What Really Happened in the Mortgage Meltdown

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?

NYC Trip 2008 0051I’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.

Lenders were aware that a very high percentage of these loans would soon be worthless, but it was a price that had to be paid if the bank was to expand and grow. And to top it off, the Feds had these quasi-governmental companies called Freddie Mac and Fannie Mae that would buy these mortgages anyway. Certainly a government backed company could not fail…could it? These trash loans to unqualified borrowers were then bundled up and sold to Freddie Mac and Fannie Mae who held them for a time and then re-packaged them again to sell to other institutions and banks, who were understandably eager to reap the benefit of potentially rising interest rates from the adjustable rate loans. The banks and investment firms certainly thought the Fannie and Freddie loan bundles were sound since they came from governmental agencies. The expectation was that these loans would soon be paid off when rising home values led borrowers to “tap” their equity through a re-finance or sell to move up to a nicer home. Uh-oh. Those drastic increases in real estate values didn’t happen, did they? Now the chickens are coming home to roost.

The whole reason that real estate prices in many areas escalated so quickly was because there was such an incredible amount of money available, again thanks to the Federal government. Simple supply and demand economics came into play and when you have a ton of money and only a few properties, the price WILL increase. Any 18 year old Economics 101 student could tell you that.

Today this government created crisis is being peddled to the American public by one certain political party as proof that the free market and capitalism are failures. Nothing could be further from the truth. What we’re seeing is the inevitable, yet predictable result of political interference in free market economics. If the government had let well enough alone, had let bankers make smart decisions with their money, had refused to bow to the political pressure of community organizers and activists, we wouldn’t be experiencing this crisis.

Anytime government gets involved in anything other than what it was Constitutionally set up to do, the result is bureaucracy, failure, poor performance, and shoddy results that are easily outpaced by the private sector. And they want to take over health care? They can’t even manage the VA, let alone all the hospitals in the country. They semi-took over education and look at the mess we’re in. Most kids can’t even find the US on a globe.

So why isn’t this story front page news? Why aren’t the big TV networks leading off the evening news with stories about how the Feds screwed up yet again? Come on, are you kidding me? Do you really expect the media to blame this mess on deadbeat borrowers and political meddling in the free market when it’s so much easier and politically expedient to put the blame on those evil and greedy lenders and capitalists? Remember, there’s an election going on.

Note: One of the community groups that were intimidating banks into making these dumb loans was an outfit called ACORN. There is one presidential candidate that did a lot of “community organizing” for ACORN in Chicago, I believe. I won’t mention his name so as to avoid politicizing this blog too much.

photo credit: akeg

About the author

Ron Haynes has written 1091 articles on The Wisdom Journal.

Ron is the founder and editor of The Wisdom Journal. He has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a partner in a national building materials company.

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