| -- End Ad Box ---> | | | | Non-performing loans had a negative effect on the |
| People are losing their homes and many more will lose | | | | S&L's profitability which of course caused tighter |
| their jobs before the mortgage meltdown works its | | | | lending guidelines such as job stability and decent |
| way through the system. | | | | down payments in order for prospective home |
| To paraphrase Alan Greenspan's remarks on March | | | | buyers to be approved for a mortgage. Way back |
| 17th, 2008, The current financial crisis in the US is | | | | then, a home buyer had to actually save up enough |
| likely to be judged in retrospect as the most | | | | money for a down payment 10 or even 20% before |
| wrenching since the end of the Second World War. | | | | a bank would ever consider underwriting a mortgage. |
| The crisis will leave many casualties. | | | | The checks & balances kept banks solvent and |
| How many casualties? Experts are predicting that in | | | | borrowers responsible. Although this approach |
| the next few years, between 15 and 20 million | | | | worked, some cried foul stating that the regulated |
| homeowners could have homes worth less than | | | | system was racist and discriminatory-and there |
| what they owe. Walking away from a bad situation | | | | certainly was some truth to this. Skipping forward to |
| may actually make sense for people who mortgages | | | | the present, banks made a bundle on mortgages |
| that are 'upside down' considering the fact that | | | | over the past five or six years. For the most part, |
| refinancing is out of the question and home equity is | | | | they allowed their underwriting criteria to be |
| nonexistent. | | | | stretched so far out of alignment that almost anyone |
| It seems quite easy to point fingers at greedy Wall | | | | could and indeed did, qualify for a mortgage despite |
| Street titans for causing the sub-prime mortgage | | | | their ability to pay. Some folks even applied for and |
| crises. They after all, put together the deals that | | | | received mortgages for more than the property was |
| allowed banks to underwrite mortgages and then | | | | worth. Sometimes for as much as 25% more than |
| offload these liabilities to investors. What many fail to | | | | their property was worth! |
| realize is that there is no shortage of blame to go | | | | Under the prior system, 125% mortgages would not |
| around from homeowners buying more home than | | | | have been possible because of course these loans |
| they could afford to real estate agents looking for | | | | were held on the banks' books and could have led to |
| more commission dollars. Mortgage brokers and | | | | losses that would have had to have been absorbed |
| bankers, the banks themselves, ratings agencies such | | | | directly by the bank. |
| as Moody's and Standard & Poor's, Wall Street, the | | | | So what went wrong? Under the current system, |
| Fed and last but certainly not least, the Federal | | | | these loans were sold to the big Wall Street |
| Government. | | | | investment firms who repackaged them as |
| Let's start with the homeowners--the people who | | | | collateralized mortgage obligations (CMO's), Mortgage |
| are now in the process or soon to enter the process, | | | | Backed Securities (MBS's) and other similar acronyms. |
| of losing their homes. Some of these people had | | | | These instruments were then sent to the ratings |
| never before owned a home and as such, may not | | | | agencies for their blessing and more importantly a |
| have been prepared for the costs associated with | | | | letter rating. Many of these structured finance deals |
| homeownership. Basic financial literacy is sorely lacking | | | | receive AAA ratings-the highest ratings available |
| in this country despite there being no shortage of | | | | meaning that in theory, these instruments were least |
| budgeting and tracking programs readily available such | | | | likely to default. How does one create a 'triple A' or |
| as Quicken and Microsoft Money. The lack of financial | | | | AAA rated financial instrument out of sub-prime |
| literacy does not absolve these buyers of their | | | | mortgages? Herein lies the magic. These Asset |
| responsibility. Every borrower receives a truth in | | | | Backed Securities (ABS) are made up of different |
| lending disclosure statement. Here is a portion of | | | | tranches or slices, each carrying a different risk and |
| what the act covers: | | | | reward level. The first dollar of principle and interest is |
| The purpose of TILA (Truth In Lending Act) is to | | | | applied to the securities with the highest rating, and |
| promote the informed use of consumer credit by | | | | the first dollar of loss is applied to the tranche with |
| requiring disclosures about its terms and cost. TILA | | | | the lowest ratings. The lower slices are designed to |
| also gives consumers the right to cancel certain credit | | | | provide a security blanket that in theory protects the |
| transactions that involve a lien on a consumer's | | | | higher-rated securities. The investment banks that |
| principal dwelling, regulates certain credit card | | | | package or 'structure' these securities in order to |
| practices, and provides a means for fair and timely | | | | earn fat fees when they sell them to investors are |
| resolution of credit billing disputes. With the exception | | | | the same entities that pay the ratings agencies to |
| of certain high-cost mortgage loans, TILA does not | | | | rate these instruments. Clearly the possibility for |
| regulate the charges that may be imposed for | | | | conflict of interest is present. If investors and not |
| consumer credit. Rather, it requires a maximum | | | | the investment banks that stand to rake in millions in |
| interest rate to be stated in variable-rate contracts | | | | fees were to pay for the rating, the potential for this |
| secured by the consumer's dwelling. It also imposes | | | | conflict of interest would be negated. Furthermore, |
| limitations on home equity plans that are subject to | | | | the investment banks have a vested interest in |
| the requirements of Sec. 226.5b and mortgages that | | | | convincing the ratings agencies of the credit |
| are subject to the requirements of Sec. 226.32. The | | | | worthiness of these securities. |
| regulation prohibits certain acts or practices in | | | | So we've already pointed fingers at homeowners, |
| connection with credit secured by a consumer's | | | | some greedy, many more I suspect, naïve or |
| principal dwelling. | | | | uninformed, real estate agents-one out of more than |
| Much of the subprime mortgage crisis can be traced | | | | 60 in my experience was a gem, mortgage brokers |
| directly back to variable-rate mortgages. As is clearly | | | | & bankers, banks, Wall Street and ratings agencies |
| stated above, TILA does not regulate the charge | | | | so who's left? The Federal Reserve and the |
| that may be imposed for consumer credit. Rather, it | | | | Government of course. |
| requires a maximum interest rate to be stated in | | | | The Fed as its known is responsible of the country's |
| variable-rate contracts secured by the consumers | | | | monetary policy and for supervision and regulation of |
| dwelling. It also clearly states that TILA also gives | | | | banks. This is the definition of the Fed's roles in their |
| consumers the right to cancel certain credit | | | | own words: |
| transactions that involve a lien on a consumer's | | | | Monetary Policy |
| principal dwelling. One has to wonder whether or not | | | | The Fed is best known for its role in making and |
| these homeowners: | | | | carrying out the country's monetary policy-that is, for |
| 1. Bothered to read the truth in lending act disclosure | | | | influencing money and credit conditions in the |
| at all. | | | | economy in order to promote the goals of high |
| 2. Understood what the truth in lending act disclosure | | | | employment, sustainable growth, and stable prices. |
| meant. | | | | The long-term goal of the Fed's monetary policy is to |
| 3. Chose to ignore the information printed clearly the | | | | ensure that money and credit grow sufficiently to |
| truth in lending act disclosure. | | | | encourage non-inflationary economic expansion. |
| A number of months ago, just as the subprime | | | | The Fed cannot guarantee that our economy will |
| mortgage crisis was beginning to unfold, The New | | | | grow at a healthy pace, or that everyone will have a |
| York Daily News ran an article about a family in New | | | | job. The attainment of these goals depends on the |
| York City, who had bought a home and were now | | | | decisions of millions of people around the country. |
| faced with the prospect of foreclosure. The article | | | | Decisions regarding how much to spend and how |
| was sympathetic to this family, highlighting the fact | | | | much to save, how much to invest in acquiring skills |
| that they're living the American dream and that this | | | | and education, how much to spend on new plant and |
| dream was about to come to an end. What I found | | | | equipment, or how many hours a week to work may |
| to be distressing was the fact that clearly visible in | | | | be some of them. |
| the photo that accompanied this sympathetic article | | | | What the Fed can do, is create an environment that |
| was a very expensive flat screen television hanging | | | | is conducive to healthy economic growth. It does so |
| on the wall. Perhaps I'm naïve, but I can assure | | | | by pursuing a goal of price stability-that is, by trying |
| you that if I were faced with the prospect of losing | | | | to prevent inflation from becoming a problem. |
| my home and having my family put out on the | | | | Inflation is defined as a sustained increase in prices |
| street, there is absolutely no way that I would still | | | | over a period of time. |
| have that expensive television hanging on my wall. It | | | | A stable level of prices is most conducive to |
| would have been one of the first things to be sold | | | | maximum sustained output and employment. Also, |
| and some financial relief would be found by | | | | stable prices encourage saving and, indirectly, capital |
| jettisoning what I'm sure was the expensive cable bill. | | | | formation because it prevents the erosion of asset |
| Clearly the public needs easy access to financial | | | | values by unanticipated inflation. |
| literacy courses. Too bad we don't see the need to | | | | Inflation causes many distortions in the market. |
| make this a mandatory course of study in our | | | | Inflation: |
| educational system. | | | | · hurts people with fixed income-when prices rise |
| Mortgage bankers and brokers have in the last four | | | | consumers cannot buy as much as they could |
| or five years been raking in cash by the bucket load | | | | previously |
| in the form of commissions paid when mortgages | | | | · discourages savings |
| they've originated, close. Many of these people have | | | | · reduces economic growth because the economy |
| not needed to do much in the way of prospecting. | | | | needs a certain level of savings to finance |
| Instead, their phones have run off the hook as | | | | investments that boost economic growth |
| people have jumped on the homeownership and | | | | · makes it harder for businesses to plan-it is difficult |
| refinancing and take out extra cash bandwagon, | | | | to decide how much to produce, because businesses |
| despite their ability to pay for their home. | | | | can't predict the demand for their product at the |
| No-document loans were readily available without the | | | | higher prices they will have to charge in order to |
| borrower having to produce documentation that | | | | cover their costs |
| backed up their income. Clearly this practice can and | | | | Bank Regulation & Supervision |
| indeed has, lead to substandard loan underwriting | | | | The Fed is one of the several Government agencies |
| processes. Were some of these mortgage bankers | | | | that share responsibility for ensuring the safety and |
| and brokers dishonest? Sure. Were all of them | | | | soundness of our banking system. The Fed has |
| dishonest? I think not. To have a massive nationwide | | | | primary responsibility for supervising bank holding |
| conspiracy, where thousands and thousands of | | | | companies, financial holding companies, |
| people involved in the mortgage banking and | | | | state-chartered banks that are members of the |
| mortgage brokering profession got together to | | | | Federal Reserve System, and the Edge Act and |
| create this situation is simply not feasible. Yes, some | | | | agreement corporations, through which U.S. banking |
| of the blame does belong with those in the mortgage | | | | organizations operate abroad. |
| industry, but they were simply a small cog in the | | | | The Fed and other agencies share the responsibility |
| huge machine that created this mess. | | | | of overseeing the operation of foreign banking |
| Let's discuss real estate agents. In 2007, we bought | | | | organizations in the United States. To insure that the |
| a home, and also sold a home. The agent we used to | | | | banking system remains competitive and operates in |
| purchase our home was absolutely fantastic. In our | | | | the public interest, the Fed considers applications by |
| opinion, she went above and beyond to make our | | | | banks for mergers or to open new branches. |
| deal happen. She answered every phone call, | | | | The passage of the Gramm-Leach-Bliley (GLB) Act in |
| followed up on every concern and was the epitome | | | | November 1999, was the culmination of a |
| of professionalism. We consider this individual to be a | | | | multi-decade effort to eliminate many of the |
| friend, and we have sent referrals her way that have | | | | restrictions on the activities of banking organizations. |
| resulted in her earning additional commissions. We will | | | | Some of the main provisions of the GLB are: |
| continue to recommend her to all who ask or | | | | · Repeals the existing limitations on the ability of |
| mention that they'd like to buy or sell a home in our | | | | banks to affiliate with securities and insurance firms |
| area. | | | | · Creates a new organizational form that allows |
| The real estate agent, we used to sell our home, | | | | banking organizations to carry new powers. This new |
| could not have been more different. We got our old | | | | entity called a "financial holding company," (FHC) and |
| home ready to sell prior to closing on our new home. | | | | its non-banking subsidiaries are allowed to engage in |
| We decided to list it as For Sale by Owner. In | | | | financial activities such as insurance and securities |
| the event that we didn't sell this home on our own, it | | | | underwriting |
| was our intention to list it with an agent as soon as | | | | The Fed's enlarged role as an umbrella supervisor of |
| we had closed on the purchase our new home. | | | | FHCs is similar to its role in supervising bank holding |
| Literally, from the day we put the sign in front of our | | | | companies. The Federal Reserve Banks will supervise |
| home and listed it on a For Sale by Owner | | | | and regulate the FHCs while each affiliate is still |
| website we were inundated with phone calls from | | | | overseen by its traditional functional regulator. |
| real estate agents. We were told many lies and were | | | | The Fed has to delineate the financial relationship |
| constantly harassed; although we had already made it | | | | between a bank and other FHC affiliates. Its primary |
| quite clear to every agent who called, and there | | | | goal is to establish barriers protecting depository |
| were more to 60 who did; that we were willing to | | | | institutions from the problems of a failing affiliate. To |
| pay half the commission-the same as they would | | | | do this efficiently the Fed has to ensure increased |
| have received had they sold another agent's listing. | | | | communication, cooperation, and coordination with |
| We also told every agent that called that we had | | | | the many supervisors of the more diversified FHCs. |
| already lined up an agent to sell our home in the | | | | The Fed has access to data on risks across the |
| event that we chose to no longer sell it ourselves. | | | | entire organization, as well as information on the |
| Our deadline was the closing date of our new home | | | | firm's management of those risks. Regulators will be |
| purchase. We did have an interested buyer who | | | | in a position to evaluate and presumably act on risks |
| shortly after our closing date decided to keep looking | | | | that threaten the safety and soundness of the |
| so we listed our home with a local agent so that we | | | | insured banks. |
| could concentrate on getting our new home ready | | | | It would appear that the Fed has failed to curb |
| for our moving date at the end of the school year. | | | | housing inflation which played a role in this entire |
| This agent showed our home a maximum of two | | | | debacle then made matters worse and in their |
| times and got an offer which we accepted. We | | | | efforts or lack there of, to properly supervise |
| ended up getting $1,000 less than we had wanted in | | | | banking institutions. |
| a declining Real Estate market. The agents who had | | | | Finally the government, a.k.a. Uncle Sam, the big |
| called many times to harass us called our listing agent | | | | Kahuna 10,000 pound elephant etc. Where do we |
| on a number of occasions and he lied telling them | | | | begin? How about with: 'Where were they?' |
| that the house was under contract when in fact it | | | | It now appears that after millions of horses are out |
| wasn't at that time-clearly a breach of our agent's | | | | of the barn (some horses ran, others were |
| fiduciary duty. Quite frankly an ethical agent would | | | | foreclosed upon) the government wants to step in |
| have continued to show our home until closing in the | | | | with a bailout to save the rest. While nobody wants |
| event that the deal fell through. | | | | to see people lose their homes, the question that |
| But wait, there's more. Our agent also acted as the | | | | must be raised is this: What about all those of us |
| buyer's mortgage broker. At the closing table, we | | | | who were responsible? Those of us, who scrimped |
| learned that he had signed documents from the | | | | and saved up a decent down payment, bought |
| buyer stating that he (our agent) represented them | | | | less-house than we could afford and who live below |
| and we had signed documents stating that he | | | | our means? Many of us drive older cars and keep |
| represented us. We also learned that the buyer had | | | | them longer. We don't run out and buy the latest and |
| effectively put down approximately 2-3% of the | | | | greatest at inflated prices, we watch, wait and |
| purchase price when financed closing costs were | | | | budget. |
| factored into the equation. Their first mortgage had | | | | When the World Trade Center was attacked, families |
| what we thought was a high fixed rate and their | | | | who decided not to sue received government |
| second mortgage came with a rate in excess of | | | | payouts and we certainly don't begrudge them as I'm |
| 8.5%. Because the closing happened in August, literally | | | | sure that given the choice, they'd prefer to still have |
| in the midst of the first wave of the meltdown, if | | | | their loved-ones over the money. The problem, in |
| they didn't close on the day they did (August 31st, | | | | typical government fashion is that those who were |
| 2007), Citibank wasn't going to extend their rate. | | | | responsible and had insurance policies in place |
| When my wife & I have bought houses in the past, | | | | received less than those who were irresponsible and |
| it had always been a very happy day. These people | | | | didn't plan ahead. I'm not talking about dishwashers at |
| looked absolutely shell-shocked at the closing table. | | | | Windows on the World and blue collar workers; I'm |
| I'm not convinced that they knew just how much | | | | talking about executives, traders and people who |
| their monthly payment was going to be until closing | | | | should have known better. |
| day. We knew down to the penny well in advance | | | | Now our government, the same government that |
| having budgeted and planned everything on a | | | | sat by idly watching as this bubble got bigger and |
| spreadsheet. Were these people stupid or just | | | | bigger despite many warnings, wants to step in and |
| inexperienced and mislead by a greedy combination | | | | bailout people who are in danger of losing their |
| of real estate agent & mortgage broker? I'm | | | | homes. There has been no talk about educating |
| extremely confident that they are intelligent people | | | | people, let's not teach people to fish, rather, let's give |
| but inexperienced and taken advantage of by an | | | | them a fish and bail them out once again at the |
| unscrupulous agent. | | | | expense of those who are responsible. |
| The banks are also culpable. Prior to bank | | | | Clearly, by keeping the majority of the population |
| deregulation, Savings and Loans provided mortgages | | | | financially ignorant, there is a lot of money to be |
| to home buyers and kept these loans on their books. | | | | made by the poverty industry. |