In their article “The American Mortgage in Historical and International Context” 2005, Green and Watcher observed how the history of the American mortgage has undergone enormous changes of late. In 1979, mortgage debt was 46 percent of income; by 2001 it had risen to 73 percent of income (Bernstein, Boushey and Mishel, 2003). Similarly, mortgage debt was 28 percent of household assets by 1979 and 41 percent of household assets by 2001. (Green and Watcher 2005)

As seen in Figure 1 below, as of 2004 mortgage debt was accounting for roughly 65% of GDP by 2004. Therefore it is clearly evident that in a few decades leading up to the crisis, the American mortgage industry witnessed a period of aggressive expansion. This unprecedented period of growth meant that the US economy had become extremely dependent on the housing market and ultimately meant that any decline in housing prices would have a detrimental effect on the US economy.

One of the more recent upward trends in mortgage debt as a percentage of GDP came in 1995, when the then President Bill Clinton passed a housing bill, which was infamous for going ridiculous lengths to increase the national homeownership rate. The bill adequately called “The National Homeownership Strategy: Partners in the American Dream”, promoted paper-thin down payments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes. (Mason (2008))

The concept behind this was that the purchase of a home provided the new owner with a form of security. For millions of Americans the value of their home would be their only real security. By 2004, 68 percent of households owned their own homes and, for most of them, housing equity will make up nearly all of their nonpension assets at retirement (Venti and Wise, 1991).

The following is a paragraph taken from the bill and is a real insight into the ideology of those who some claim put the causes of the crisis into motion. “For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership” (Mason (2008)). Mason (2008) found the contents of this bill slightly bemusing – “It strikes me as reckless to promote home sales to individuals in such constrained financial predicaments.”

In contrast to Mason, thanks to the kind of policies mentioned above, Green and Watcher (2005) states that the home mortgages available to borrowers in the United States have evolved over time, into a broadly available menu of choices that is not available anywhere else in the world. They believed that this wide variety of choices was a benefit to the U.S mortgage system as it, coupled with the implicit government guarantee for Fannie Mae and Freddie Mac, solved the problem of how to persuade low-risk borrowers to join the property ladder. Green and Watcher (2005) believed that these unique characteristics of the U.S. mortgage provided substantial benefits for American homeowners and the overall stability of the economy. But Green and Watcher (2005) did ultimately conclude that the benefits to mortgage borrowers come with their own set of risks: namely, the risk that Fannie Mae and Freddie Mac will malfunction in a way that will either cost the federal government a lot of money, or lead to a systematic crisis in U.S. financial markets, or both. This risk is real.

The Housing Bubble

By 2004, 68 percent of households owned their own homes and, for most of them, housing equity will make up nearly all of their nonpension assets at retirement (Venti and Wise, 1991). While the other 32 percent at the time were owners-in-waiting, renting and watching the housing market with great interest. Himmelberg et al (2005) noted that in some individual cities, such as San Francisco and Boston, real home prices grew about 75 percent from 1995 to 2004, almost double the national average.

Himmelberg et al (2005) noted that between 1975 and 1995, real single-family house prices in the United States increased an average of 0.5 percent per year, or 10 percent over the course of two decades. By contrast, from 1995 to 2004, national real house prices grew 3.6 percent per year, a mo