Whatever Happened to Accountability ?
To afford this, we had spent the previous seven years in a pathetic downtown office building that we shared with orphaned social service agencies and down-on-their-luck plaintiff attorneys.
This is the way that it had always worked in America: you work, you save, you sacrifice, you buy. I busted my hump in college and paid cash for my first home the day after graduation. Granted it was an affordable duplex and not a big deal, but that’s the way most of us were raised.
Things started changing about 15 years ago. President Clinton began to use the Community Reinvestment Act and other new legislation to force banks to make loans to “subprime” borrowers.
It’s the economy, stupid.
As I understand it “subprime” refers less to a kind of loan, but more to a kind of borrower, one who cannot afford to pay the traditional 20 percent down payment or cannot afford a mortgage payment in line with their income, typically no more than 28 percent.
Then radical groups like ACORN came to town and harassed lenders and contested their plans to expand into new branches or new states unless they could show they were CRA-compliant.
Under pressure, the lenders turned to Fannie Mae and Freddie Mac to relieve them of the stupid loans they were now being strongly encouraged to make.
These two government-sponsored enterprises were designed to help keep lenders liquid by buying their loans and, for a small fee, assuming the risk of default. Before the CRA squeeze, Fannie and Freddie had tough lending standards so default was never much of an issue. That was then.
In 1999, under pressure from the White House, Fannie Mae CEO, Franklin Raines, was publicly boasting that his agency had lowered the down payment requirements for a home and now planned
to offer credit to borrowers a “notch below” customary standards.
The new entries put upward pressure on the whole housing market. With housing prices on the rise, private investment groups began to actively buy and bundle non-traditional loans and sell them to investors on the private market.
As the demand surged in key areas, and fresh capital flooded the market, lenders came up with new ways to attract subprime borrowers, most notably the interest-only, adjustable-rate mortgage (IO ARM).
As these loans played out, borrowers would make little or no down payment on a home and would pay just the loan’s interest for the first two years. Whatever happened to sacrifice?
After two years, the loan would con-vert to a conventional principal and interest amortization plan for the next 28 years.
Rapid appreciation offered subprime borrowers at least the illusion of real equ- ity, which they could draw upon to pay their mortgage and even credit card debt.
Lenders got careless. They got their origination fees and could pass the loans along to a prosperous secondary market. And with prices rising, everyone on the food chain was eating well.
To keep the bubble inflated, many len-ders resorted to stated-income loans or liar loans. Soon, more than half of all sub-prime borrowers were self-reporting their income.
With the FED keep- ing interest rates low and Greenspan wink-ing at adjustable rates, borrowers continued to borrow, lenders to lend, and investors to invest. This led to what some call “risk synergy,” a mess much greater than the sum of its parts.
Wall Street had a hand in it, but this was largely a government created, sustained and mismanaged bubble.
At the bubble’s peak in 2006, a Los Angeles family of median income could afford only two percent of the area’s homes (In KC, by contrast, that figure was 87 %).
The market essentially ran out of new buyers. When prices began to flatten, credit began to tighten, all but driving the credit-challenged out of the market.
Without appreciation to sustain adjusting mortgages, subprime borrowers began
to default. The rest, as they say, is history.
What do they say? “Equity is a fantasy. Debt is real.” I think that is it. Have enough of us learned this lesson? I hope so. Now will someone please tell Washington.
Joe Sweeney
Editor-In-Chief & Publisher
Sweeney@IngramsOnLine.com