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58 In 2008, the economy experienced the historical fall of the housing market and the resulting financial crisis—an epic phenomenon that some feared would grow to rival the Great Depression of the 1930s. Nearly a decade later, hindsight is an invaluable tool for examining what caused the housing bubble to burst, how it has affected the market in the years since, and whether conditions are ripe for another housing bubble. In an Insight blog post published in Novem- ber, Freddie Mac laid out three primary warning signs that would precede a new housing bubble. One is skyrocketing home prices, a circumstance on display in markets across the country. How- ever, Freddie insists that the central role of easy credit availability is the oxygen that keeps a bubble alive, and if that oxygen is cut off, the bubble ceases to exist. A second warning sign is a short- age of inventory, a problem currently affecting the industry. Freddie's third warning sign seems obvious—the bubble actually bursts. "If it doesn't burst, it wasn't a bubble," the report noted. With home prices rising, inventory short- ages common, and CoreLogic estimating that nearly half of the nation's largest 50 markets are overvalued, this is seemingly a time for the industry to mind the old adage about those that do not learn from history are doomed to repeat it. However, the housing market shows numbers that appear steady. Nor do economic conditions line up perfectly with 2008 when it comes to factors such as unemployment, credit availability, workforce numbers, or wages. Should the current housing setting ease every- one's concerns, or does the U.S. economy need to proceed with caution? At what point in the future could the market face similar problems—assum- ing it will? THE BEGINNING OF THE END Subprime lending, along with irresponsible lending practices, is famous for being the reason for the housing bubble. In 2006, $600 billion of subprime loans were originated, most of which were securitized. at year, subprime lending accounted for 23.5 percent of all mortgage origi- nations, according to the Financial Crisis Inquiry Commission report by Stanford Law School. However, to understand the full scope of the housing and economic collapse of 2008, one has to look back even further. While the crisis occurred in 2008, the dominoes for that collapse were set in place long before the bubble actually burst. In 1992, Congress and the President required government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to meet a certain quota in purchasing mortgages from banks and nonbank lenders. is quota required that a certain percent- age of the mortgages the GSEs bought had to be approved for borrowers who were at or below the median income in the places where they lived. Such mortgages were termed subprime mortgages. e GSEs' quota was 30 percent at the beginning, but the Department of Housing and Urban Development (HUD) was eventually given authority to adjust that number, and over time, HUD increased it. By 2008, just before the financial crisis, 56 percent of the loans the GSEs bought had to be made to people who were at or below median income. However, it is difficult to find prime mortgages when buying mortgages that are made to people below median income. Due to these challenges, Fannie and Fred- die had to make a change. Peter J. Wallison was former White House Counsel under President Ronald Reagan and served as General Counsel of the U.S. Treasury Department from 1981 to 1985. Currently an Arthur F. Burns Fellow in Finan- cial Policy Studies at the American Enterprise Institute, Wallison explains that, under this quota, Fannie and Freddie had to reduce their underwrit- ing standards. "In 1992, before these affordable housing goals were actually adopted, Fannie and Freddie were famous for one thing, and that is they only bought prime mortgages," Wallison said. "But as the affordable housing goals increased over time, they had to start reducing their underwriting standards, and they did." By the late 1990s, the enterprises were accept- ing mortgages with only 3 percent down pay- ments, and by the year 2000, they were accepting HISTORY SET TO REPEAT ITSELF? C O V E R S T O R Y / N I C O L E C A S P E R S O N 58

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