Who is to Blame for the Mortgage and Foreclosure Mess?
Every once in a while, somebody will ask me “Who is to blame for the current housing and foreclosure mess?” Usually they want a short, snappy answer. The truth is that there is a giant pie of blame, and there’s plenty to go around. In no particular order, here are some of the culprits. This is my opinion alone, and you are welcome to disagree with me.
Fannie Mae. The Federal National Mortgage Association, shortened to FNMA and then simply Fannie Mae, is a federally chartered entity designed to encourage home ownership primarily by purchasing mortgages from other institutions. That meant that your local savings and loan would have the money to make new loans in your neighborhood. That by itself is not the problem; until recent years, they and sibling corporation Freddie Mac were only allowed to buy certain mortgages that met very strict criteria — so-called “conforming” mortgages. The old girl has been urging people to buy a house for years, selling us a bill of goods that somehow or another our lives would be magically improved by home ownership.
The economy. The sad truth is that wages have not kept pace with inflation for almost all of this decade, inflation has been under-measured, and housing prices have gone up much faster than inflation! Joe Average could not have caught up to the curve if he wanted to. The economy also got a lot of people into situations where they had to take out second mortgages or equity lines of credit to pay the bills. This left them with little equity and a higher mortgage bill.
Stupid accountants. I have actually had people tell me their accountant told them to buy a bigger house for the interest deduction! The money you “save” with this deduction is only the amount you spent on mortgage interest (not principal) times your tax bracket. Let’s say for simplicity that you have a $1300 per month mortgage and $1000 of that is interest. If you are in the 28% tax bracket, you are spending $1300 per month, your monthly tax savings is only $280. If you would have spent $1300 per month renting, then fine, you saved money at the end of the year. Many would argue that if you are spending more than $1020 on rent it’s coming out ahead. Many people doing this math forget to account for the additional $280 out of pocket each month. If you are “just getting by” paying $1100 per month, this “savings” will bleed you dry.
An unscrupulous minority of mortgage brokers. Most mortgage brokers that I have known have done great work trying to get people into affordable mortgages and been brutally honest with clients about exactly how much they can afford (that’s why I prefer that clients get their pre-qualification letter before we even start looking). However, a few mortgage brokers have been all about the fees at the end of the deal, and will do anything to get it done. Even when that means putting people into a mortgage they can’t really afford in the long term. Perhaps they will even say tell the client to come back and refinance in a year — and they neglect to mention that they will rack up another fee to do so! They have ruined the credibility of programs meant for special circumstances by abusing them and the homeowners they sign up for them. “Stated income” loans? A necessity for those who are small business owners or paid largely in tips! Not intended for Joe Average (or his mortgage broker) to lie about how much money he makes so it looks like he can afford a house that he really can’t afford!
A similar unscrupulous minority of real estate agents. I’ve talked a little about them before. Some agents fixate on the fact that they don’t do a lot more to sell a $200,000 home than a $100,000 home but they get paid as a percentage of sales price. So some agents try to steer their clients up-market regardless of what they can afford. Agents like this don’t consider the effect this will have on their future business. You never know whether that guy you helped (or didn’t help) with the $100,000 home will just happen to be talking to somebody who needs help with a $500,000 home.
Appraisers in a Catch-22. Make no mistake, appraisers found themselves in a tough place a few years ago, particularly in the hottest markets. They were being paid to say yes! Yes! That house may have only been worth 80% of that last year, but it’s worth that now. Yes! An almost identical house on the next block sold for $20,000 less two weeks ago but this house is worth even more now. They weren’t going to get any business from their mortgage broker clients if they didn’t at least try to come close. At $300 a pop, they had to do what they had to do.
Overly enthusiastic buyers. Motivated by greed for rising housing prices and fear that they would be priced out, some buyers over-extended themselves. They never thought housing prices could go down. They refused to “just say no” to that house they love but just can’t afford.
Government programs to artificially stimulate housing demand. I’m not going to criticize the mortgage income deduction here, despite the fact that it’s the only “investment” that the tax code favors. Rather, I am quite critical of programs for first time home-buyers. President Bush has made widespread home-ownership a priority of his Administration as part of his Ownership Society and as a result has spearheaded several such initiatives. Unfortunately, there wasn’t really enough information and education to go with these initiatives. There are many things first-time home-buyers do not know and perhaps have never thought about. I think some of these buyers ended up in over their heads with homes in need of more repair than they knew how to handle, with bills they didn’t anticipate, perhaps in neighborhoods that were not what they first seemed. By the time they knew they were in over their heads, it was much too late.
And last but not least, the only individual I will single out.
Phil Gramm. The then-senior Senator from Texas is the prime architect of the banking deregulation resulting in “too big to fail” institutions. His further work deregulating the commodities and futures markets made possible the labyrinthine transactions that make it impossible to know just how big the housing problem is, nor how long it will take to completely play out. Further, the modern complications Senator Gramm’s deregulation allowed make it difficult for mortgage providers to modify mortgage terms to prevent foreclosures without violating contracts with investors who have purchased part or all of the paper.
While there are certainly other culprits, these are some of the biggest.
Cross-posted at BridgetMagnus.com.
Cartoon by Daryl Cagle, MSNBC.com
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10 Responses to “Who is to Blame for the Mortgage and Foreclosure Mess?”
The cause of the mortgage crises is outsourced american labor and lack of jobs. The source of that is the unaffordable american worker. The source of that is high cost of healthcare benefits and inflated wages necessary to keep up with costly health insurance premiums.
So, therefore, the cause of the mortgage crises is costly health insurance premiums.
Silhouette is on to something. Fox News recently reported that a Ford or GM vehicle has $ 1,500-1,600 extra built into the sticker price to underwrite the health care costs of auto workers. Compare that to $ 300.00 for a Toyota, and one begins to understand the problem. As for Bridget Magnus' article, it does a good job of laying out some of the issues involved. The GOP needs to speak of necessary vs. excessive regulation, and not deregulation. After this fiscal mess, there isn't an American who thinks that things should be unregulated which is what deregulation has come to mean. Surely, it's a matter of finding the right balance.
The really annoying thing about Gramm is that he still insists that he was completely right in what he did and that it should stand as is.
Good analysis of many of the central factors Bridget, especially from one in the know like yourself, an accomplisher Realtor.
dr.e
also dear Jim_Satterfield, I think Gramm may be a significant reason why McCain lost. There are many factors no doubt. But as one looks into Gramm's behind the scenes manipulations and his dedicatedly 'let them eat cake' stances, it begins to look like he belongs to the Methuselah club, that group of persons of any era that keeps to themselves, enrich only those they deem like themselves. I am not sure only having run up against him a few times, but you get the impression as you mentioned, sense of right, even as Rome explodes in flames and people suffer so. It's probably more than time for him to truly be only allowed near putting courses.
People wanting more than they can afford, something for nothing, expecting their homes not only to function as ATMs but also to rise in value like stocks did in the 1990s or how Lucky Streak was going to pay off big in the fifth race that afternoon. That's the main reason.
The lenders are sharks, all right, but they're hardly the only problem, and naming them principally or exclusively as the villains here is just engaging in appeal-to-losers'-emotions stereotypical-trashy-type populism.
The right context is to look at earlier housing bubbles (in California, for example, this was hardly the first!) as well as in the stock bubble. The bubble mentality (and associated behavior) is what should be examined.
As usual, the Democrats are never mentioned by TMV contributors……..hat tip freemarket.org
The current mortgage crisis came about in large part because of Clinton-era government pressure on lenders to make risky loans in order to “make homeownership more affordable for lower-income Americans and those with a poor credit history,” the DC Examiner notes today. “Those steps encouraged riskier mortgage lending by minimizing the role of credit histories in lending decisions, loosening required debt-to-equity ratios to allow borrowers to make small or even no down payments at all, and encouraging lenders the use of floating or adjustable interest-rate mortgages, including those with low ‘teasers.’”
The liberal Village Voice previously chronicled how Clinton Administration housing secretary Andrew Cuomo helped spawn the mortgage crisis through his pressure on lenders to promote affordable housing and diversity. “Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.
He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded ‘kickbacks’ to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.” (See Wayne Barrett, “Andrew Cuomo and Fannie and Freddie: How the Youngest Housing and Urban Development Secretary in History Gave Birth to the Mortgage Crisis,” Village Voice, August 5, 2008).
Investors Business Daily had an editorial yesterday about how another federal “law designed to encourage minority homeownership” also contributed to the mortgage crisis by pressuring lenders to make risky loans.
The Bush Administration also deserves criticism: although some Bush Administration officials “meekly advocated reforms” of the risky practices engaged in by the government-backed mortgage giants (the “Government-Sponsored Enterprises” Fannie Mae & Freddie Mac, which received $10 billion annually in taxpayer subsidies even before their current bailout), Fannie’s well-paid lobbyists easily defeated those reform proposals by paying off liberal lawmakers and bullying critics. And the Administration did nothing to end federal obsessions with “affordable housing” and “diversity” that encouraged lenders to make risky loans to borrowers with little savings.
Its a great analysis magnus..
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I don't know what is the truth for the mess..But from your post u made me clear about that..Thanks..
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U gave me a gud points for the mess..thnks..
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