The Clinton government used the Community Reinvestment Act to require the two primary home lending institution in the US, Fannie Mae and Freddie Mac, by 2007, to favour sub prime borrowers. 55% of their mortgages were required to be provided to low and moderate income borrowers, and 25% were to be for low and very low income borrowers.
The intentions were of course good, to assist low income groups to achieve home ownership. The sub prime mortgages were to help borrowers who did not have the capital for a deposit or the income level needed to service a mortgage.
As a consequence, there was a lowering of the lending standards normally required, with low deposits and lower interest rates applying for an introductory period. Wall Street cooperated by pooling these loans and distributing the risk to a wide investor market.
The sub prime loans were very popular, the theory being that rising house prices would provide additional equity in the property after two years of low interest payments.
The reduction of lending standards meant that home ownership in the US increased from 65% in 1994 to 69% in 1996. In 2002, President Bush continued the procedure, with a goal of 5.5 million additional home owners including 1 million minority home owners, by 2010.
Of course this did not work out as planned, with extensive mortgage defaults as interest rates rose and housing prices fell. The US home ownership rate is now down to 67.5%.
In Australia, the home ownership rate has been about 70% since 1960. This figure has remained constant in spite of the fluctuations in interest rates and the various government incentive schemes. The Reserve Bank reports that in Australia there are currently only 25,000 mortgages that are in arrears 90 days or more.
So the US government’s good intentions produced a disastrous outcome, which then spread globally as the US housing market imploded and the lenders failed.
Since small businesses in Australia often use their residential property as security for business borrowing, being spared the US experience has been a blessing. We assist small Australian businesses by providing them with prospects at no cost to them from our Local Search Facility in our Australian Business Directory.
There are 1.2 million businesses listed in our directory, most of which are small businesses.
Monte Huebsch, CEO
The intentions were of course good, to assist low income groups to achieve home ownership. The sub prime mortgages were to help borrowers who did not have the capital for a deposit or the income level needed to service a mortgage.
As a consequence, there was a lowering of the lending standards normally required, with low deposits and lower interest rates applying for an introductory period. Wall Street cooperated by pooling these loans and distributing the risk to a wide investor market.
The sub prime loans were very popular, the theory being that rising house prices would provide additional equity in the property after two years of low interest payments.
The reduction of lending standards meant that home ownership in the US increased from 65% in 1994 to 69% in 1996. In 2002, President Bush continued the procedure, with a goal of 5.5 million additional home owners including 1 million minority home owners, by 2010.
Of course this did not work out as planned, with extensive mortgage defaults as interest rates rose and housing prices fell. The US home ownership rate is now down to 67.5%.
In Australia, the home ownership rate has been about 70% since 1960. This figure has remained constant in spite of the fluctuations in interest rates and the various government incentive schemes. The Reserve Bank reports that in Australia there are currently only 25,000 mortgages that are in arrears 90 days or more.
So the US government’s good intentions produced a disastrous outcome, which then spread globally as the US housing market imploded and the lenders failed.
Since small businesses in Australia often use their residential property as security for business borrowing, being spared the US experience has been a blessing. We assist small Australian businesses by providing them with prospects at no cost to them from our Local Search Facility in our Australian Business Directory.
There are 1.2 million businesses listed in our directory, most of which are small businesses.
Monte Huebsch, CEO
