The Mortgage Crisis

Note:  This musing was written well before the Lehman/AIG/, etc crisis hit the fan.  I guess most of my insights are considered pretty obvious at this point, following the aftermath of the near collapse of the market and subsequent sinking of the McCain electoral ship.  Nevertheless, I leave the original thoughts here for history’s sake!

I believe the so-called mortgage crisis has been created as a result of 4 inter-related factors:

  1. The failure of Federal Banking regulators, most of whom are ex-banking industry executives, to police the industry.  The intent of banking regulations, setup after the devasting economic crash of ’29, was to insure that banks did not over-extend their assets by requiring a certain reserve of depositors’ money to handle bad loans and runs on deposits.  Over the years, regulators have looked the other way as lenders found more and more inventive ways to put money in the hands of unqualified borrowers.. Offering 2nd and 3rd mortgages, as well as unsecured credit, as a way to circumvent the intent of the minimum downpayment required to insure each borrower has some personal financial stake in their housing loan. 
  2. Greedy lenders and investors.. blessed with the gift of blind regulators, they have followed the guiding principles of capitalism to the extreme (maximize profits, minimize expenses, regardless of any social, ethical, or moral consequences) to overlook the most basic underwriting principles, in favor of placing loans in any way possible, knowing they will be “packaging” those loans and passing the potential default rate off to yet other greedy investors, looking for an easy return on their money with presumably little risk.  In essence, a huge preponderance of loans were made in the past decade to borrowers who had little or none of their own money involved in the purchase (or those who refinanced their existing homes to 100% of their obviously inflated appraisals during a grossly overheated real estate market).
  3. Borrowers who have knowingly misrepresented their financial condition to lenders in order to purchase property with loans they weren’t financially qualified to repay.  This included such techniques as raiding cash advances on credit cards (at usurious rates) to make the minimal down payment requirement.
  4. The Media…always on the lookout for new sensational issues to fan the public’s desire for sound-bite doom-and-gloom news.  In yet another instance, I believe the media’s over-focus on this issue has contributed to somewhat of a self-fulling prophesy of banking failures.

Now, the majority of financially responsible American taxpayers are being required to pony up and bail out those greedy investors who were looking for a “sure thing”, and bail out the poor overextended homeowners who have “lost everything”.  Yet, how can a person who, 2 years ago was living successfully in a rented housing, then bought a house with no money down, be considered to have lost everything?  Worse case, they move back into a rental, leave the bank with their deflated value property (which the bank was so eager to lend on), and the borrower is no worse off than before.

And now, the worst travesty of all:  A pandering Congress, intent on appealing to voters in an election year, has determined that the “fix” to a problem that was created in large part due to home buyers obtaining mortgages with little or no personal down payment requirement, is to burden taxpayers again with PROVIDING that downpayment via the $7,500 credit to home buyers! 

Incredulous as this may seem, yes, Congress has actually poured fuel to the flame, at taxpayer expense, to insure that we rush headlong toward the next mortgage crisis, creating a brand new class of borrowers in homes with zero personal equity, until the US banking system finally goes irretrievably down the tubes!

If the staunch proponents of capitalism (which presumably embraces a true free market) would stick to their principles, then we would allow the market itself to weed out banks and bankers and borrowers who overextended themselves.  Instead, our so-called federal banking overseers have chosen to reward both borrowers and lenders for their misdeeds by bailing them out (with OUR taxpayer money).  This includes top executives of failed institutions, who, after having betrayed their stockholders and the FDIC, have been allowed to scurry out the back door in the middle of the night, like rats leaving a sinking ship, kept fully afloat by their multi-million dollar mis-management severance rewards!

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