The Big Short In One Chart! The Case of Phoenix AZ (The Fed’s And Federal Government’s Forgotten Role In The Mortgage Crisis)

I don’t mean to be a Debbie Downer, but it is important to understand what happened to the US economy and housing market in the US back in 2000s that culminated in such destruction to American households.

The book/movie “The Big Short” laid the blame on subprime adjustable-rate mortgages (ARMs) which is partially true. It also blamed Collateralized Debt Obligations (CDOs). But “The Big Short” ignored the Federal government and Federal Reserve’s role in the financial disaster.

It all started in 1995 under President Bill Clinton when HUD issued its now infamous National Homeowership Strategy  in order to increase homeownership rates, particularly among minorities. The NHS included Action 44: Flexible Mortgage Underwriting Criteria. Flexible? Like ALT-A (no or limited documentation) loans? Yes, the mortgage product that had less that 5% serious delinquencies (60+ days) as of late 2007, but exploded after 2007.

altadelinq

Using Phoenix AZ was an example, notice that Phoenix’s home price index soared post-1995 as mortgage underwriting became looser coupled with The Fed lowering its target rate as a result of the 2001 recession. But The Fed overdid it, resulting in a massive house price bubble that exploded. The Fed then lowered their target rate to near zero percent but the damage had been done.

bigshort1a

At the national level, adjustable-rate mortgages (ARMs) were higher than post crisis.

armsssss

As housing construction collapsed, unemployment skyrocketed as did subprime mortgage delinquencies.

Phoenix was rocked by unemployment in the wake (not John Wake) of the construction boom and collapse. Pre-foreclosure filing rose with the unemployment rate, then subsided.

phoenixstuff

So, The Big Short failed to mention the role of the Federal government and The Federal Reserve in the crisis, a dance that was a fantasy with a bad ending.

That is, The Fed and the Federal government were hoping for Heineken but got Pabst Blue Ribbon instead.

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