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Thursday, April 10, 2008

Answering Obama's Mortgage Paranoia

As part of his stump speech, Barack Obama had this to say about bank's roles in the mortgage crisis...

The top mortgage lenders spend $185 million lobbying Congress, and we wonder why Washington looked the other way when they were tricking families into buying homes they couldn't afford.

I don't know the exact numbers so I will take Obama's word about the lobbying efforts. He is right that banks spend plenty of money on lobbying and those lobbying efforts are meant to keep the regulators of their backs. This is absolutely done in the self interest of the banks and with no regard for the welfare of the borrower, however Obama takes things to a paranoid and conspiratorial level when he suggests that this was done so they could create loans they knew couldn't be paid back.

In any paranoid conspiracy theory one needs a large powerful boogeyman that always is able to act in its own self interest at the expense of everyone else. That is what Obama is peddling here. He is suggesting that the banks literally created the sub prime mess because that would benefit them. Of course, nothing could be further from the truth. If you believe Obama, then banks somehow were better off foreclosing on homes instead of having those loans get paid back. The problem with this theory is that it is supported by no numbers.

On a typical thirty year mortgage, the borrower winds up paying three times as much as they originally borrowed over the life of the loan. With regards to a foreclosure, it will take a minimum of six months from the first late payment before the bank takes ownership of the home. In that time, the bank needs to employ lawyers. They need to contact and maintain contact with the borrower, and of course create and execute all sorts of paperwork. Finally, the bank is usually lucky to sell the property for 70% of the value of the home. Yet, Obama is suggesting that banks tricked borrowers into buying homes they couldn't afford. Apparently, if you are Barack Obama, you think the bank would rather collect on seventy percent of the value of the home rather than three times the loan amount.

I have little to no use for banks however the suggestion that banks created loans that were specifically supposed to trick borrowers into taking on more than they could handle belies reality. Dozens of banks have gone under or at least stopped doing mortgages since the crisis materialized. From smaller mortgage companies like First Magnus to larger banks like Greenpoint, all of these operations have ceased to exist. Just yesterday, Washington Mutual cut off all wholesale mortgage operations. Sub prime banks are nearly non existent. If banks had a secret plan to make money by taking people's homes, that plan certainly blew up in their faces.

The reality is that banks got caught up just like everyone else and made foolish and irresponsible decisions and many of them are paying for it now. Suggesting that they puppetteered this mortgage crisis for their own benefit is not only paranoid but it frankly flies in the face of all the facts.

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