I watched 60 MINUTES last night after the football game. There was a segment about houses that are being torn down in Cleveland, and what they are doing in Cleveland about trying to save neighborhoods from falling apart because of the financial crisis and the recession.
Earlier in the day, I watched THIS WEEK, and listened to George Will speak about the housing crisis. I try to like George Will. He is an intelligent person and while I don't always agree with his conservative positions on various topics, I usually think he has at least his facts straight. Sunday, George Will in my opinion did not know WTF he was talking about when he spoke about housing and why there were so many foreclosures.
Now, I am going to relate a personal story that happened to me almost 42 years ago when I went to get a mortgage on my first house in June 1970. I walked into Central Trust Bank at the corner of 4th and Vine Streets, their main office, and asked where I could apply for a home loan. I was instructed to walk through several sliding glass doors until I got to the mortgage department. A man at a desk asked if he could help me and I told him that I wanted to apply for a mortgage. He asked me where the house was located, and I told him Clifton. He then said to me, "north or south of Ludlow (Avenue)?" I said north of Ludlow Avenue, and he said have a seat.
The reason why the Federal Government got into the mortgage business in the first place is because people of color and other ethnic backgrounds were being denied home loans based on where they had to live or the color of their skin. You see, to fully understand why the government got involved in situations years ago, you must understand the history. Newt Gingrich is a big history buff, but he comes from Georgia where they make up their history to suit the situation.
Have you ever heard of REDLINING? Redlining can be defined as when financial institutions refuse to make loans in areas of a city that have people that don't look like the people running the bank. In other words, credit rating had little if anything to do with why the mortgage was not approved, and the lending institution did not have to say why they refused to give the loan. But, what caused this housing crisis, I have written about for the last several years, but you will not hear this explanation on TV because it is too complicated for the mass viewing audience to listen to.
The 3 large credit rating agencies permitted the housing bubble and fueled the financial crisis. Banks made mortgage loans and were able to sell these loans where they were bundled and broken up and sold as mortgage-backed bonds. These mortgage-backed bonds were sold to pension funds, endowments, foundations, large institutions, money mangers and investors around the world. The key to inflating the housing bubble was the TRIPLE-A ratings that the investment bankers were able to secure from the credit rating agencies. With the TRIPLE-A rating in hand, the bond salespeople were able to sell these mortgage-backed bonds around the world. The key element to keep this charade going was the originators of mortgages. With Wall Street investment bankers able to sell mortgage-backed bonds anywhere in the world with a TRIPLE-A rating, the table was set for greed to fill every plate. Wall Street packaged the mortgages regardless of quality because they knew that the credit rating agencies' growth in EPS was coming from the rating of mortgage-backed bonds. Eventually, these mortgage-backed bonds became suspect and the beginning of the end of the bubble was in sight when credit default swaps came on the scene.
So, don't be so quick to blame people for making liar loans if the originators were pushing people to buy homes they knew they could not afford. Regulations need to be put in place to discourage greed. Jail is where these greedy SOB need to go.
Stay tuned.
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3 comments:
Not only jail time. They have to be hit hard where it hurts.....in their pocketbook.....and not tiny fines...I believe ALL their wealth should be confiscated by the government and used to reduce the debt.
To a certain extent I agree with Winslow, but I think I would like to see a restoration of regulation on Banks and the banking/financial industry - to include, as they never have, restrictions on the form and amount of compensation and bonuses organizations in the financial industry can pay. Because what they do affects every man, woman, and child in this country - in recent times, to their detriment.
Some other things contributed to the situation as well. Real low interest rates made it too easy to borrow a lot of money.
Trade deficit with China and other countries, like oil producing countries, contributed to those nations pouring money into buying US debt, thus more money sloshing around in the market.
This all, including the credit rating debacle, had the effect of pushing house values, in many markets far higher than most working people, in those markets, could afford. Especially if the worker's jobs were being sent to places like China.
House values turned into something like a pyramid game. Most of the market, here in Bellingham for instance, was only made up of people who had already bought houses and were moving to another house. New first time home buyers could not afford to get into the market just on wages alone.
Without the flow of new people coming into the pyramid, the pyramid started to collapse as most workers could no longer afford houses in a lot of local markets.
Soon Wall Street and the banks did what they seem to do best. They started to panic. They started to panic when they suddenly realized that the situation was unsustainable. Wall Street seems to be very good at creating the product called panic.
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