If you want to make sense of the roots of the economic crisis and the giant, still unaddressed issue of housing, see the Nov. 13 testimony of Susan Wachter of the Wharton School at the University of Pennsylvania before the U.S. Senate Committee on Banking, Housing and Urban Affairs (she's at 65:47 minutes into the hearing). You can also read her testimony:
Early in the 1990 decade, nonprime lending was insignificant; by 2006 nonprime lending constituted 47 percent of mortgage originations. The unprecedented expansion of poorly underwritten credit induced and supported a U.S. housing asset bubble beginning in 2003...
And, she continues,
This weakening of lending standards, coupled with increased production, resulted in mortgages which were structured to fail, even in the absence of intent or fraud. However, fraudulent lending also did increase. Eventually, this process became unsustainable, price increases halted, and the poorly underwritten loans could not be rescued by high and ever-increasing prices. This led to today's system breakdown.
The roots of the economic downturn are in housing, so solutions need to be focused there:
Even with the efforts to solve our banking liquidity problems, we will not solve the prevailing problem if the housing downturn continues and the house market decline shows no sign of abating. Moreover, despite bank recapitalization and rescue efforts, economically rational loan modifications that would help stabilize the market are not occurring.
So while housing prices need to fall to some real value level, the danger now is price declines that are too big:
Since their peak in 2006, housing values have fallen over 20 percent so far. While another 10 percent fall brings the index to 2003 levels, price declines may far exceed this decline...
The solution is loan modifications. Yet they are not happening
...at the scale necessary in order to assure a market turnaround at fundamental levels instead of a severe overcorrection.
She concludes that:
Voluntary efforts are not working. The rules of the game need to change.
Are members of Congress and members of the California Legislature listening?