Part 1 - Government Sponsored Enterprise
As our lives evolve into more demanding professional, as well as family lives, our quest for convenience and affordability expands. As a result, retailers have fostered the creation of an array of big box stores covering all sorts of categories; from department stores to electronics to groceries. However our need, and love, for the big box retailer has evolved into other areas; Mortgages.
Yes, mortgages. What’s even more strange is that the borrower may not even be aware!
The far majority of real estate loans created in America, and Islamic ones, ultimately reside with a handful extremely large enterprises.
The main product of big box mortgage enterprise is the conventional mortgage. Without exception, its does serve its purpose. Its extremely convenient, affordable and an unlimited amount of loans could be created - a robust and ‘sustainable’ model. Borrowers now have access to hundreds of thousands of dollars to purchase a home, a vacation home, a rental property - simply determined by their income and their payment history. All this and, in some cases, putting as little as 3, 5 10% down.
However access to such funds wasn't always so easy.
Prior to the New Deal [1932], local banks would lend funds that were actually on hand via deposits. Terms were extremely short; 3 to 7 years. Loan to value rates were low, ~60%; large down and short terms.
Several New Deal measures created government sponsored enterprises (GSE’s) in the finance sector. Their goal was simple; make it far easier for Americans to borrow money to purchase a home - the American dream (of homeownership) was born!
Upon initial formation, the length of GSE backed loans was bumped up to 25 years. Relative home payments decreased which corresponded with a large increase in home values [60% after after adjusting for inflation].
Consumers were not complaining as it was far easier to buy a home, and move from the proverbial poor to the middle class.
Currently the limits set by Fannie Mae, which are reflective of ALL conventional loans (from any bank - even those formed under the auspices of Islamic Banks in America), allow a debt-to-income ratio of 45% with good credit. This can be obtained with as little as 3% down.
If moving away to a non conventional loan, which exclude the bulk of Islamic financing houses, DTI ratios can increase to 55% and down payments could be as low as zero. Not so surprisingly, these types of loans played a large role in the formation of the real estate bubble we witnessed in 2007.
To put this in context, the DTI typically includes loans on real estate, automobiles, student loans, credit cards and child supports. It is weighed against one pre tax income. When other monthly obligations are factored, such as utilities, phone, food, gas, medical and federal and state tax, it is surprising that Americans are able to stay afloat in the sea of borrowed money. Or are we?
Since the inception of GSE’s in the mortgage place, the saving rates of Americans have consistently declined. In 2006 the respective value was negative; indicating that Americans are spending more than they are earning! The value has since risen to above zero.
[Bureau of Economic Analysis - Personal savings as a percent of disposable personal income]
The paradoxical relationship between the ease of availability of funds and overspending, i.e., lack of savings, has effectively been demonstrated.
The question that needs to be considered, in lieu of such lax borrowing opportunities [not only present with mortgages but across the board] is; ‘what ramifications do funds, with such ease of availability, have on a society?’
For over a decade, financial experts have actually answered - and as a result of such financial habits, e.g., lax borrowing regulations resulting in over leveraging, they have dubbed the US a spendthrift nation as evident by the declining savings rate!
From the mid 1980’s to the mid 2000’s to the present, economists, such as Lansing, have concluded that ‘Failure to boost saving in the years ahead may lead to some painful adjustments in the future.’
[http://www.frbsf.org/economic-research/publications/economic-letter/2005/november/spendthrift-nation/#subhead3]
The secular view of poor economic practice is that such behavior ultimately result in a predicament which will come to fruit upon retirement of the individual. Islamic teaching not only focuses on the individuals near future, but concern beyond the individual is emphasized. Part 2 will explore the responsibilities and hindrances as a result of ease of availability of funds.
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