Clinton Was Right To Advocate Home Loans To Lower-Rated Borrowers. Here's Why.

I bought my first home in 1998, and I well remember being shocked at the time that I qualified for a loan. My loan officer had an explanation at the time that I thought made sense.

She told me that the economy was humming along under Clinton, and that people's salaries were increasing, but that home prices were relatively steady, ie: not bubbling or over inflating. She told me that her bank was flush with cash to lend, due in part to people's salaries increasing.

Seems that the norm was that a bank wanted a 10% down payment on the typical home loan. So, if you bought a $200,000 home, you needed $20,000 down and the bank would lend you $180,000. The problem was that the best-rated borrowers were able to put 20-25% down because they were doing well under Clinton. That meant that rather than having to borrow $180,000 at the going rate, the home buyer needed to borrow only $160,000. That meant that the bank was lending $10,000 LESS on that mortgage than they normally would have. Multiply that $10,000 over hundreds of thousands of home loans, and the number grows into the millions. Figure the interest NOT PAID on that $10,000 over the life of a 30-yr mortgage, and the banks saw a big hit in their long-term profits, AND they had extra cash sitting around with nowhere to lend it. Worse, banks were having to lower interest rates to compete for the $ from those top-rated borrowers.

What Clinton suggested was that banks look beyond the best-rated lendees and consider lending to potential home owners who were in the second and third tier. That's where I came in - I got a loan with 10% down, and since my credit rating wasn't at the top, I paid an additional point on my mortgage over what a best-rated customer could expect. Of course, I could always try to refinance down the road after showing a good credit history, but that was something for a later day.

When we moved out of that home 6 years later, we made a healthy profit and the buyers got a home that continued to increase in value.

Clinton's plan made sense AT THE TIME.

Enter gw bush. The economy starts to cool. The banks are in the same boat with their best-rated borrowers, but the not-best borrowers now need a larger loan to buy the same home because home prices are inching upwards. At this point, the bushies SHOULD HAVE reigned in the loans and made it tougher for people to qualify. But doing that would have sent a signal to the economists that the bush economy was not as rosy as they were being told. Instead, the bushies went the opposite way, lowering the hurdle for the lower-rated prospects when they should have been raising it. The result, no-money down, interest-only loans to anyone and everyone who could lie about their income. The no-questions-asked-easy-money fueled not only a boom in new home building, but an over-inflation of prices for existing homes. Simple supply and demand in action. And just to keep everyone fat happy and stupid, the banks get busy writing home equity loans so home owners could buy Hummers and other non-essentials to fuel the consumer-base economy.

Continuing and EXPANDING what Clinton had initiated DIDN'T MAKE SENSE at that time, but to not expand the Clinton plan would have been to admit the economy was heading into the dumpster.

So, don't let anyone tell you that the housing boom and meltdown was "all Clinton's Fault," because what he did at the time made a lot of sense. What DIDN'T make sense was for bushco to offer a distress-masking political solution to an economic situation that had CHANGED since Clinton left office.