Commercial Property

Restrictive Growth Management Was A Necessary Condition for the Housing Bubble

their other homes and building fewer units which added significantly to housing prices in cities that passed inclusionary zoning ordinances. Mosca: I"m going to stay positive and say elected officials are trying to pass legislation, create ordinances, regulations, amendments, and zoning to help those who need and perhaps they do not look beyond what they are doing to the overall picture? O"Toole: They need to start listening to people other than urban planners who don"t understand enough economics to fight their way out of a paper bag. Urban planners rely largely on the fads and myths about urban areas and because of these fads and myths their policy advice is terrible and led us into this terrible housing crisis that has caused this recession. Mosca: What do you say to the people who blame "Wall Street" because they failed to properly assess the risks of sub-prime mortgages? O"Toole: There is some blame to be handed out there but it"s interesting when normally you borrow money to buy a house the lender requires a 20% down payment and there is a good reason for that. Housing prices do fluctuate a little bit but they rarely fluctuate more than 20% over a few years. They rarely go down as much as 20%. Only if some economy totally collapses are you going to see housing prices go down by more than 20%. So, by requiring a 20% down payment, they are making sure that people do not get underwater. When you start imposing these growth management rules, you make housing prices more much more volatile and you start seeing swings where a 20% down payment isn"t enough to keep people from being underwater. Instead of maintaining or increasing the 20% requirement though both lenders like Freddie Mae and Fannie Mac or mortgage purchasers like Fannie Mae or Freddie Mac and then Wall Street went ahead and started buying mortgages that had less than 20% down payment, 10%, 5% and then eventually zero percent. Wall Street could be to blame but really the problem is that Fannie Mae and Freddie Mac started buying these loans at a 0% down payment. When Fannie Mae and Freddie Mac put their stamp of approval on it, then it became okay for Wall Street to do it. Wall Street didn"t assess the risk properly. (Come back again next week for Part 2 of this interview).

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