"There is always a philosophy for lack of courage."—Albert Camus

Tuesday, September 23, 2008

Congress Mortgaged our Markets

The financial markets in this country are weathering a severe storm. My strategy in life, modeled for me by some great people, has always been to face rough times with humor. Right now, though, is no time for a belly laugh, not with a lot of very good people watching their net worth slip through the netting and down the drain. But a chuckle is still appropriate, even if it comes with a grim echo.

The funniest gag of all comes from Nancy Pelosi, blaming the Bush administration for the collapse of the nation’s mortgage base. This occurred, she says, because of a lack of regulation and oversight. For people living out here in the real world, that is a real thigh-slapping screamer. What brought so many mortgage banks down was a surfeit of regulation and oversight, but regulation designed for goals other than fiscal security.

Look, anyone who has bought or sold a house in the last twenty years is well aware of the situation. The real estate agent or mortgage broker whom you work with will certainly clue you in to the existence of FHA mortgages, Fannie Mae and Freddie Mac. You, as a middle-class person, will be told that you must put up 20 percent of the cost of the home you purchase. It is possible also to pay 10 percent in advance and borrow 90 percent, but then you will have to pay a monthly charge above the mortgage payment. That charge is to pay for mortgage insurance, where the bank gets some additional degree of protection from loss in case they foreclose and the house only sells for 80 percent of value.

But if you are poor, the agent or broker adds, then you are in good shape. Between Fannie and Freddie they can lend you up to 95, 97 and 100 percent of the price.

Now, I have been both buyer and seller of real estate over these two decades, and I have been shaking my head quietly over this situation. It was clear to me, as it should have been to any responsible person, that this system was a disaster waiting to happen. There is a reason why banks do not agree to lend more than 80 percent of the value of the property, more than one reason in fact. Values often go down twenty percent on their own, and the value of a home in foreclosure is also hurt by the process. There is also a reason to demand that a buyer put up some money, more than one reason here too. It is important that a person has some ability to manage funds well enough to accumulate some; it also bodes well for repayment when the purchaser has put some of his own capital on the line.

The idea of helping a poor person get a house is wonderful, but it flies against some of the harder edges of reality. It could work in many cases, or even in most cases, but it puts the lender in the position of having no margin for error. As long as the borrower can keep his job, with a salary increasing in proportion to inflation, without radical new expenditures caused by illness, and as long as the house keeps its value, the result will be a win-win. But if any one of those elements takes a hit, the whole house of cards will come tumbling down.

Clearly, then, the only way this system works is by eventually pushing the bad debt back to the government. Yet the government bureaucrats do not have their own money at stake. What they do have at risk is their job if they cannot show Congress that enough poor people are getting into homes. An unhealthy paradox evolves, where the government worries more about pushing loans than about collecting loans. Lenders and brokers get the message, so they run around recruiting new buyers among the barely-employed. How could this fail to fail?

Fail it has. After years of scratching my head, trying to figure out how this works, I have achieved perfect clarity. No mystery here after all. The answer is simple: it does not work! Never did, never could have.

As with any crisis, the only hope is if the villains are correctly identified and blame is reasonably apportioned. What are the chances that Congress will suddenly hit themselves in the collective forehead and yell, “Eureka, two plus two equals four”? Now there is a thought that has to make you chuckle.

4 comments:

Toby Katz said...

They accused the banking industry of racism, saying that they were "red-lining" -- refusing to give loans in black neighborhoods out of sheer bigotry -- and forced the banking industry to make risky loans across the country.

They never asked themselves, "Why would banks practice 'racism' if they could make money by lending to poor blacks? Why would they leave millions of dollars lying around, and not pick it up, if there was profit to be made?" They never asked -- what was at work, irrational bigotry or rational economics?

Now the chickens are coming home to roost and when it turns out -- just as conservative economists predicted! -- the poor credit risks are in fact poor credit risks -- that many poor people really could /not/ afford mortgages, and are now in danger in losing the homes they could not afford -- NOW they again accuse the banks of racism for having "taken advantage" of vulnerable people by giving them mortgages!

Liberalism means never having to say you're sorry and always having somebody ELSE to blame for your own mistakes.

Tom Van Dyke said...

Yeah, Mr. Homnick. You'll never find any intelligent person to debate against your points, because any intelligent person who tends to vote for the other party would just move on to some unrelated complaint.

Toby Katz presents an astonishing bit of common sense, that "poor credit risks are in fact poor credit risks."

There was also some manipulation of the process of snarfing up easy government-sponsored mortgage money, and some of it was political, but such complaints will wash up dead on the shores of the mainstream media, so what's the point of even going into it?

The funny thing about the conservative point of view is that it only succeeds on principle, when the power of its principles somehow overcomes the din of the noise that is mindless radicalism and feel-good liberalism.

So keep up the good work, Jay. I continue to trust that American politics is more than a black hole of chatter and the proposition that perception equals reality. Against all odds, and with all the forces of mass media nature allied against them, somehow Maverick McCain and Sister Sarah still remain competitive in the polls.

In fact, pollster John Zogby, shedding himself of his own faulty polling techniques, gets it right for once, allowing for the possibility of a McCain/Palin landslide:

John Zogby, president of Zogby International, told a group of businesspeople today that it’s up to Democratic Sen. Barack Obama to convince voters to go with him. If he’s not successful, the country will likely vote for “a comfortable old shoe”, that being Republican Sen. John McCain.

I like comfortable old shoes. Lord knows I've spent way too much for a snazzy-looking pair I'll never wear again.

James F. Elliott said...

Jay, not a single reputable economist backs up your... version... of events. There's no "there" there. Jeez, Jay, even Steven Sailer doesn't back this up, and he'd cream his pants to have it so.

Instead of riffing off Jeff Jacoby, why don't you go back to commenting on something you know about, like Jewish parables?

Jay D. Homnick said...

The beautiful thing about debating with gracious liberals like James is that even when they disagree they are never...

1) dismissive
2) crude
3) vague
4) reliant on unnamed experts
5) personally demeaning.