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Friday, October 10, 2008

From Ownership Society to Owned Society

by Chuck McGlawn
Bush takes office for his first term soon thereafter he begins laying the ground work for what would become known as the "Ownership Society". Now, every Republican worth his salt knows that property owners, compared to renters overwhelming vote Republican. So Bush has Congress from “I George W. Bush” In 2001 there were steps to greatly increase the number of people that would qualify for the loans necessary to buy a home.

Follow me on this. The very “liberal” first two years of the Clinton administration spawned a movement that produced, a Conservative dominated Republican majority in Congress. Notables of that group are Newt Gingrich and Bob Barr. Add to that the resounding echo of Perot’s call for a “balanced budget”, combined with the huge success of a welfare reform adopted by beleaguered Michigan brought on by its dying auto industry and the concomitant reduction of tax revenues that was forced onto the Clinton Administration. Now add to all of those curbs on government expansion, a Dot Com boom unprecedented in America’s history with the possible exception of the “Industrial Revolution”, resulting in balanced budgets and a gradual rise in the standard of living, and a true increase in home ownership.

Enter from stage left George Bush jumping in front of this already significant move toward home ownership, saying, “The Bush Administration wants to make homeownership easier and more accessible to all. It sounds like he is going to expand the already growing homeownership. And, “sounds like” is where it ends. What he really meant, as it turns out is that the Bush Administration would “Own Society”. Now how long these plans were in the works before Bush took office I do not know. However, in 2001 there were thousands, tens of thousands perhaps even hundreds of thousands of families nearing the threshold of home ownership. These families were saving their money to participate in the American Dream of owning a cottage home with a white picket fence. At that time, the Maestro (name or group unknown) began to orchestrate events with the precision of a metronome. The Dot Com Boom went bust, and to keep America on an even keel the real estate bubble is launched. With each tick downward of the interest rate brought on by an increase in the money supply brought more and more people closer to that magic threshold of home ownership.

Lower interest rates made the “Stated Income” loan, where the borrower with a sufficient down payment can qualify for a loan, at a slightly higher interest rate, without having to verify or document the family income. This step coaxed tens of thousands to plunk down their life savings. Pushed ever closer by being allowed by the government to borrow against their IRAs and 401Ks.

Each of these steps was artificially pushing up and up and up the price of homes. Now everyone wants a piece of the action. The final inducement is unveiled in late 2000. It is a plan where the buyer can name his own interest rate (as low as 1%) for the first five years. This innovation (trap) causes a stampede of buyers, driving home prices through the roof.

Real Estate Agents eager for commissions told buyers, “Even if you do not get the needed raises on your job to be able to afford the payments when the rate adjusts, at the end of five years the house will have increased enough in value that you can sell for a hefty profit.” Needless to say, when the glut of homes coming on the market after five years popped the housing bubble, there was a huge transfer of wealth. People had invested their life savings, their IRAs and 401Ks. Others had been encouraged to refinanced and take equity out of their homes to install swimming pools, room additions or buying big SUV or paying for exotic vacations, often times found themselves out of a job and facing foreclosure. More houses on the market driving housing prices even lower.

Who will end up owning these homes? Well surprise surprise it will be the very same investment bankers that we are bailing out right now.

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