What Happens when the Government "Helps" Business.

For the last two nights I have been discussing the Down Payment Assistance legislation, and its effects. As this story was playing out, it made me think deeper as to the unintended consequences that occur when government tries to manipulate the free market. Let's assume that these efforts in tampering are done with the most noble of intentions, but just as in checkers, every move now will have a consequence down the line. We are now living in a world that none of us have any clear idea of what will happen next, we can look to history, and to other countries who have tried similar policies to conjecture of what will come, but we simply don't know. One of the recurring themes of conversation that I have heard as discussing business plans is that no one knows, that the rules we have all learned are no longer in play. We must all make it up again as we go.

Let's look back at the DPA programs. They were brought into the market in 1994, the first company was Nehemiah founded by an young African American preacher with a 5,000.00 loan from a Baptist Church in California as a charitable fundraiser. This was allowed by the government who set the legal guidelines to use this program to help those who had the income and credit but not the down payment for home ownership. It was a huge influence in helping minority and single women into a much larger percentage of home ownership. The first building company that really embraced this program was Crossmann Communities in Indianapolis, their success with the program helped this idea spread rapidly across our market, as well as the entire country. One of those who saw Dick Crosser and John Shumann's Crossmann Communities explode was Chuck Morgan, of C.P. Morgan. Chuck saw the opportunity but went one step further studying the big box and assembly line approach of a huge builder out West. He completely retooled his company's business model from a builder known for his quality, and changed to quantity, or "more square foot for less money." By matching the mortgage model that Crossmann was using and adding huge homes for less money, he flew to the top of the food chain.

We can argue that both companies were taking advantage of the programs and not focusing on what was best for their clients. If you look at my first DPA blog, I laid out my argument there. Soon after, the government, through Barney Franks, Chris Dodd, Franklin Raines, Maxine Waters, Andrew Cuomo, and others brought us the wonderful world of Sub-Prime loans. Not only did these programs get approved by the government, there were rules that if lenders didn't place enough of these high risk loans, they were subject for fines. The market embraced these, now everyone was a buyer. If someone could fog a mirror, they could buy a house. Once these 100% or higher Loan to value mortgages, without those silly qualification requirements that FHA wanted were readily available, FHA almost went the way of the Do Do Bird. Now companies like C.P. Morgan, Crossmann, and any that specialized in the lower priced product doubled and tripled in size. What this did was create huge companies, massively successful, employing hundreds and bringing huge amounts of revenue into the industry and community at large.

Pop goes the Bubble! First casualty was the Sub-Prime lending, overnight it was gone. Frankly good riddance but these large companies with huge payrolls, and overhead took a pretty hard shot to the chin. Fortunately for them they were able to refocus on DPAs and FHA, it wouldn't allow them to sell as many homes as they could under sub-prime, these buyers would now have to qualify and actually afford their loans. If this was the end of the story, there would have been a shrinking of the market, but most of the builders we lost would likely have been able to survive and restructure on the lifeblood of DPAs and FHAs. However in just a few more months, pop goes the DPAs. Once that blow came, there was no way a company like C.P. Morgan could survive. We can either like or dislike them as a company, but the big story here is that it was the government that created them and then the government that killed them. Since all that happened was a very smart businessman Chuck Morgan saw government approved programs and created a very successful business model to take full advantage of them, then almost overnight they were taken away leaving his company cold turkey. This is no different than someone getting kids hooked on pot then later on crack until their life blood is their next fix, then just cutting them off. How different is that then the builder's story above?

We now are watching Cash for Clunkers. I am thrilled for the car dealers having a chance to cash in after the attacks they just suffered through. However, will this short term gain, cause unintended long term pain? I can think of several possible long term problems that this can cause. Maybe I will do another post on them some other time. Do you think it is going to be long term positive, negative, or business neutral?