Why did 10 million Americans lose their homes after the 2008 financial crisis?

That's a good question and people really need to know more.

When we solve a problem, after a while, we tend to forget what solved the problem and go back to what we did before, causing things to fall off a cliff.

That was the mortgage and financial crisis of 2008 because it forgot the lessons of the Great Depression.

History before the Great Depression

In the 1920s, when the economy was booming and the party never seemed to stop, banks laid, lending large amounts of money on the assumption that all that money would be repaid and that there would be enough collateral to repay it.

Other than that, no.

One of the biggest assets people can own and that banks can recover is real estate. As Will Rogers once pointed out: "Buy land. They're not making anything more. "Real estate almost always appreciates in value.

Before the early 1900s, most people did not own their own homes. Most people rent. Many live in cheap apartments and apartments in the cities, or as tenants on farms in rural areas. After the border was closed, land speculators often bought government surplus land grants.

But by the 1920s, that began to change, as banks became more confident in providing credit for new construction. There is a clear speculative bubble. People buy property and build houses on future credit that has no basis other than hope.

As the stock market continues to rise, banks are betting on it. With the customer's deposit.

Then the stock market crash hit in 1929.

Banks that were grossly overleveraged and undercapitalized were hit hard. Many went out of business, while those who deposited in bankrupt banks lost everything. No deposit insurance. If your bank goes bankrupt, all your savings will be emptied.

If you lose your job, it means that you also lose any means to continue paying off your home loan.

In addition, a large number of new buildings for sale suddenly appeared... No one can afford it anymore. This has depressed property values everywhere.

Suddenly, your $10,000 property last year may now be worth only $5,000. But you may still owe $8,000 – we call it "underwater." If you default or declare bankruptcy, the bank suffers losses. And you are on the street.

So, what can banks do with a house? How can they sell it? Nobody buys. As a result, banks suddenly have large amounts of illiquid assets.

More foreclosures in nearby areas continue to further reduce property values, and the destructive cycle eventually repeats.

The Hoover administration experimented with economic protectionism. At the government's urging, Congress passed the Smoot-Hawley Act of 1930, which, by God, imposed steep tariffs on more than 20,000 imports to protect American commerce.

It backfired and greatly exacerbated the worsening Great Depression.

Weather conditions didn't help. Beginning in 1930, severe drought swept through the Midwest and the Great Plains. It now appears that farmers have been adopting poor farming practices, removing fences and forest windbreaks, and not planting cover crops for the winter. The thin layer of high-quality topsoil on the Great Plains turned to dust and became an ecological nightmare.

Due to crop failure, the farm began to go bankrupt. The Smoot-Hawley tariffs will only make things worse.

In addition, the money supply dried up. Surviving banks like JPMorgan Chase simply shut down credit taps to stay afloat. They stopped lending. Why? Again: non-current assets. Banks keep all these property and other assets that cannot be sold. People don't trust banks because a lot of people lose everything by putting their deposits in the bank. Because banks can't sell anything they own, and no one is willing to give them any cash, they don't have money to give away.

Part of the problem lies in the gold standard. Under the Federal Reserve Act, at least 40% of the currency in circulation must be backed by gold reserves held by the federal government. Therefore, no modern tool can print more money to help increase liquidity.

On top of that, gold has become more expensive. Because of the gold standard, mortgages often had clauses that allowed banks to demand repayment in gold. By 1932, this had led to a difference in payments between the dollar and the value of gold, meaning that if the debtor was forced to repay in gold, he could lose up to $1.69 for every dollar he owed. This still leads to more bankruptcies and foreclosures.

Severe deflation initially began to emerge due to tariffs, insufficient money supply, agricultural collapse, and insufficient consumer spending. That makes U.S. exports increasingly expensive for overseas importers, even if other countries don't impose retaliatory tariffs of their own. Manufacturing began to collapse. The steel industry is a close second.

The Great Depression spiraled out of control.

When Roosevelt succeeded Hoover in 1932, the nation was becoming increasingly desperate.

New

Roosevelt came up with a radical new idea, which he called the New Deal. The premise is that the government will intervene in the economy and prop up the economy through deficit spending and government borrowing. The New Deal will set government programs to get people back to work, back into agriculture and construction, and eventually, once people are back on their feet, the government can remove that support.

Various New Deal reforms targeted the financial sector in an attempt to get credit back into flow.

One of the reforms that directly targets banks is the Glass-Steagall Act. One of the problems with the banking crisis is that banks may gamble with depositors' money. The Glass-Steagall Act separates investment banking from commercial banking. Investment banks are gamblers. These involve stocks and bonds, venture capital, hedge funds, and Wall Street. A commercial bank is a savings and lending institution where you save your money. The Glass Steagall Act puts a firewall in between. The idea is that Wall Street may collapse and the Main Street will not disappear with it.

The other is to protect depositors. Commercial banks will be required to pay the new Federal Deposit Insurance Corporation (FDIC), which will ensure depositors are repaid in the event of a bank failure. This encourages people to trust the bank again. People put money in banks, and banks can use that money to start lending again.

Security agreements help reduce the risk of default on certain types of loans. Guarantors are always there: they are promises to repay the debt when the original debtor defaults.

The federal government specifically targeted housing loans in an attempt to reduce homelessness. So, in 1938, through the National Housing Act, the government established the Federal National Mortgage Association (FNMA). The FNMA, or "Fannie Mae", will purchase mortgages from banks, which will continue to "service" mortgages. From a consumer's perspective, it looks like their ordinary transaction: getting a loan from a bank, paying the bank. Banks kept some money as "service fees," the Fed took over the loans, and more importantly: default risk. This created a mortgage secondary market for the first time in history.

But Fannie Mae will only buy a mortgage if it meets certain criteria, such as debt-to-income ratio, loan term, etc. If the bank wants to make other loans, that's fine, but Fannie Mae won't buy it.

And the program basically works. Banks started lending again. Credit slowly began to thaw. Banks are starting to get more liquidity on their balance sheets. People are starting to be able to buy homes again.

After World War II, the real estate market took off again, in part because of the GI Bill of Rights, the push for suburbanization, and the creation of easily replicable, affordable ranch homes on standardized templates.

But it's always Fannie Mae and the 30-year fixed-rate mortgage that drives everything behind the scenes, which has become part of the standardized experience in the United States, just like baseball. Home prices have risen steadily, and homeownership has become a stable part of the U.S. economy. In fact, everyone in this country can see a viable path to owning their own home.

By the 1960s, FNMA owned more than 90 percent of residential mortgages in the United States, and individual homeownership rose to its highest level on record. This led to the largest expansion of the middle class in history.

So, of course, like all very successful government projects, we have to solve this problem.

privatization

In 1954, FNMA was semi-privatized as a public-private mix, with the government owning preferred stock (with better voting rights within the company) and the public holding common stock (offering dividends but with lower voting rights).

In 1968, Fannie Mae was completely privatized, and a small portion of it, known as Ginnie Mae, was spun off to maintain Federal Housing Administration loans, Veterans Administration loans, and Farmer Family Administration mortgage insurance. Because Fannie Mae had a near monopoly on the secondary mortgage market, the government created the Federal Home Loan Mortgage Corporation to compete with it: Freddie Mac.

By 1981, Fannie Mae and Freddie Mac were doing well as private companies, and Fannie Mae came up with a great idea to implement in a limited environment: pass on mortgage derivatives. They bundled various mortgages together and sold them as a bond to investors. Investors love the idea. For nearly fifty years, the real estate market has been extremely stable and offers modest but highly reliable returns. Thus, commercial home loan mortgage-backed securities were born.

Savings and loan crisis

By the early 1980s, the economy had stabilized for 30 years (more or less), and commercial banks were doing well even during the "stagflation" period of the 1970s thanks to the Glass-Steagall Act. House prices continue to be in line with wage growth.

Commercial banks, namely savings banks and lending banks, want to do better. S&L is the kind of bank in How Good Life is. S&L, like credit unions, is singled out for federal legislation for a single purpose: to promote and promote homeownership, small businesses, auto loans, and more.

The business-friendly Congress agreed. They passed two laws in 1980 (signed by Jimmy Carter) and 1982 (signed by Ronald Reagan) that allowed banks to offer a variety of new savings and loan options, including adjustable-rate mortgages, and greatly reduced regulation of these banks.

Adjustable rate mortgages work by locking in a fixed interest rate for a short period of time, and then after the initial term, the mortgage rate will be readjusted for each additional term thereafter. If the main interest rate set by the Fed remains high, lenders will be hit hard.

But S&L has a solution for consumers: just continue to refinance your home at the end of each first installment. House prices are always going to keep rising, right? They can charge a checkout fee every few years, while consumers are essentially still tied up in debt while they have a steady stream of income that is always guaranteed if something happens. It is perfect.

By the mid-1980s, due to a lack of regulation, S&L began to make increasingly risky decisions to offer certificates of deposit with interest rates as high as 8 to 10 percent. They are not regulated by the Federal Deposit Insurance Corporation (FDIC) while still providing federal insurance for deposits (what could go wrong there, right?). ）

Then, in order to reduce inflation, the Fed raised short-term interest rates, which had a knock-on effect on these savings and lending institutions, which were very vulnerable to this particular problem due to these wrong decisions, lack of proper capitalization, and overcommitment. Savers.

By 1992, nearly one-third of the country's savings and loan banks had failed.

The crisis gave rise to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which eliminated some oversight that had been removed because people wanted to make more money, particularly better capitalization rules (which were linked to risk), increased deposit insurance premiums and reinstated some Federal Deposit Insurance Corporation (FDIC) oversight, and lowered the banks' non-residential mortgage portfolio caps.

Repeal of the Glass-Steagall Act

Remember how we built firewalls between investment and commercial banks during the Great Depression of the 30s?

Again, it worked very well and we have to fix it.

Beginning in the '60s, federal regulators began to allow commercial banks to re-enter the securities market. The list is limited and should be kept in a relatively safe place.

This accelerated under Reagan's deregulatory policies and continued under Clinton in the 90s of the 20th century. By 1999, Bill Clinton declared that the Glass-Steagall Act no longer had any meaningful use, and most declared it dead long before that. The law was formally repealed in 1999 through the Gram-Rich-Billier Act.

Immediately, investment banks and commercial banks began to merge again. Bear Stearns, Lehman Brothers, Citibank, all these investment banks started buying commercial banks or merging.

There are cultural differences between these.

Remember: investment banks are gamblers. These are the guys from Wall Street. They are adventurers. They are hedge fund managers. These are Gordon Gecko's types. Commercial banks are people on the streets. They are usually conservative, George Bailey types.

Investment banker culture triumphed in the 2000s. George Bailey began smoking Coke, wearing Ray-Ban glasses, a blazer and jeans.

Subprime loans, NINJA and ARM loans

In the early 90s of the 20th century, affordable housing began to become a growing problem. George S. H· George H.W. Bush signed legislation in late 1992 amending the charters of Fannie Mae and Freddie Mac to promote loans to people with less financial resources than the traditional primary standard. The Clinton administration continues to push Fannie Mae and Freddie Mac to accept more low- and moderate-income earners.

This means taking on riskier loans.

The Clinton administration enacted rules in 2000 to limit predatory lending practices and prohibit these high-risk loans from counting toward low-income targets.

The Bush administration repealed these predatory lending rules in 2004 and allowed those risky "subprime" mortgages to count toward low-income targets set by the Department of Housing and Urban Development.

Remember those ARM mortgages?

Hehe. It's been a long time, and you're probably covering it up, aren't you? I told you it would be important.

Banks began to issue increasingly risky loans, usually ARM loans. They can achieve HUD goals and make good money. Again: the gravy train is endless, right? For more than fifty years, the real estate market has not lost value even during the recession of the 70s and 80s.

So, they put more people in the house. Bigger house. The house is more expensive. The economy is doing well. The new building is hot. Contractors couldn't build Mack mansions fast enough.

With these subprime loans, banks began a bottom-to-bottom race, getting ninja loans along the way: no income, no job, no assets. Are you a homeless person selling Etsy products in your car? You have been prequalified to purchase a 250,000-plus-250,000-acre subdivision home. Congratulations.

As long as you can afford to pay, you can join.

Deregulation

In the early 2000s, the Bush administration wanted to keep the economy going. From March 2001 to November 2001, after the dot-com bubble burst, there was a low-level recession. The government removed a number of regulatory rules for the securities and financial sectors. One of the rules is about capitalization.

Capitalization requirements refer to how much cash a bank needs to keep on its balance sheet to prevent bank failure in the event of an accident. Remember: this is why banks struggled before the Great Depression and before the savings and loan crisis. They take on too much debt and don't have enough money to actually pay off the entire debt.

The Bush administration relaxed capital requirements and rules on which assets can be counted as capital. It turns out that some of these assets are not very useful.

Collateralized debt bonds and mortgage-backed securities

Remember in 1981, Fannie Mae began issuing these mortgage-backed securities and reselling them as bonds at low but reliable rates?

The situation is further complicated by the increased use of financial instruments for collateralized debt obligations. Basically, the CDO simply promises to pay investors sequentially based on the cash flow of the projects in which the CDO invests. The rate of return is related to the degree of risk of the CDO.

In the 70s and 80s, CDOs were quite safe, mundane things. They are basically like index funds; They invested a lot of things and did it pretty well. But by the mid-2000s, CDO was becoming riskier and offering more and more rewards. CDOs are buying mortgages like crazy because with the rise of subprime mortgages, their interest rates are getting higher and higher.

But people are nervous about investing only in these high-risk CDOs. As a result, investment banks that buy these mortgage-backed securities began bundling some high-risk mortgages with some regular, low-risk mortgages and promising them to be safer.

Then some investment banks started lying about how many high-risk mortgages there were. Why? Once again: the real estate market is very stable and has been rising. These loans just look risky on paper, right? I mean, these debtors can always continue to refinance every few years.

Therefore, the bank buys these assets and adds them to the capital statement.

You see that, right? Do you see the problem here? Not yet?

Go to pieces

Some people I know can earn $10-$12 an hour, how can I afford these huge houses, boats, jet skis, and campervans. My parents were both teachers; They did a good job, but we couldn't afford it all, and I know they did it better than some of them. The loan officer shook his head and said, "No. "They can afford to pay for it."

Some of them have no furniture in their homes. If they throw a party, they rent furniture for a few days. I'm serious. That's one thing. Many of them are saddled with heavy credit card debt, paying each other debt, and proving it with the idea that they'll be fine when the next raise starts.

This is a typical speculative bubble.

Then in late 2006-2007, the bubble burst.

There is an oversupply in the real estate market. People no longer buy new and existing homes. Home values began to decline.

Suddenly, as home values stabilize and then fall, the little assets that many buyers have in their homes also fall, and they are heavily indebted. Without more equity, they can't refinance. Since they couldn't refinance, these ARM loans or other loans came into effect and interest rates soared.

Suddenly, they couldn't pay anymore.

Then they defaulted on their mortgages.

The second is foreclosure.

And often bankruptcy.

This becomes a vicious circle. Once one or two neighbors lose their homes due to foreclosure, it can affect the property values of others around those properties like an infectious disease. As property values declined, healthy borrowers began to suffer, and now they are unable to refinance.

In 2007, lenders had 79% more foreclosures than in 2006: 1.3 million foreclosures. In 2008, that number soared another 81 percent: 2.3 million. As of August 2008, nearly one in ten mortgages nationwide was in default and foreclosure proceedings. A year later, the proportion has risen to more than 14% nationally.

Recession

Keep in mind that the financial sector invests heavily in all these real estate market securities. They thought they were safe. They believe the housing market will only rise. Their entire foundation is built on it.

They rely on these securities to meet capital requirements.

Securities suddenly became almost worthless.

Large banks ran out of liquid cash almost immediately. This is what happened to companies such as Bear Stearns, Lehman Brothers, Goldman Sachs, Citibank, and others. They suddenly hold billions of dollars in assets that are either worthless or frozen altogether. They can't sell even something of value.

Due to the illiquidity of their assets, they have no money to lend anymore.

The lack of credit is the cause of economic stagnation.

This has affected all walks of life in the United States. This has affected all walks of life in the world. This meant that businesses began to have to lay off workers because they could not get the funds to continue paying wages.

Then, since these people lost their jobs, they started defaulting on their mortgages. This has once again affected the CDO market.

That's why it's so important for the Fed to buy these toxic assets and provide banks with liquid cash. They must get credit flowing again to restart the gears of the economy. Without it, we would almost certainly see a full-blown repeat of the Great Depression.

That brings us to where we are today.

This is a short, overly simplistic explanation. Things are more complicated than that, and there are other factors at play, but that's the basic main story. That's how about 10 million homes were foreclosed.

And we have not fully recovered. The number of renters is more than twice as high as the number of owner-occupants. Less than a third of those who have lost their home due to foreclosure over the past decade have been able to repurchase another home. About two-thirds of those who lost their homes have had so much credit damage that they no longer qualify. Hundreds of thousands, if not millions, of people were so traumatized by the experience that they refused to experience it again.

The number of renters versus homeowners is much higher [among millennials], who have never seen any substantial part of the post-2008 economic recovery. Even without accounting for the massive increase in student debt we're saddled with, we're still not earning enough wages to save enough money to buy things.

75% of our generation want to own a house.

And, if reading this is not enough to chill your heart, the current government already abolished in 2004, and these rules and regulations were implemented after the collapse of the 1980s after they were lifted. Because the first two times worked well.