Your comments on those predictions, as well as the ones in this podcast are welcome there.

Back in the late 1990s, as I looked at property prices and risk data associated with homebuyers and other borrowers, I tried to warn our senior people we were headed for a serious downturn because the property markets had become excessively speculative. People were purchasing homes for short-term speculative gains rather than as shelter. The percentage of mortgage loans being made to investors rather than owner-occupants was rapidly increasing.

Back then, the sub-prime market was still very small by comparison to the conventional mortgage market. Yet, in the U.S. the two GSEs (Fannie Mae and Freddie Mac), along with FHA and the Federal Home Loan Banks were pouring accelerant onto the already intense speculative fire. As property prices (essentially land prices, as noted by Fred Harrison) climbed, we annually increased our maximum loan amount to accomodate the speculative investment climate. Then, because household incomes had become stagnant and savings disappearing, we were forced to lower down payment requirements, lower credit score thresholds, allow for interest only mortgage terms and other exotic mortgage products — all to keep mortgage volumes high (and guarantee fees on MBS growing) and to satisfy analysts who expected repeated double-digit increases in earnings. The best our credit and risk management folks could do was try to increase our fees to offset the greater risks, require additional pool insurance coverage for portions of the business and look at every loan that defaulted to determine if the lender adhered to the eligibility criteria, that the property appraisal was supported by comparable sales data, and prudent underwriting was used. All of these checks and balances keep loan losses relatively low until the overall economy began to implode in 2005 and the hundreds of billions of dollars in subprime mortgages began to default — the beginning of a chain reaction that continues to this moment.

Fred Harrison has provided the keys to preventing the meltdown of the property markets, and the consequent failure of many of our financial institutions. A measure that ought to be adopted immediately, however, is to prohibit any bank that accepts government insured deposits from making loans for the purchase or refinancing of land value. This measure would shift the risk of credit-fueled land speculation to financial players who can price for the risk and accept the risks without the prospect of a taxpayer bailout. It would protect the bankers (never very good at managing the risks associated with derivatives and credit default swaps and other exotic financial instruments) from themselves. And, protect us from the bankers.