Diminishing Property Rights Will Lead to a Higher Rate of Mortgage Defaults by Eric Englund

With respect to property rights, 1913 was a terrible year. This was the year when the Sixteenth Amendment to the U.S. Constitution was ratified – allowing the federal government to directly tax its citizens. To add insult to injury, the Federal Reserve was established and the fiat-banking cartel was born. Therefore, in 1913, the federal government was empowered to tax its citizens in two ways. One way, of course, is via direct taxation. The other, and more pernicious method of taxation, is through inflation – by the Federal Reserve debasing the dollar. In essence, Americans became slaves to the state, via taxation, as they do not fully own the fruits of their labor (i.e. money) and what fruit they are allowed to keep is debased by central banking. The long-term effects, of the federal government’s assault on money (as private property), have certainly spilled into the arena of real property as well. For it is a logical progression to go from not fully owning the fruit of one’s own labor to not truly owning one’s own real property. The U.S. Supreme Court’s June 2005 decision, in the Kelo vs. City of New London case, has seen to this. Incrementally, Americans have been conditioned to believe that the state decides which rights, including property rights, are granted to the people. Such conditioning will prove to be disastrous when America’s housing bubble collapses.

Slowly, but surely, private property rights have been eroded. In cities and counties all over the U.S., Americans are being subjected to real estate fascism. County commissioners, city councilmen, and other public officials have literally gained dictatorial powers over real property. Homeowners are being told that trees cannot be cut down from one’s yard, that soil may not be imported to establish a new garden, that a small structure may not be built in a back yard, that a home remodel must meet certain arbitrary standards, and the list goes on and on. Even worse is the use of the powers of eminent domain where local government seizes property and, often times, hands it over to politically-connected companies. Accordingly, the Fifth Amendment has become a mockery. When summing all of this up, one must ask if individuals and businesses really have private property rights?

What is so alarming here is that Americans, in general, see no problem with this creeping real estate fascism. I have some friends (a married couple) who live in a Seattle suburb and have blindly accepted the dictates of the local city planners. Five years ago, I helped my friends build a storage shed in their back yard. As it turns out, the cinder-block foundation upon which we built the shed was deemed inadequate by the building inspector – he stated that city code required a concrete-slab foundation for such a sizable shed. Consequently, we literally sawed off four feet of the structure in order for the shed to meet the city code pertaining to using a cinder-block foundation (as a side note, a neighbor tipped off the city inspector, prompting this unpleasant alteration to the structure). My friends just shrugged their shoulders and have unwittingly accepted the fact that they share their property’s ownership with the local government.

Since the New Deal, the federal government has massively intervened in the private housing market – which, in many ways, has lead to the aforementioned real estate fascism. The Federal Housing Authority (FHA) was established in 1934 with the objective of rescuing a housing industry that "...was flat on its back." The following lame reasons were given for the creation of this federal monstrosity during the Great Depression – as found on the Department of Housing and Urban Development’s website:

Two million construction workers had lost their jobs.
Terms were difficult to meet for homebuyers seeking mortgages.
Mortgage loan terms were limited to 50 percent of the property’s market value, with a repayment schedule spread over three to five years and ending with a balloon payment.
America was primarily a nation of renters. Only four in ten households owned homes.

In 1965, the FHA became a part of HUD. On a combined basis, the "FHA and HUD have insured almost 30 million home mortgages and 38,000 multifamily project mortgages representing 4.1 million apartments, since 1934." Undeniably, the federal government’s intervention into the housing market has been enormous.

Since 1934, an alphabet soup of government agencies and government sponsored enterprises (GSEs) have intervened in America’s housing market with the objective – as stated on Ginnie Mae’s website, using this agency’s statement as a proxy – to "...help make affordable housing a reality for millions of low-and-moderate-income households across America by channeling global capital into the nation’s housing markets." In addition to Ginnie Mae, other federal agencies involved in the housing market include the Department of Veteran Affairs, the Department of Agriculture’s Rural Housing Service, and HUD’s own Office of Public and Indian Housing. Not to forget the GSEs, Fannie Mae and Freddie Mac have become behemoths in providing liquidity to the housing market.

When combining the Federal Reserve’s current (and reckless) low interest rate policy with the housing-market interventions perpetrated by the above-mentioned governmental and quasi-governmental housing entities, millions of otherwise unqualified Americans now "own" homes. Members of Congress and even President Bush are taking credit for helping Americans realize the American dream of home ownership. What these politicians fail to recognize is that they have enabled a circumvention of the customary route to home ownership – in which Americans saved enough for a 20% down payment in order to qualify for a traditional 30-year mortgage. Hence, Americans now have very little "skin" in the game as the mortgage lending system has been so distorted, by the government, that literally anyone with a pulse can qualify for a mortgage loan – including loans that require minimal to absolutely no down payment. Millions of households have interest only, reverse amortization, or adjustable rate mortgages and typically depend upon having two wage earners in order to afford the monthly house payment. Indeed, with federal involvement, mortgage credit is easy to secure. Thanks to Uncle Sam, never have so many people, with so little at stake, been able to borrow so much money.

Now the big question becomes what will happen to the real estate market when long-term interest rates (and, most likely, unemployment) begin to rise? One must look at how Americans have become conditioned, by the federal government, to uncritically view the issue of private property rights. We have a draconian tax system which makes it clear that Americans do not fully own the fruits of their own labor (i.e. money earned via hard work). We have local governments – now emboldened by the U.S. Supreme Court – which decide for themselves what real estate property rights may or may not exist. We have federal bureaucracies that provide shortcuts allowing Americans to purchase homes without having to work and save for a meaningful down payment – essentially, home mortgage credit has been socialized. We have a fiat-money system that steals our wealth via the pernicious tax of inflation. Thus, we have a society in which the meaning of private property ownership has been debased by the federal government itself. So when long-term interest rates begin to rise, I see massive mortgage defaults ahead. Heck, I can hear the mantra now: "I can’t afford my house payment anymore, so it’s the government’s problem now, not mine." Consequently, hugely expensive bailouts of the GSEs, and other federally backed institutions, lay on the horizon. Of course, this will mean higher taxes (both directly and via inflation) and, therefore, further violations of property rights. Does anyone care anymore?

Eric Englund [send him mail], who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. You are invited to visit his website.