Mortgage Mess Redux

The current financial morass we still endure began with the mortgage mess that came to light in 2008 at the latest.   Many of the politicians acted with great surprise that there was a problem and quickly jumped to blame “Wall Street” for the problems and the crunch on new mortgages and the construction business.  That lead to TARP and then the Government Motors bailout and the Stimulus bill soon after.  The birth of the Tea Party had its inception and inspiration from a rant by Rick Santelli on CNBC in the late winter of ’09.

His rant arose with the first of several Federal programs to protect the poor homeowners who were facing foreclosure because they couldn’t pay for the mortgages they were “tricked” into signing for homes they couldn’t afford even with they put virtually no money down at the time of closing.   They made no sacrifice to get the home in the first place.   Santelli asked then on the floor of one of the exchanges if “you” wanted to pay for your neighbor’s house when you had played by the rules and he had the big house and lots of goodies he couldn’t afford.  The roar of the crowd was overwhelming.   Helping out those who were irresponsible in the first place raised the whole spectre of moral hazard.  We were at a tipping point where there was an abandonment of personal responsibility for personal decisions and a turn toward government to fix all our problems for ourselves.  It was during that time that Santelli talked about holding a “tea party” to protest the actions of the Federal government bailing out homeowners regardless of the foolishness or even venality of their own actions.   That phrase about the tea party was picked up by those folks who believed Government intervention into every aspect of our lives and dominance of our lives was wrong then  and the wrong direction to be taking.   The Fed got into the act at that time also and in addition to the Stimulus bill of over 800bn, the Fed went on a buying binge to bolster the mortgage and credit markets with over 1 trillion of various bond purchases during ’09.

Well, a few trillion dollars later we still face the same problem.  The housing and mortgage mess got us on the downhill slide and do you think we have improved the situation with all that Federal money (and borrowing) thrown at the problem?  Now there is the added burden of the legal difficulties created by the sloppy paperwork and legal work of the big banks and the investment houses that bought those mortgages.  At the moment over 90% of all our mortgages or owned or backed by the Federal government rather than the private market.  That can’t be a good thing.  They can’t even deliver the mail on time and on budget and they are controlling trillions of dollars in mortgage obligations.   This is no defense of the banks.    In a free market system properly allowed to function we all have to bear responsibility for our decisions and failures.   Yes, failure means the person or company goes under and we move on and reset things.  But that has not happened because the politicians don’t think we are tough enough or brave enough to face the consequences of our own actions.

The banks for a few decades now had been under increasing pressure to make loans to minority groups.  They were accused of “redlining” certain areas and not providing funding and loans for new homes.  No need to repeat the legislative history, we all should know it by now.  The Federal government in its infinite wisdom decided that it was good policy to make loans to minority groups and that failure to do so should be punished.  The banking industry had all along argued that they would make loans to anyone who had the credit to service the loans.  Of course that was true.  Why would they not increase their business if they could by making such loans.  It was business and credit that determined the lending standards.  But the Feds came busting in the door and demanded that they make such loans.  After all the Feds regulated the banks and they made it clear if they did not comply with the new rules they would make life miserable for the banks and even revoke their charters.

Eventually, the banks caved into the new laws and the intense pressure of the regulators.  They did want businessmen have always done throughout history; they figured out a way to make money in the existing system whether they liked it or not.  Soon those new loans were rolling out.  We know they were “liar loans” and loans with no documentation and loans made with no money down and often even the closing costs were covered by a grant from one institution or another that existed to aid minority groups.  Then those loans were bundled up and sold to Fannie or Freddie and often after that were resold into the bond markets with those securitization packages or done so directly by the investment houses.  But like those chickens coming home to roost, the bad loans eventually revealed themselves to be just what they were from the beginning–bad loans that should have never been made.

Now the politicians scream about the bad loans  but where were the voices of the politicians and their outrage when they were being made in the first place?  These loans weren’t being made in the dark of the night in some obscure alley.  Get the Feds out of the mortgage business entirely.  Let the State legal system deal with the foreclosure process.  That is a matter of State law in any event and there are perfectly adequate protections for anyone that was truly defrauded by some bank.  Let the investment bankers and banks that bought those mortgage securities suffer whatever loss they incur for a bad decision.  Dismantle Fannie and Freddie and don’t resurrect them.  We must as a nation restore the vigorous concept of moral hazard to the marketplace and our daily lives.  Take ownership of our decisions and consequences as individuals and companies.  Yes, there will be some pain, but hell’s bells we have already suffered pain and are still doing so.  We can figure this out on our own, thank you very much if the Federal government will get out of the way.

“A man’s liberties are none the less aggressed upon because those who coerce him do so in the belief that he will be benefitted.”  H. Spencer.


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Filed under business, Economics, government, Politics

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