Personal Responsibility: Part II Housing Crisis

As much as either political party wants you to believe it was: (a) The greedy banks and wall street hedge fund managers that took advantage of the poor (b) the stupidity of those who signed mortgage papers with up to 125% financing and the government backing of those loans (Guess you can't pick which one is which!).  The fact of the matter is that there were many factors which added up to make the housing mess we are in.  In a way, we all went along for the ride, enjoying every moment -- until the roof fell in.

Sometimes there is irresponsibility on both sides of the mortgage table.  Here is my list as to why the collapse of 2008 occurred:

1. The banks had no business lending 100% of the value of a house -- None.  That gives no room for error in a down housing market.  That was stupid, greedy, and downright immoral.  No downpayment?  Seriously?
2. Borrowers had no business borrowing 100% of the value of a house -- None.  That gives no room for error from their standpoint.  That was stupid, irresponsible, and walking away when the house went down in value was immoral.  You signed a contract and you should live up to it.  No downpayment?  Seriously?  When you have no skin in the game, all they do is walk away.  They put in nothing.  They have nothing to lose.
3. The banks, real estate agents, and appraisers colluded to create a fake housing price "premium".  To push these 100%'ers through and get their closing costs too, they had to "fudge" things a bit, didn't they?  How do you buy an asset worth say $100,000 and pay the bank and realtors $5,000 in closing costs?  Simple you price the asset at $105,000 and get an appraiser to rubber stamp it.  Who hires the appraiser?  The banks do.  Sure, the borrow does technically, but the banks nudge them in the right direction and says well "If it doesn't appraise for $XXX we can't do the deal."  The appraiser realizes this.  He also wants to be paid on the next closing (The bank would fire him if he doesn't).  So... $100,000 asset for $105,000?  Sure.  <Stamp>.  An appraisal should be totally independent and hired exclusively by the buyer -- for their eyes only.  The bank should not be allowed to see it until afterward. No numbers should be disclosed beforehand.
4. The government should have never implied the backing of the majority of these loans through Freddie and Fannie.  Thank you Mr. Clinton.  Even when confronted about the solvency of F&F in the early 2000's, Congressmen (Frank and Dodd to be specific) said this wasn't a problem.  Not a problem?  16% of the mortgage industry completely tanking is evidently not a problem.  The government, yes, is a big player here.  Without this implied backing, the banks would not have been able to be so greedy.  See No. 1 above.  Stepping up and cutting bad loans through tighter regulations a few years in would have avoided a lot of this, but they wanted the votes.  This was a way to buy them and punt the issue down the road.
5. Bundled mortgage backed securities.  This means of wrapping a bundle of subprime mortgages together and sold as a package allowed the banks to get rid of nearly all risk.  This also enabled the banks to rack up huge closing fees and record profits with little risk.  They sold these out immediately and never looked back.  The mortgage firms who bought didn't allow enough buffer for a down market.  Once these bundles started to go sour and underwater they were like dominoes.  Lehman Brothers and AIG got pummeled, and we the taxpayer bailed out the irresponsible again.

So what did the government do?  Why they came up with TARP and Obama's Mortgage Plan.  Two pieces of legislation aimed to help whom?  Well, of course, the most irresponsible people in the whole mess -- banks, insurance companies, wall street, and borrowers. 

The people who got hurt the most are the people who have made their payments all along.  In 2000, I built a house worth about $145,000.  Ten years later, my house is probably worth $140,000.  Most homeowners are like me. 

My solution would have been much simpler.  Let those that were irresponsible fail and be bought by others who were responsible.  Anyone who had paid their mortgages faithfully would have gotten $5,000 given to the banks and credited against their mortgage.  Then once all this cash flowed into the bank (remember this wasn't free as they reduced their solid mortgages by $5,000 each -- think of it as taking the money out of the bank's own savings accounts which to them are loans) you hand them these 100% mortgages that were underwater and say:  Deal with these and reduce their rates to a fixed reasonable amount (more than those that are responsible, but up to a cap (8%?) so the banks have to suffer, and the borrowers get some help but do not get away scott free).  $5,000 x 85% of 44 million mortgages equals less than what we spent on TARP and Obama's mortgage relief plan by several billion dollars.  Those who were responsible got rewarded.  Those who weren't get to deal with their own irresponsible behavior.

Next we'll look at Obama's Mortgage plan and how it works.  As you might guess, it also rewards irresponsibility.  Here's a link to get familiar with it.



http://www.wisebread.com/details-of-obamas-mortgage-plan-released-will-you-benefit