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Massive Meltdown - Part 3

This part 3 of 3.  Part 1 and Part 2 are here and here.

This mortgage crisis, turned financial crisis, turned absolute economic crisis, did not begin over night but has been brewing since at least the late 1990’s.  This crisis was instigated by a convergence of factors: low interest rates, increased subprime lending, popularity of mortgage-backed securities (MBS), corporate greed and deregulation.

Blinded by Greed

Did anyone in the mortgage industry really look at the quality of the mortgages or were they blinded by greed?

Here are just two examples of borrowers who received loans from BNC Mortgage, a former subsidiary of Lehman Brothers:

“One homeowner, Johnny Pitts, was a Muni bus driver who had bought an Oakland home for $429,950 in 2005.  His mortgage payment, which had started at $2,880, was about to reset to $3,730 a month – plus $750 more for taxes and insurance.  Home payments are supposed to be no more than 40 percent of income.  By that formula, the necessary income would have been $11,200 a month or $134,400 a year.  Was it reasonable to assume a bus driver was bringing home that kind of money?  In fact, Pitt’s take-home pay was just $4,000 a month.”

The other homeowners, Jeff and Vanessa Hahn of Fairfield, were on the hook for monthly payments of $5,000 – exactly the amount they earned together as a self-employed businessman and teacher.”

These examples are indicative of the fast and loose underwriting requirements that financial conglomerates had as they chased after bigger profits.  Just look at the size of the problem.  The government bailout is going to cost taxpayers at least $700 billion.

There will be people out there that say it is the borrowers’ fault because they should have known they could not afford the mortgage loans.  Yes, there is truth to that, but consider this.  You want the “American Dream” of owning a home and you hear advertisements saying interest rates are at an all-time low, no down payment necessary or low initial monthly payments.  So you go visit a mortgage broker/lender, who has instructions from his/her boss to make loans.  You sit down with someone who you think is an expert on mortgage financing and they tell you “don’t worry we will get you that house you wanted just pay us a $500 application fee to get the process started.”  In two weeks you get that loan approval.  You are in heaven because the “American Dream” is within your grasp.  You will have something of significant value that, who knows, maybe you can pass along to your kids – hell yes you are going to close on that house and mortgage.

What happened?

Greed.  Fraud.  Deception.  Add to that deregulation.  The Glass-Steagall Act of 1933 (actually they were two separate laws) prohibited a bank holding company from owning other financial companies and prohibited a bank from offering investment, commercial banking and insurance services.  The Act was a response to a collapse in portions of the U.S. commercial banking system.  Wow, sound familiar?

In 1999, the Gramm-Leach-Bliley Act was passed, as known as the Financial Services Modernization Act, in part named after Senator Phil Gramm.  Gramm-Leach-Bliley repealed the provisions of Glass-Steagall Act that prohibited banks from offering investment, banking and insurance services.  It essentially allowed commercial banks and investment banks to merge.  Today, we have large financial conglomerates such as Citigroup, Bank of America and J.P. Morgan Chase just to name a few.

But while tearing down the barriers to ownership for these financial conglomerates it also tore down the mechanisms that were preventing conflicts of interest between the profit objectives of banks, investment firms and insurance companies.  CEOs of financial conglomerates are going to push for what will make the most money or profit.  So, if the investment banking division is making a killing on MBS, he/she will tell the lending division to issue more loans even if it means lowering mortgage underwriting standards.

Advocates of Gramm-Leach-Bliley said that it was too inconvenient for consumers to go to separate places or entities for financial services.  So why not make it convenient for the consumer by having one place to get all your financial services.  Gramm-Leach-Bliley sacrificed the security and stability of our financial system for convenience and in the interest of increased profits for financial conglomerates.

We are left holding the proverbial bag.  But it is more than just the hundreds of billions (possibly trillions) of dollars of our money that is bailing out the gross negligence or greed of these institutions.  We are paying even more in terms of falling home values, and for many of us our home is our most valuable asset.  This crisis also threatens are savings and investments that we have worked hard to maintain.

But how is the federal government going to pay for this $700 billion?  By issuing more U.S. Treasury debt and burdening future generations of Americans.  So what, what is a few billion or trillion dollars here or there!  When are we going to learn that when corporations, and the people who run them, are given unfettered money making opportunities they will always take it to the extreme and beyond.  History is fulled with examples.