The True Believer
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In 2002-2004, George W. Bush actively campaigned for zero down and zero doc mortgages in the name of closing the racial gap in minority homeownership. This sent a big signal to the financial industry that federal financial regulators would not be actively enforcing traditional lending standards.

The Housing Bubble took off in 2004, helping Bush get re-elected, with his share of his strategically treasured Hispanic vote up from about 35% in 2000 to 40% in 2004 as Hispanics got more mortgages and more jobs as construction workers and home improvement fixer-uppers.

This is similar to how Richard Nixon had his friend Fed Chairman Arthur Burns inflate the money supply in 1972 so he could get re-elected. The interesting thing, though, is that Bush appears to have been largely uncynical. If the month after his re-election, Bush had signaled to the Executive Branch and to the industry that they shouldn't be quite so lax on mortgage standards any more, there wouldn't have been a mortgage meltdown.

But he wasn't that cynical. He drank his own Kool-Aid.

DataQuick reports on California mortgages:

Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3 million in 2006, 8.5 percent have so far resulted in default. A particularly toxic period appears to have been August through November 2006 which had more than a 9 percent default rate. Of the 2.1 million loans made in 2007, it's 4.6 percent - a percentage that's likely to rise significantly during the rest of this year.
You'll notice that the default percentages should run in the opposite direction: "Of cars built in 2004, 8.5% are no longer running, while of cars built in 2005, 4.9% have been disposed of, but less than one percent of 2006 cars are now out of action." That makes sense. Instead, "scraping the bottom of the barrel" is the best single explanation of the 2004 to 2006 trend.

The people who bought in California in 2004 weren't quite so sterling credit prospects as this makes them look. They bought at lower prices than the classes of 2005 and 2006, and had more chance to get out from under their mortgages by selling while still above water rather than defaulting.

But housing prices in California more or less plateaued in later 2005 through 2006, so the worse performance of 2006 borrowers compared to 2005 reflects, in part, bottom-scraping.

Still, the take-away message is that the class of 2005 included a lot of people who couldn't qualify for a loan in 2004. And the class of the first half of 2006 included people who couldn't qualify for a loan even in 2005. And the class of August-November 2006 included a fair number of people who couldn't normally borrow a cup of sugar from their neighbor.

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