Lehman Brothers, Bear Stearns, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, Indy Mac, Goldman Sachs. You hear these names every day in the news. You hear we’re in a “credit crunch,” a “mortgage crisis,” and the terms “bailout,” and “golden parachutes.” Democrats blaming deregulation (funny considering that they voted for deregulation by repealing the Glass-Stegall Act back in 1999), Republicans looking around for someone to blame and not sure who, Libertarians suddenly in favor of government intervention. What in the world is going on? You know it has something to do with bad mortgages, “toxic mortgages” as the news media says.
But what’s really going on and what really happened to cause it?
I’d be willing to wager that you’re aware that some less than stellar borrowers managed to convince some mortgage companies to give them a loan to buy their dream home. Politicians would love for us to think that everyone was altruistic in this mess except for those “greedy” bankers and mortgage lenders. But the truth of the matter is that this mess rests squarely on the political meddling of the government, and how it used strong arm tactics to dictate who would get mortgages.
All the media hype used to be about “redlining,” the practice of refusing to make mortgage loans to applicants who lived in certain lower income neighborhoods. Neighborhoods full of voters. Voters who wanted houses. In theory, a banker would draw a red line around certain neighborhoods that were off limits for the bank’s loan underwriters. No one in the government or the media cared that the people living in these neighborhoods were known for having bad credit. No one in the government or the media really cared anything about the borrower’s credit history in general, or debt-to-income ratios, whether the borrower even had a job, or loan-to-value ratios, or a borrower’s personal net worth and they certainly didn’t think these factors should be considered in the mortgage process. That just wouldn’t be “fair.” Owning a home in America is a right, by God! They even coined a term for it–NINJA loans–no job, no income, no assets. But these were voters, constituents, and they needed representation, regardless of what made sense. Things just escalated from there.
And guess what happened? Political correctness won out over common sense. The Feds made it crystal clear to banks and mortgage companies that if they did not bring more minorities and low-income Americans into the world of home ownership there would be a steep price to pay. Congress established programs like the CRA (Community Redevelopment Act) that helped activist groups and community organizers essentially halt a bank’s efforts to grow if that bank didn’t increase the portion of its loan portfolio that consisted of these unqualified borrowers, and hence the “subprime” mortgage mess. XYZ bank didn’t want to loan money to Harry Homebuyer because Harry had a job history that looked like swiss cheese, owed way too much money on his 37 credit cards, and wasn’t exactly known for making payments on time. Then politicians told XYZ Bank to figure out a way to make that loan or forget about opening those new branch offices across the state. The loan, and millions like it, was made under political pressure and predictably, the loan failed and now here we are. That’s your government at work. Attorney General Janet Reno and President Clinton promised “vigorous enforcement” of these Acts and other programs and also promised to insure the demise of any who stood in their way.