Reams have been written about the housing and credit crunch, but the root causes will probably be debated for decades. We asked several housing experts who attended a forum on California's housing market, sponsored by the USC Lusk Center for Real Estate and the online real estate service Zillow, in San Francisco Friday: "What would have prevented the housing and credit crash?" Here's what they said:
"The events of the past six or seven years show that loose underwriting does nobody any favors. Foreclosures are terrible things for the families who experience them and for the communities that have large numbers of them. The whole point of underwriting is to prevent default and foreclosure, and the unpleasant fact is that down payment and FICO (credit scores) are predictors of likelihood of default. If all loans had been properly underwritten, taking into account equity, credit history and ability to pay, we would not have had the boom or the bust."
— Richard Green, director of USC Lusk Center for Real Estate
"The housing bubble was blown out of proportion largely by the complete collapse of credit standards for borrowers. People received ridiculous amounts of money with no capacity to pay it back. This in turn was driven by the ability of Wall Street to push risk to unsuspecting clients. Ultimately the solution is to make the financiers -- the mortgage brokers and asset collectors -- responsible for their actions. This would head off such breakdowns in credit."
— Christopher Thornberg, Founding Partner, Beacon Economics, LLC
"We needed to share better consumer information that focused on the past and future trend in house prices. Buyers were acting in a short-run frenzy but they were encouraged by a long-run outlook that was unexamined and uninformed as to its basis. Buyers simply assumed that prices never go down, always rise, and often at heated rates. We were negligent in not telling them why the big run up had occurred over the last 30 years and why the big surge was due to end.
We were riding a generational wave of upward pressure on prices that was founded in the 1970s -- when the Baby Boomers first entered their late 20s -- and that was due to run out of steam when the Boomers reached their maximum housing stage. The Baby Bust generation following behind brought a lot of slack to the housing market. Consumers needed to learn they were buying into a diminishing market whose demographic push was about to drop out. These facts were all known to housing experts, but we did not share them very widely. We were complicit in the train wreck because we did not speak out sooner about the eroding long-run support for upward price trends. We should have lanced that bubble of long-run expectations."
—Dowell Myers, Professor, Director, Population Dynamics Research Group, USC Sol Price School of Public Policy
"Maybe time will reveal a single bad actor or external event that points to the cause of the collapse. More likely, the financial crisis was a convergence of multiple forces. Flawed credit rating agencies, advanced financial engineering and cheap money flooding our economy drove home prices to appreciate faster than at any time in history. The result was a nation of homeowners accessing credit through new-found equity.
"It is possible to look at tension points that had significant impact in expanding the bubble. For instance, leverage most certainly intensified the damage. Whether it was large financial institutions like AIG, taking normal market risk and compounding it through the development of innovative instruments of finance (such as synthetic Collateralize Debt Obligations) when home prices declined, the downside impact was exponential. Another was complete deterioration in underwriting standards. Too many loans were being made with limited or no borrower documentation, such as income, to borrowers with deteriorating credit.
"We may never isolate a single cause. It is possible, that we rebuild a model of residential finance that protects the middle class' most valuable asset and allows for safe, long term investment and prevents our capital markets from reverting to a playpen of speculation."
— Jason Gold, Director, Progressive Policy Institute's "Re-thinking US Housing Policy"
"There were many factors that contributed to the crash. The three big ones that don't receive enough attention are by elected and appointed officials in Washington D.C. 1) They repealed the Glass-Steagall Act in 1999, allowing federally insured banks to do investment banking. 2) They pressured the GSEs (government sponsored enterprises such as Fannie Mae and Freddie Mac) and HUD (U.S. Housing and Urban Development Department) to lend far more aggressively in the interest of growing home ownership. 3) The Fed propped up the economy by dropping interest rates dramatically during the dot-com recession, and never raised them when the housing market got overheated.
Finally, and I am still stunned that this continues today, none of the big banks or regulatory agencies have good metrics in place to monitor local housing market conditions. The lack of information is unbelievable."
— John Burns, CEO, John Burns Real Estate Consulting
Contact Pete Carey at 408-920-5419