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Saturday, September 20, 2008

Uneducated Lies, Misunderstands, and Misconceptions About the Mortgage Crisis

It's time to put to rest all of the inaccuracy going around the media and the country about what started the crisis, perpetuated, and is at fault for it.

1) Greedy mortgage professionals are to blame and borrowers were just innocent victims

I am happy to report that this myth has largely been marginalized as enough has been written on the crisis that the truth finally did come out. That said, you will still find a few columnists here and there continuing to pretend as though the borrowers were just innocent victims. Make no mistake, greedy mortgage professionals have plenty of blame, but that blame must be shared by the borrowers as well. Yet, the damage has already been done. This false narrative allowed the corrupt Dodd/Frank bill to pass.

Take it from someone that was there, these borrowers, for the most part, knew exactly what they were doing. Often times, borrowers were more knowledgable about the fraud that could be committed than the brokers themselves. This idea though that loans were done without their knowledge and payments created that they weren't aware of is pure fantasy. The borrowers knew exactly how much they were going to pay monthly, and they simply convinced themselves that they could afford it.

2) Deregulation caused the mortgage crisis

The roots of the mortgage crisis are very complicated and you can either blame a whole lot of folks, or I actually only blame Alan Greenspan and give everyone else a pass as a creature of the capitalistic system. Yet, blaming deregulation is not only simplistic but frankly wrong. The problem wasn't deregulation but a lack of enforcement of regulations already in place: mainly FRAUD. Most of the bad loans were done fraudulently. They were so called stated loans, in which income/assets were stated. You can't lie about how much you make even if you are not showing the documents to prove it. You certainly can't lie about how much is in your bank account. Yet, these loans, for the most part, weren't pursued. They were systemic in the industry. The entire industry was making money hand over fist through these loans and borrowers were buying extravagant homes. You can't expect the industry to police itself if everyone was banking. It was up to the regulators to police the industry. They failed, but it was a failure of enforcement not deregulation that did it.

3) Fannie Mae/Freddie Mac failed because the loosened their standards responding to calls from Congress to loan to lower income folks.

This is the new chic theory especially on the right. Too bad it isn't supported by facts or reality. It's true that Congress demanded more loans in low income areas. It's also true that Fannie responded and it's true that Congress didn't do an diligence in overseeing the matter. It isn't true that this played any significant factor in their demise. Their demise didn't happen due to altruism. It happened because of greed. I remember for over a year sub prime reps (those that represent banks that sell to those like me, mortgage brokers) coming in and telling me that if I had a high loan to value loan (with little or no money down) that they could compete with Fannie/Freddie loans. Often, they were competitive. These two giants were losing market share. That's why the loosened their restrictions. It isn't because they were responding to some altruistic calling. Now, Congress should have been overseeing this as much as they should have been overseeing lending into low income areas, but let's make sure the facts are correct.

4) More transparency is necessary for the industry.

Anyone who has closed on a loan knows full well that the industry doesn't suffer from a lack of transparency. You sign at least one hundred documents making sure that everything is transparent. In fact, the industry is so transparent that it is easy to hide anything important. Try and find the important document when you are signing over a hundred of them.

5) A new regulatory body needs to be created to monitor the industry

That's not the problem. The problem is that the regulatory bodies don't do much of a job monitoring the industry. The Office of Banks and Real Estate is among the weakest regulatory agencies around. Everyone from Justice, the IRS, each individual state's AG's, etc. all have some form of jurisdiction in mortgages. The bodies we have don't do a good job.

6)The Democrats or Republicans policies caused this.

Let's make no mistake this is not a partisan issue. Both sides have plenty of blame to go around. Regulators were asleeep while fraud was being perpetrated en masse and no one did a thing. Yet, Congress stood idly by while this happened as well. Bush has plenty of explaining to do for not prosecuting mass fraud, but so do the Democrats in Congress for blocking reform of Fannie and Freddie. Barack Obama blames Bush policies for the crisis, but for four years he was in the Senate while mass fraud happened and said nothing until it blew up. All sides are to blame and the party we should vote for is the one that doesn't point fingers but offers solutions.

7) Fannie/Freddie are the scum of the Earth and we should just close them.

All right, the first part is absolutely true, but the second is a lot more complicated. If only it were as simple as closing these two, but it isn't. They control the entire market. By securitizing, they also set the rates and the underwriting guidelines. Without them, there is no mortgage market. They can't be closed but need, badly, serious reform. I have suggested privatization and breaking them up, but reform they are badly in need of.


Anonymous said...

Hi Mike, nice post, bookmarked. One question, tho - is it correct that Fannie and Freddie got to borrow at below market rates?



mike volpe said...

Not only is it correct, but this happened because these two are so called Government Sponsored Entities. This is just another reason why it was imperative that these two have the proper oversight. It is just another reason why their debacle should be even more infuriating.