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I wrote in an earlier post that the real estate bubble, among others, has been caused by a larger credit or liquidity bubble. This is not, however, what real estate pundits would have you believe. Their story, as everyone knows by now, is that there is simply not enough housing supply to meet demand. This is simply not true.

If there currently is not enough housing supply, then why are rental vacancy rates in hot real estate markets like Miami, Washington DC, Phoenix, Las Vegas and Austin in the double digits? The answer is that people have left their rentals to become homeowners. And the main driver of this process has been the loosest lending standards in the history of capitalism.

“Why have the banks been so loose?” you ask. Well, as discussed in “Ramblin’ on My Mind,” Alan Greenspan has played a large role. But, perhaps more importantly, the “Government Sponsored Enterprises” have played a large role as well. Fannie Mae and Freddie Mac, the nation’s two major GSE’s, are the largest buyers of mortgages in the world. Their existence allows a bank to originate a loan and immediately sell it to Fannie or Freddie and wash their hands of the credit risk. That guy, with $28k annual paycheck who just put 0% down on a $500,000 home and used an option ARM to pull it off, is now Fannie’s problem. (Fannie and Freddie are also backed, implicitly, by the full faith and credit of the U.S. Government, so essentially “that guy” is now the taxpayers’ problem.)

This process has led banks to originate loans that they would be unwilling to keep in their own portfolio and has generated fabulous loan origination profits for them… until now.

It turns out that Fannie and Freddie have been cooking their books to the tune of about $11 billion. In light of this, Congress and the White House are working to rein in the growth of the GSE’s loan portfolios to limit systemic risk. GMAC, a division of General Motors and one of the largest mortgage originators in the country, was just today downgraded to a junk credit by ratings agency Fitch (S&P downgraded their rating to junk a few weeks ago). The U.S. Treasury recently warned lenders about taking on too much credit risk.

So it seems there is a gathering headwind for credit growth. Could there be a credit crunch on the horizon?

In 2002, Alan Greenspan was bestowed the title of “Knight Commander of the British Empire.” Even though “Sir Alan,” the preferred appellation used by his admirers, will retire early next year, if we do see the banks reverse their loose lending standards he may earn a new title. “Captain Crunch” has a nice ring to it.

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