didn’t get created until 1970. And it was a subsidiary of the Federal Home Loan Bank board, which was the overseer and national organizing entity for those thrifts and savings and loans in the savings and loans crisis in 1989. Congress spun out Freddie Mac into private ownership, and Fannie Mae was spun out into private ownership in 1968. So it became a congressionally chartered company that was owned by shareholders, but governed by a charter granted by Congress, which had certain privileges and certain restrictions and principle me principle mission was to provide stability and liquidity in the nation’s mortgage markets, and help to provide mortgage financing as broadly and widely as possible. And then Annie Mae, following the creation of the Federal Housing Administration, is what led to the eventual nationalization, if you will, the National scope of the mortgage system, which today provides a very uniform mortgage rates, regardless of where you live, right back in the day, even in the 1960s. mortgage rates vary greatly, depending on how many deposits different institutions had and how much demand there was for home loans.
Jason Hartman 19:14
Yeah. And back to the Great Depression, you know, just think of Jimmy Stewart and its wonderful life. That was your mortgage lender right there.
Barry Zigas 19:21
So that’s exactly right.
Jason Hartman 19:22
Interesting. So would it be fair to say though, that Fannie Mae’s mission, and Freddie Mac’s I guess to is to increase homeownership, that’s one of its missions, so its mission is to help build build homeownership. Another part of his mission is to provide stability in the mortgage markets, right to be a counter cyclical and stabilizing force. And the third is to ensure broad liquidity in the mortgage markets so that the flow of funds is is free and there is a lot of liquidity. So that’s one thing that the US has, that other countries around the world just do not have. We have a very unique mortgage system here. It’s really a gift I mean, if you’re not taking advantage of these awesome mortgages we have in the US, you’re missing out because it really is a gift.
Barry Zigas 20:07
But well, the system we have I just said the system we have is made it possible for American consumers to both obtain mortgages at very affordable rates, because there is so much liquidity and for three decades investors want these but it also has enabled consumers to get long term fixed rate mortgages, that they can prepay without penalty. Right. And that’s it. That’s an extremely important feature for consumers.
Jason Hartman 20:30
Yeah, no question about it. So promoting homeownership. And, you know, I’ve tried to analyze this over the years. And I’m, I wonder if, you know, maybe you’ve ever thought about it, analyzed it, you know, maybe done some reports on it research with with your various parts of your career. But what are homeownership rates, like around the world where they don’t have the kind of system we have? And related to that? If you promote something, which they do, they obviously promote this liquidity and this robust mortgage market that we have, don’t you just naturally create a bubble and increase prices? And if you promote mortgages and make them more widely available, the price is going to go up of the properties that they’re attached to? Right. All right.
Barry Zigas 21:14
Well, that’s it. That’s a really good and complex question with a variety of different answers. So first, on the question of global comparisons, a it’s very tough to make real global comparisons in the housing policy arena, because you have to think holistically about what the policies are. So how does the national government policy treat rental housing? How does it treat homeownership? How does it treat the other necessities of life so in in countries, for instance, that have universal entitlement to health care and education and pensions, consumers can actually afford to spend substantially more for their homes and be less concerned about the liquidity of their own mortgage, because they’re protected in so many other ways in the economy, the United States, uniquely among the developed Western nations, depends on the private sector to provide almost all of those services. So that’s one big difference. In fact, there are countries with higher homeownership rates than the United States. But those systems run with a different kind of mortgage financing. Consumers typically put down very large amounts of money to buy their home mortgages are much smaller, and they’re often of shorter duration and have to be refinanced frequently.
Jason Hartman 22:22
Typically, like that five year cycle, right, where they’re refining this
Barry Zigas 22:26
Five, seven, ten. you know, consumers today, going to buy alone, get alone will be confronted with a series of options. Even in the United States, you can have a long term fixed rate mortgage for 30 years, you can have one for 15 years. And then there are adjustable rate mortgages, which operate in five, seven and 10 year terms. And those shorter terms are much more common. Around the world, very few places have long term Fixed Rate Mortgages the way the United States has. And that’s been a great advantage to consumers. The second part of your question, doesn’t more mortgage financing leads to housing, inflation bubbles and unaffordability. That depends on two things, one a is there enough liquidity to finance the demand? Because if there wasn’t enough liquidity a fancy man, then actually prices would go up? because it’d be more demand than there was supply? The second part of that gets to the question of what are the terms of the mortgage? And what are the credit qualification. So if you were offering anybody credit, regardless of their ability to repay the loan, then you could in fact, flood the market with liquidity, drive up prices, and create a bubble. And in fact, that’s exactly what happened. In the mid 2000s, a whole branch of lending opened up subprime lending, and so called alt a lending that was focused entirely on changing the criteria, the qualification criteria to make it possible to provide mortgage financing to more consumers. And what happened was those loans turned from being convenience loans to being abusive loans. And in fact, we did create a bubble and that bubble burst in 2008. And we still suffering some of the repercussions of that if you have good credit standards, right? That is a natural break on how many consumers can qualify for a mortgage. And if you see house prices rising, and income is not, and you have standards for how much of your income people should be willing or able to pay for their mortgage, you have a natural cap on demand. And one of the things Fannie Mae and Freddie Mac are supposed to do is provide that stabilizing force in the market by establishing national standards for mortgage lending, that are designed to balance liquidity and stability. One of the things that happened in the mid 2000s was that equation got out of whack, and we work our way out of it. Yeah.
Jason Hartman 24:46
Yeah, no question about it. Do you have an opinion? I’m sure you do as to what the homeownership rate should be. I mean, it got as high as about 69% during the george bush ownership era, you know, promotion. And now I think it’s maybe 62 63% somewhere around there, if I’m not mistaken, what’s your opinion? And what have been some of maybe the stated goals of these organizations? Maybe they didn’t publish that. But it was internal as to what they thought the homeownership rate should be?
Barry Zigas 25:12
I think it’s a great question. And let me start by saying, you know, when you look at the aggregate, homeownership rate, it really masks tremendous disparities in homeownership rates among Americans. So the overall rate is somewhere in the mid 60s now low to mid 60s percent, it was as high as 69%. Right before the crash. But that masked big differences, the homeownership rate among white Americans is over 70% at one time approach 75% and the homeownership rate among African Americans as well below 50%. And similarly, Hispanic Americans well below 50%. So there’s tremendous disparity. So that number 62, masks, enormous difference.
Jason Hartman 25:51
I agree with you. But I’d be really curious to know, when you look at those racial segmentations, what is the percentage based on married or single households, you know, when we have a single parent household, it’s a lot harder to buy a house. And I would argue that the government has created that problem and the African American community.
Barry Zigas 26:13
Well, so let’s, let’s break that down. So first of all, I don’t actually know the differential rates between single head household and married households, I’m certain it’s lower for the first and higher for the second. That’s number one. Number two, when you look at the rates, apples to apples, if you compare household size, income, credit qualifications among white applicants and black applicants, black applicants fare much, much worse, they do not get the same treatment or access to mortgage credit,
Jason Hartman 26:42
Really, when you when you compare really the qualification now that’s, that’s scary.
Barry Zigas 26:45
One of the foundations of the national homeownership strategies It started with the Carter administration moved into the bush administration was based on that kind of analysis was when you look longitudinally across populations, the things that you might intuitively say, Oh, well, it’s obvious why the homeownership rates are lower because of whatever socio economic conditions credit whatever,
Jason Hartman 27:07
Lower incomes, whatever,
Barry Zigas 27:09
that when you look at the different slices, not that’s not true. And so there is discrimination in the mortgage markets, and there’s discrimination. That’s both current. And there’s discrimination that’s historical. So
Jason Hartman 27:20
Is it actual mortgage denials? Or is it that people just don’t apply in the first place? They don’t try to buy a house?
Barry Zigas 27:26
Yeah, that’s great question. It’s a combination of things. So So historically, first of all, African Americans were excluded from the mortgage system for many years, right? The term redlining originated with the homeowners loan Corporation, and again, ended into the FHA, where black households were not really allowed to get financing for housing. So that put those households really behind the wealth building train, right, right, white households who were able to take advantage of low down payment mortgages, were able historically to build up wealth which they can pass on to their heirs, and to position them to buy homes in the future.
Jason Hartman 28:02
I’ve seen those studies and I agree with them, they’re they’re really tragic. There, there’s no, I did
Barry Zigas 28:06
not have those. Now, fast forward to today. 1968, we have the Fair Housing Act, which banned overt discrimination in housing, we still see a big lag. And we see that lag for a number of reasons. One of them is there’s still discrimination in the mortgage markets that gets shown over and over again by testers who present exactly the same characteristics to a lender or a landlord. And black households don’t get treated the same as White House, that’s one, two, you have this lack of wealth, which means low income, that middle income, black households often have only a small amount of money to put down for a down payment that limits their choices, and it limits the size of the house or price they can buy. And then finally, in as we think about credit and the way we evaluate people’s likelihood of repayment through credit score’s the algorithms that go into developing those scores have been shown to have all kinds of implicit biases, which often work against the interests of black homeowners or black aspiring homeowners. Finally, we did research when I was at Fannie Mae, that showed that there has been partly because of this historical pattern of discrimination, African American households are more likely to say that people like me, can’t get a mortgage, people like me, don’t get to be homeowners, and they sort of take themselves out of the market. And when I was at Fannie Mae in the mid 90s, we ran a big big campaign to try to bring more people into the market because we knew there were creditworthy borrowers who were simply self self selecting out of the system because of their fear of being discriminated against, or their experience of it.
Jason Hartman 29:40
Now, I’m wondering also depending on the you know, the reality of this discrimination, are the lenders discriminate against people or neighborhoods because because for Yeah, if you look at this as a very much a current events, okay, I remember living in Orange County growing up in Los Angeles in 1992, Rodney King riots, okay, if I was a lender, I wouldn’t want to finance anything in a neighborhood that’s going to be burned down and destroyed. And businesses certainly didn’t want to reopen there. So how much of that is the area versus the human?
Barry Zigas 30:16
Well, we have a lot of I mean, it’s both. It’s both issues, lenders have discriminated geographically for decades, and often based on who lived there, nevermind what happened in the neighborhood. So the history of redlining was defined redlining as a term. And a tool was defined by the percentage of non white people living in the community. And that was judged to be a less credit worthy community, a place where you should not lend as much money or even be willing to lend any money at all. So there have been geographic discrimination for decades. And the Community Reinvestment Act and the home mortgage Disclosure Act, which were adopted in the mid 1970s. were designed to combat that geographic discrimination, right? In second level is personal discrimination, which I’ve described comes in a variety of formats. Some of it is over bad treatment. Some of it is lack of access to credit in the community. So lenders don’t market to that part of the population for any number of reasons. And the third is that the way we think about and evaluate credit is laced with embedded bias, about behaviors about history that end up discriminating against African American families and Hispanic families to a similar degree. The question going forward really is how do we make sure that the system fully serves as many households as possible in a way that’s responsible, sustainable, and doesn’t discriminate on the basis of any non relevant financial factors. And that’s a challenge the industry has not yet met,
Jason Hartman 31:46
I want to ask you about these new credit scoring proposals way beyond FIFO, which I talked about on the show over the years that are pretty interesting. But in terms of Oh, the Community Reinvestment Act, I wanted to talk about that a lot of people placed the blame for the mortgage meltdown that preceded the Great Recession. And I really divide that into two things. I think there was a mortgage meltdown. And that was only phase one. Then there was the Wall Street scam going on behind the scenes, that was a whole different thing. I mean, I predicted the mortgage meltdown years before it happened, and people argued with me vociferous Lee, and, you know, said I was crazy, and especially realtors, you know, said I was trying to destroy their business. I mean, you can’t believe the hate I encountered for that. I certainly. I was right. Yeah. Yeah. Yeah. So but but I did not know about what Wall Street all the shenanigans they were, you know, all the criminal activity they were doing behind the scenes. That was all a surprise to me. And I guess that’s the subject of The Big Short, right. So we But with that, how much of the Community Reinvestment Act is to blame for that mortgage meltdown? I mean, forcing these banks basically shaking them down to give loans to people who just aren’t qualified because they had to, you know, do a form of affirmative action. Is that true? Or is that false? Oh, man,
Barry Zigas 33:06
That’s and that’s a why that ideologues who are unwilling to accept responsibility for the consequences of their economic policies like to promote. Okay, you don’t have to take my word for it. The financial crisis investigations commission reached that conclusion, congressional hearings have reached that conclusion, academics at the Federal Reserve and other places have reached that conclusion. There’s no evidence whatsoever that the Community Reinvestment Act was a contributing factor to the mortgage meltdown in which
Jason Hartman 33:33
Were lenders promoting mortgages to lenders.
Barry Zigas 33:38
Let’s be clear with the CRA require CRA requires that lenders serve all parts of their community from which they accept deposits. That’s the basic theory of CRA. It does not require them to make particular kinds of loans, it simply requires them to be able to demonstrate that they’re not denying credit to any part of the areas from which they are drawing deposits. And in fact, loans that were created under so called CRA programs, which were designed to provide broader access performed Far, far better than the subprime loans that were not CRA eligible. And the alt a loans that were not crls because they didn’t serve low and moderate income people, or they did it in an abusive and predatory fashion. The CRA is designed to just make sure that lenders do not discriminate geographically in their distribution of credit and their access to credit. Fannie Mae similarly had housing goals and there are some who argue that the fulfilling of the housing goals which was one of my responsibilities when I was at Fannie Mae and I was partly responsible for developing the housing goals. This legislation was another driver of this that’s also been debunked by the Federal by the financial crisis investigations commissioned by the Federal Reserve and others. Fannie Mae and Freddie Mac did expand their credit criteria, but did it in a way that was designed to be responsible and prudent And so even the access products that I was responsible for, we had a hard floor on credit scores. We required investigation into credit. These were fully underwritten loans, the loans that drove the crisis really drove the crisis, where the so called liar loans and no income no and, you know, loans that were designed to enable people to buy homes that was standard underwriting they would not have qualified for and that drove the inflation you described. And that’s what led to the crash. The larger economic crash was then, as you say,
Jason Hartman 35:31
current talking about a very long term inflation from the 30s. Okay,
Barry Zigas 35:35
Well, but housing you know, housing inflates because there’s always an imbalance between supply and demand. The responsibility of the mortgage finance system is not to provide so much credit that it artificially inflates that bubble beyond the ability of the system to maintain itself and all through the 1990s. In the early 2000s. We had a very stable system, where millions of home new homeowners were created. As the population grew, the ownership rate grew gradually, incrementally, and the system was very stable. It became disabled lies, actually, when credit moved away from lenders that were accountable for CRA and from the system that Fannie Mae and Freddie Mac operated. their share of that market declined very very precipitously in advance of the crisis, and their loans all performed Far, far better than those of the unregulated no so called New innovators who came into the market in the early 2000s.
Jason Hartman 36:28
This will be continued on the next episode. Thank you for listening and happy investing.
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