The document summarizes how government policies from the 1990s through the 2000s contributed to inflating the housing bubble by: 1) Increasing the percentage of FHA loans with down payments of less than 3% from 13% in 1992 to 50% in 2000. 2) Lowering standards for approving mortgage loans so that the ratio of homeowners with less than 3% down payments increased from 1 in 230 in 1989 to 1 in 7 in 2003 to 1 in 3 in 2007. 3) Government increasingly backing subprime and risky mortgages so that by 2008, Fannie Mae and Freddie Mac alone held or insured 13.4 million while overall government guaranteed over 20 million risky loans.

2. In 1993 the FHA began to increase the
percentage of its loans that
involved down payments of less
than 3 percent.
13% in 1992
28% in 1996
50% in 2000
Standards lowered for approving mortgage loans

3. In 1989, only 1 in 230 homebuyers bought a
home with a down payment of 3
percent or less. In 2003, that ratio was 1 in 7.
By 2007, it was 1 in 3.
Buying made easy

4. Tax deductions encourage oversized mortgages
In 2009, one in four taxpayers
itemized mortgage interest,
accounting for about two-thirds of
the mortgage interest paid by all
borrowers.

5. Government doubles down
To expand ownership to homebuyers
with shaky credit, government
increasingly has backed
subprime and nonprime
mortgages. By 2008, Fannie and
Freddie alone held or insured 13.4
million of them while overall,
government and its entities guaranteed
more than 20 million.

6. Government investment in
20.4 million subprime and other
risky loans is about three
times the size of the private
mortgage-backed securities
market.
Inflating the bubble

7. Homeowners take the money and run
In 2003, homeowners
cashed out equity in
their homes to the tune
of $400 billion. Equity
extraction was worth
more than $700 billion in
both 2004 and 2005.

8. The average US
homeowner has
Not much left to bank less than 7
percent equity in
his or her home.
As recently as 1990,
US home equity was
45 percent.

9. Government ups its skin in the game
The Federal Housing Administration has
increased its market share of home
purchase loans, from 8 percent in 2007 to 43
43%
percent in 2010.
8%

10. Debt’s climb as a percent of GDP
In 1986, residential
mortgage debt
accounted for 39
percent of gross
domestic product. In
1990, mortgage debt
was 50 percent of
GDP. In 2007, it was
75 percent.
1986 1999 2007

11. Government is left holding the bag
By 2008, half of all mortgages in America — 28 million — were
subprime or nonprime loans. Seventy-four percent of them were guaranteed
by government or government-agencies

12. American Enterprise Institute