Mortgage Bailout Closer, and what it means
Fri Feb 22, 2008 at 10:10:20 AM PDT
The New York Times Business section leads with this article,
WASHINGTON — Prodded in part by some of the nation’s biggest banks, the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their
Much of the discussion of the current mortgage crisis, which is the trigger for the larger credit crunch in economies throughout the world, see the responsibility as so diffuse that no single individual can be held responsible. A recent OpEd by Eliot Spitzer makes clear who the main culprit is, and the name is familiar, George W. Bush.
Read on.
Here is the article from the San Diego Union Tribune, Protection for predatory lenders
And here's the key sections:
Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.
-snip
Several state legislatures enacted laws aimed at curbing such practices. North Carolina passed a predatory lending law in 1999, Georgia in 2002 and New York in 2003.
What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions pre-empting all state predatory lending laws, thereby rendering them inoperative against national banks. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.
But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation in 2005 of possible discrimination in mortgage lending by a number of banks, including national banks, the OCC filed a federal lawsuit to stop the investigation against the national banks.
The tragedy of this mortgage crisis is that it is the culmination of a process that began with the elimination of the requirement that there be a sizable down payment that was paid for by the investor for a home. This is the equivalent of the margin requirement when stocks are purchased.
When we buy a stock with a 50% margin, we may leverage our investment, but the investor who will benefit from the appreciation of the stock, also pays for the downside. Houses are an investment asset just as equities are. When the margin requirements, the down payment is reduced to zero, then we have a bizarre incentive to bid up the value of the house, without any concern with the actual value of the asset.
And those with the least net worth have less to lose. If the house increases in value they retain the profit, but if the house value declines then they lose not a thing. In fact they will be the first to abandon the house to foreclosure accelerating the decline of values. If the bailouts under discussion take effect, the person who did not participate in this bubble, who saw it for what it was, becomes the loser.
He/she remains in his rental property, even less able to ever own at the now supported higher prices. And this is the kicker. He must now pay the taxes to subsidize the person who bid up the price of homes that he can no longer afford.
This is the worst of all possible worlds. The financial gurus who created these arcane securitized debt instruments designed to sell to unwitting investors, abetted by "repected" rating companies such as Standard and Poors who gave them a AAA rating, will do just fine. They will continue their CEO positions making tens of millions a year as the shareholder's equity drops.
And the large population of homeowners are injured as their homes decline in price. Financially, some are only back to where they were five years ago before the bubble started, but the infection of individuals perception was ubiquitous, and not many had immunity to it. Mortgage companies were offering free money, no risk, on imagined equity based no the bubble values that were created by this vast scheme.
This is a domestic situation with the same characteristic as the Iraq incursion, in that both have no good solution. Going into Iraq was easier than getting out, and starting this bubble was easier than lessening the suffering it is causing.
It was largely a result of the virulent free enterprise mentality, that was perverted to eliminating legitimate government restraint. However, the Democrats in Congress could have made a bit more noise. Sadly, too many are in bed with the same financial interests as the Republicans.
Eliot Spitzer, and the Attorney's General of the states tried to fight this, but they were stopped by a Federalism that never anticipated that the reigns of government would be in the hands of those who were pathologically and ideologically criminally negligent.
Now we will all pay the price. Just how much it will be is yet to be seen.
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