Rural America has been fighting numerous megatrends that have caused us to shrink since 1941, but no event accelerated this decline more than the 2008 recession. It drained billions of dollars of wealth from our economy, government enacted massive new regulations, and a trillion dollar bailout of Wall Street blew a big hole in the Federal budget; all these events negatively impacted rural America disproportionately.
The genesis of the Great Recession of 2008 was a 1999 action by Fannie Mae, the nation’s biggest underwriter of home mortgages, to weaken mortgage qualification requirements. Congress and the President supported this move by this government-funded organization with the intent of making home ownership more accessible to lower income and minorities buyers; the sub-prime mortgage industry was born.
From 1999 to 2008, the number of these loans grew and standards were further relaxed to support more home ownership. The number of sub-prime loans increased substantially because banks could offer “teaser” rates that would later adjust and earn higher fees. Banks fell all over themselves to originate these highly profitable loans.
Mortgage insurance companies and rating agencies joined the party, by rubber-stamping the insurance application and assigning the rating demanded by the bank to ensure the loans were sold. The Collateralized Mortgage Obligation Bond (CMOs) made up of many of these questionable loans became big business, and investors flocked to purchase them; the lion’s share were purchased by Wall Street investment banks, who then leveraged them again through a new debt instrument called Collateral Debt Obligations (“CDOs”); this was like throwing gasoline on a fire.
The high volume of these mortgages to new homebuyers created a bull market for real estate and values skyrocketed. Everything seemed fine through 2006.
The end started when an increasing number of these unqualified borrowers began defaulting on their loans. Next, the adjustable rate mortgages with teaser rates started to adjust and the homeowner’s mortgage payments jumped dramatically, causing them to be unable to make the much higher payment. In 2008, late payments reached a crescendo, and defaults skyrocketed. As a result, home values dropped and the beginnings of a recession took root.
The final straw was the defaults on many of the CMOs and CDOs owned by Wall Street investment banks, creating the need for Congress to ride to the rescue to head off a much larger crisis; more rural money shipped to big businesses.
What was at the root of this disaster? There was plenty of greed and dishonesty that intensified the crisis, but the heart of the problem was the Federal government inserting themselves in the housing market and creating a vehicle by which banks and mortgage companies could make money on loans they would not normally approve. Ultimately, no one benefitted, especially low-income families and minorities, and we all paid the price.
The best thing Washington, D.C. can do for rural America is to quit inserting themselves into the American way of business and life. I believe that given a choice on a level playing field, Americans will prefer the life offered by small town America and Bourbon County. I know I do.
If you want to know more about this topic, I recommend you watch the movie, The Big Short, released in 2015. It funny, entertaining, star-studded and informative; It does contain a significant amount of profanity.