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All you need to know about the "housing crisis" in one press release from nine years ago

SEATTLE, Washington - Via Cafe Hayek, a press release from Wells Fargo in August 2000 (text not bolded in original):

A new home financing program, designed to spur homeownership among California’s educators, may receive an “A” from teachers throughout the state. The program, announced today by Wells Fargo Home Mortgage, Inc., the California Housing Loan Insurance Fund (CaHLIF) and Freddie Mac, allows teachers working within the state to purchase a home with a downpayment of just $500.
The program also offers teachers relaxed credit guidelines – making it easier to qualify for the program – and higher qualifying ratios, which allows homebuyers to qualify for more home. Wells Fargo Home Mortgage will be the exclusive provider of these loans; CaHLIF will provide downpayment assistance and mortgage insurance; and, Freddie Mac will purchase the loans.
A starting salary for a California public school teacher is $29,000 a year, according to the California Teachers Association, while the average teacher’s salary is $44,000. Meanwhile, the median home price in California is $217,520.
While California educators will only need $500 for a downpayment, the remaining downpayment will be funded by CaHLIF in the form of a 3 percent simple interest loan with payment deferred until the end of the loan term, or when the home is sold or refinanced.
As a commenter at CH noted, a $200K loan under these circumstances would be about $1,300/mo for someone making $44K a year. I make more than triple that and I consider my mortgage of under $1,600 to be approaching the upper range of what I consider acceptable relative to my income.

The "crisis" has repeatedly been spun in the media as crazy, gambling, out of control banks making bad decisions, but in this case all the bank (Wells Fargo) is doing is writing an ill-advised loan, scraping off a bit of vigorish, and dumping the turkey loan off on the only kind of entity that would want such a thing, a government mutant like Freddie Mac.

This particular example is doubly odious, doubly indicative of the danger of having a government entity tinkering in the housing market, because not only was Freddie gobbling up absurd loans, but in this case it was a special for teachers!. Why are teachers making $44K more deserving of cushy loans than anyone else making $44k? At least it was available to both public and private school teachers... cold comfort.


JB said...

This program announced in 2000! It is defunct. Why are you posting about a defunct, nine-year old program? You should check with the California housing fund mentioned in the release to see how many loans were actually made and sold to Freddie. For all you know the teachers came in looking for one of these and got sold on a subprime loan, because lenders made more money selling subprime to Wall Street than other loans to Fannie or Freddie.