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It also doesn't help that the gap between rich and poor is increasing, food is more expensive, and fuel is through the roof. So those homeowners that once could pay their bills, are now forced to choose between things like gas to get to work to make money, mortgage payments to prevent foreclosure, medical bills to keep their families healthy, and even FOOD!
If anything, I blame the trickle down effect, and the general loosening of regulations over the past eight years.
Andrea Mitchell said on MSNBC's Morning Joe that former Speaker of the House Newt Gingrich,, worked very hard behind the scenes to kill the bailout plan, despite issuing a statement that he would have supported the legislation if where still in Congress.
Mitchell Said: "I am told reliably by leading Republicans who are close to him. He was whipping against this up until the last minute.... Newt Gingrich was telling people in the strongest possible language that this was a terrible deal, not only that it was a terrible deal., that it was a disaster it was the end of democracy as we know it that it was socialism, and then at the last minute comes out with a statement when the vote was already in play" (More GOP, spin, lies and hypocrisy!)
My take on this crisis, is that Lenders suckered average folks into mortgages which they could afford at first. Because there were no Regulations or Oversight, these Lenders would raise the monthly mortgages to an amount they could no longer afford! The houses were then foreclosed on and then re-sold again to some other unsuspecting victim, until the whole deck of cards has collapsed. What is compelling, is that before the total collapse, CEO's pay themselves millions, sometimes billions as compensation pay for the said collapse! For instance, "In 2007, Wall Street's five biggest firms-- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley - paid a record $39 billion in bonuses to themselves." From ABC's Political Punch
Could these enormous salaries the CEO's unjustly earn be one of the Main reasons why these companies fail and go under, and which actually, and in the end, bankrupt these companies to fail!
So no, minority and low-income borrowers aren't *personally* to blame (except in the case of liar's loans.)
Securities backed by mortgages to the previously redlined were just another financial weapon of mass destruction, just another symptom of irrational exuberance.
It was NOT us(little people) you morons, it was GREED on your part. You got that GREED nothing more nothing less. How dare you blame people that are just trying to make life a little better, with you UNREGULATED GREED.
You all should be horsewhipped and ran out of town on a rail.
As the Pogo cartoon character once said, "I've seen the enemy and it is us". Until a substantial number of Americans undergo a fundamental change in their personalities, thereby being able to recognize charlatans and thieves and not let such people near the country's government, we are doomed to keep repeating such catastrophes.
Household International (now HSBC) was sued in 2002 by Acorn. HSBC had trouble in subprime loans.
After the ligtigations, Citi and HSBC worked closely with Acorn to make lots of loans to low income persons.
Did Countrywide had close work relationship with Acorn to make subprime loans?
HSBC was a little bit lucky that their UK Headquarter called it an end on subprime loans in early 2007, announced to their shareholders that they would stop expanding their US business in 2007, after noticing the abnormal increase in delinquency rate. Look at how good, in terms of bad debt ratio and capital ratio HSBC have had during the financial crisis 2007 and 2008. HSBC is a very conservative bank for many year, they did not blame any party. But they stop their business expansion plan in US and would focus on emerging markets. Reason? They fear of something in US banking environment.
HSBC would not make any provocative statement on this issue. Their strategy change in 2007 meant something. Obviously you have not study the reasons behind HSBC strategy change.
If this is caused by simple greed, HSBC can manage the problem.
If this is caused by something HSBC cannot manage, what do you think HSBC was afraid of?
I also would like to comment on factors that led to the combination of unsustainable housing prices with high leverage, and the specific mis-belief that led to AAA ratings on the top "tranche" of a CDO.
First, it wasn't just subprime; at a critical period, they seem to have tossed their previous high standards, as demonstrated by their exposure to Alt-A (unverified income) loans. Here is the official Fannie Mae 2007 document:
http://www.fanniemae.com/ir/pdf/earnings/2007/c...
Note subprime exposure down to $56 Billion, but Alt-A up to $360 Billion!!!
They were relying on credit scores, without verifying sufficient income to maintain payments.
Did government FORCE them to do this? No, but the target percentage of "loans to below median income recipients" had been steadily increased by HUD, under both Clinton and Bush; 52% of all their new loans in 2005 had to be to such recipients, to maintain their government benefits.
Given what competing mortgage companies were doing, and what the government required, they may have faced an impossible situation. Well, not completely impossible: they could have chosen to shrink: to maintain their high standards, and make far fewer loans, since they would no longer have been competitive versus other loan offerings. Is it surprising that they instead chose to increase their risk?
So yes, it was a BUSINESS decision, but it was compounded by the government requirements.
Granted, their actions are still only a secondary cause; the primary causes appear to be years of low interest rates and easy mortgage terms (See *) allowing housing prices to rise to unsustainable levels, plus the interaction of securitization / credit default swaps & non-transparent risks / the ability to duck capital-holding requirements via these financial shell-games.
*: I'd also like to point out something I don't see mentioned much: when everyone was able to get mortgages more easily, that inevitably meant housing prices rose, helping home owners but hurting home buyers. Why? Because if I want a house and you want a house, and we are competing to buy that house, and we are both now able to come up with more money, then one of us is likely to be willing to pay that extra money to be the one who gets the house. This helped drive the housing price boom, which helped drive the illusion that housing prices could keep going up and up. My point is that the unsustainable housing prices weren't just due to Greenspan's < 2% interest rates in 2002-04 increasing the money supply, though those contributed.
It is crucial to understand these US-wide pressures on housing prices, because the unsustainability of prices, combined with unsafe leverage, is what did in the CDO financial instruments that were AAA rated. Historically, housing prices fluctuated differently in different regions of the country. So pooling mortgages across the country reduced risk. But in the current meltdown, housing prices everywhere were revealed to be unsustainable. It started with undocumented loans and subprime loans, but the most important facts about these loans:
0% down - 10% down; and low initial rates that later rose. And if it wasn't the primary loan on the house that left the homeowner with little equity, it was an added equity line of credit. As soon as ANY factor made mortgages harder to get, or potential buyers less able to afford large mortgages, housing prices were bound to drop. As soon as they dropped a little, some buyers owed more on their houses than the house was worth. It was rational to walk away. Or they had a loan with low initial rate, and the rate increased beyond what they could possibly pay, so they had no choice. Once this started happening, the snowballing was inevitable, given such a high percentage of households with little equity and/or rising-rate loans. We hit a bump that affected the whole country (it doesn't really matter what the initial bump was), and soon housing prices everywhere were snowballing downward, plus refinancing suddenly became more difficult as the lenders retrenched. So the number of homeowners with no incentive to stay, or unable to stay, skyrocketed. Often, these were homeowners who had survived the preceding few years with unsustainable borrowing practices, both on their home and on credit cards. Abruptly, lenders stopped extending additional credit, and these borrowers couldn't even maintain payments on the credit they had (many had been surviving by going farther and farther into debt). That this could happen nationwide, on the scale that it did, was inconceivable to the raters who assigned AAA rating to the top CDO tranche. (The top tranche got its money before lower tranches, so it seemed extremely unlikely that enough loans would default to affect it.) That AAA rating lulled some major investors to highly leverage those CDOs: some had their entire net worth exposed to a financial instrument they considered safe. Oops.
It wasn't just low-income people who hit negative equity -- it was across-the-board. And not just individual homeowners: there are partially-built subdivisions that were no longer going to make enough to repay the loans taken out to build them -- so the builders walked away.
Meanwhile, during the boom, people with existing homes pulled their increased equity out, rather than leaving it in. It isn't just the financial companies that exposed themselves to unnecessary risks; so did the average homeowner.
So, pick your poison: irresponsible financial companies with non-transparent securities hiding risk, mistaken AAA ratings, excessive leverage, government monetary policy and housing policy, unsustainable bubble in housing prices, people owning homes with little or no equity, historic levels of household debt, ten trillion dollars in federal debt -- it doesn't require any knowledge of economics to instinctively feel that one way or another something was eventually going to go very wrong. Plenty of blame for everyone.
I certainly agree with the basic observation, that blaming low-income people is .. absurd. And racist. However, that isn't actually what is being claimed. Rather, the claim being made is "unintentional consequences": that well-intended government actions (to help those people) may have exacerbated the situation. This is entirely possible, and shouldn't be dismissed out of hand. Specifically, our government encouraged lending to low-income people, but failed to make sure the lending practices didn't put people into unsustainable situations. Community activists have been complaining about this fact for years. So, it isn't the CRA that is the culprit, but implementation of oversight, both in Congress and HUD, that failed us.
"Fannie and Freddie were huge players in the subprime market, buying 48 percent of all subprime-mortgage-backed securities offered in 2004 — way above anything they would ever need to meet affordable housing goals."
The point of this article is to make it clear that there was no government sponsored program that led to the subprime housing mess. But the first statement above directly contradicts this, despite the authors attempt to downplay it. And as for the 48% of all subprime-mortgage backed securities - my GOD! Am I the only one who recognizes that Fannie and Freddie were creating the very feeding frenzy that led more and more people to offer subprime loans by purchasing so much of the "subprime mortgage backed securities" (which I guess are the credit default swaps I keep hearing about?)
Something fishy here when people try to minimize the role of Democrat-backed social engineering via cheap mortgages in the current crisis. Something ain't adding up!
See http://www.washingtonpost.com/wp-dyn/content/gr...
and http://en.wikipedia.org/wiki/Subprime_mortgage_...
Note this was all related to Mr. Clinton's ingenious changes to the CRA in 1995.
by Thomas J. DiLorenzo
The thousands of mortgage defaults and foreclosures in the "subprime" housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call "communities of color" that they might not otherwise make based on purely economic criteria.
The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various "neighborhood organizations," as they like to call themselves, such as "ACORN" (Association of Community Organizations for Reform Now). These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.
So-called "community groups" like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA "protest" is issued by a "community group." This can cost banks great sums of money, and the "community groups" understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.
A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the "Neighborhood Assistance Corporation of America." He once boasted to the New York Times that he had "won" loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one "community group" operating in one city – Boston.
Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.
Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as "subprime" loans. In order to compensate themselves for the added risk of extending these loans, many lenders have increased the lending fees associated with mortgage loans. This is simply an indirect way of doing what banks always do – and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.
But this is discriminatory!, complained the "community organizations." Thus, if one browses the ACORN web site, one can read of their boasts of having "predatory lending laws" passed in numerous states which outlaw such fees, prohibiting banks from protecting themselves from the added risk involved in making forced loans to "subprime" borrowers.
These are price control laws, and price controls always cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But in this case the banks are forced to continue making the marginal loans by their bureaucratic masters at the Fed and the other three federal bureaucracies mentioned above. So-called predatory lending laws therefore force the banks to "eat" the losses. This is undoubtedly a contributing factor to the bankruptcy of dozens of mortgage lenders over the past year.
Then of course there is the issue of the Fed’s monetary policy having created the housing bubble, characterized by a spectacular escalation of real estate values in every American city over the past decade or so. This created a further problem for the financial institutions that are victimized by the CRA. They are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.
The only way these borrowers could qualify for their mortgage loans (even ignoring their bad credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low first-year rates in the 3 percent range, and sometimes lower. This is what has largely fueled the subprime mortgage meltdown – the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward. Thus, the combination of the Fed’s enforcement of the CRA (with the help of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting real estate bubble and the "subprime" mortgage meltdown.
Don’t expect to read about this in the "mainstream media," however, which generally views groups like ACORN as heroic champions of the poor, laws like the CRA as anti-discrimination laws, and places all of the blame for the subprime mortgage meltdown on greedy capitalists, especially mortgage brokers. Encouraged by such reporting, the odious Senator Charles Schumer of New York has promised federal legislation that will reign in these miscreants, while the Bush administration is proposing an indirect bank bailout by having the Federal Housing Administration cover many of the bad "subprime" loans. This will create what economists call a "moral hazard" by encouraging even more bad loans to be extended in the future. Every banker in America will be glad to extend loans (at high rates of interest) to the most uncreditworthy borrowers if he thinks there is no possibility of default with the FHA effectively guaranteeing the loan.
September 6, 2007
Thomas J. DiLorenzo [send him mail] professor of economics at Loyola College in Maryland and the author of The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War, (Three Rivers Press/Random House). His latest book is Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe (Crown Forum/Random House).
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