Columnist for the Australian, Janet Albrechtsen, offers an “outsiders view” of the current mortgage credit mess:
Take nonrecourse mortgage loans. When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn’t cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It’s a neat way of reminding Australians to borrow responsibly.
In America, where populist post-Depression laws in many states have mandated loans be nonrecourse, the opposite is true. Americans can take out a mortgage more or less as a one-way bet. If you can’t afford the repayments and can’t refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability — such as credit cards — before they pay off their mortgage.
Quite apart from ugly economic effects of such laws, they are objectionable in a moral sense. America is meant to be the land of sturdy individuality and personal responsibility. Instead, nonrecourse lending laws mean that mortgages, as an asset class, are of dubious value.
This is made worse by the fact that traditionally many American mortgages were typically set at a fixed rate for the 25- or 30-year life of the loan and the borrower often has the nifty ability to refinance without penalty. Most Australian mortgages are usually subject to a variable rate of interest. Fixed-rate loans are limited to around five years. So when Australian lenders offer a fixed-rate loan for five years, they fund it by borrowing five-year money. If borrowers want to repay a fixed-rate loan early, sensible economics require that they pay the lender a “break” fee, which compensates the lender for the lost interest the loan would have brought in had it been carried to term.
Prepayment penalties are either prohibited or severely restricted in the U.S. Thus, an American lender who makes a 30-year fixed rate loan that the borrower can prepay at any time without penalty is simply making a bet about the average life of a loan. And while it’s true that there are good quality statistics about how long American loans usually last, these are necessarily averages. Averages don’t reflect actual experience and are especially misleading when real outcomes are at the extreme. If market interest rates fall below the fixed interest rates, borrowers will simply refinance at lower rates. Another fine deal for borrowers. If market rates rise above the fixed interest rates, borrowers will stand pat. So loans are terminated by borrowers when they are profitable for lenders and loans last longer when they are unprofitable for the banks. Who would want to be an American lender?
America has a long and undistinguished history of populist politicians stacking the cards against lenders and in favor of risky homeownership. Proving that good intentions are no guarantee of good policy, President Jimmy Carter’s 1977 Community Reinvestment Act, which required banks to make loans to low-income people, was just another legislative leg-up for high-risk borrowers. If socially laudable but economically reckless laws cause entirely predictable problems for lenders, don’t be surprised if taxpayers have to bail them out.
The final proof that American social policies have made mortgage lending an unviable industry rests with Fannie Mae and Freddie Mac. If sensible business people don’t get into the mortgage industry because it is fundamentally a bad business, the American way has been to send in a couple of quasi-government agencies to fill the gap.
Fannie and Freddie dominated the mortgage industry because ultimately government was prepared to fund activities that prudent lenders would not. When their implicit government guarantee became explicit, America’s system of government-directed lending on socially desirable, but commercially imprudent, lending stood exposed.
Now, Australians — and others — place a high value on homeownership too. But they are aghast at the dumb things America has tolerated in pursuit of that goal. Even more dumbfounding is that nobody in Washington seems to be talking about fixing it.
While I admit to finding some of the Australian lending policies a bit Draconian (I’m a fan of the 30-year fixed, for example), the essential point here is obvious and worth exploring: the reason we have Freddie and Fannie in the first place is because private mortgage lenders knew better than to go into a business that heavily favored losing money. Are we really to believe, as some Democrats are now arguing, that “deregulation” of the kind favored by conservatives is to blame for the mortgage collapse?
Again, we are being treated to a semantic shell game. “Deregulation” was, in a sense, responsible for the ultimate collapse of Fannie and Freddie (corruption, accounting irregularities, bad stewardship were the more immediate causes) — but the deregulation in question in this instance came from Democrats and some Republicans who opposed the increased government oversight (“regulation”) on Frannie and Freddie suggested by Alan Greenspan, and then preposed by Bush and, later, McCain.
What we shouldn’t do, however, is get lost in the signifiers. Because in one instance, deregulation is meant to keep the government out of the way of the market functioning properly in the private sector. In this instance, “deregulation” meant something else entirely — namely, an unwillingness to hold to account a government-backed giant whose practices and corruption were providing dividends to certain of its Congressional supporters by way of campaign contributions and other benefits.
In short, Democrats are more than happy to regulate private industry, but when it comes to the industries tied to government, a desire for oversight or the investigation into accounting irregularities are signs of “racism,” which to this day is why the McCain campaign hasn’t dared attacked the Democrats — Obama, Dodd, Schumer, and Frank chief among them — for their complicity in the current economic mess.
The McCain campaign has started to hammer away at the Ayers connection; they are now, too, going to start pinning Rezco to Obama in a more public way — at the risk of the Obama campaign countering with the Keating 5.
But what they really must do — and what Americans are more likely to care about — is to tie the Democratic congress to the mortgage crisis mess, and drive home that their 10% approval rating will likely only worsen should the Executive become a rubber stamp for more of their dangerous schemes.
As Terry H (who sent me this article) points out in his email, “The situation is actually worse, since the Democrats are proposing to expand upon the polices contributory to the problem in the first place.”
And the reason they can do that is that they knew what the press would spin as obstruction to a bailout would destroy Republican chances in the upcoming elections — which enabled them to hammer out a bill that did little to address the roots of the problem.
Had McCain and the GOP tied the crisis to Dems immediately, they risked alienating them — which could have (nobody knows for certain) led to a major economic collapse; and don’t think the Dems weren’t willing to go there and place the blame squarely on the Republicans.
But now that the bill is solidified, McCain/Palin simply must risk being called “enemies of the poor,” “racist,” or whatever else will be thrown at them to chill actual discussion of the issues that got us into this mess, in order to explain to the American people, in the simplest terms possible, why running a lending policy based on social engineering can’t work — at least, not until capital itself becomes capable of caving to emotional appeals.
Obama has been running out the clock. The press has gone out of its way to help him with this four-corners strategy.
To break through to the American people, McCain has to reframe the financial collapse — taking it back to Carter and Clinton (the latter being somewhat sympathetic to the argument).
Time is running out. Let’s hope McCain risks going off script at the next two debates and refusing to have “facts” spun as “smears”.
It’s funny how in just a few days the Democrats were able to leverage the financial crisis into over an extra hundred billion dollars of government crap. You give them a super majority with Baracky Chavez and the fun is really gonna start I think. When the lynchpin of your politics is a bad economy what you can expect is more bad economy I think. We should think about electing people who look at down times and don’t salivate. Or tank the market on purpose like Harry Reid and Chuck Schumer. Martha Stewart went to jail for a damn sight less.
I don’t think Johnny Mac is up to it. He’s sure not tugging at the bridle, anyway.
Attack, you dumb bastard, before you get your ass handed to ya! I shouldn’t have to tell a fighter jock this.
If only Schumer, Dodd, and Frank were white. Then maybe we could criticize them without being accused of racism.
Nah!
But now that the bill is solidified, McCain/Palin simply must risk being called “enemies of the poor,†“racist,†or whatever else will be thrown at them to chill actual discussion of the issues that got us into this mess, in order to explain to the American people, in the simplest terms possible, why running a lending policy based on social engineering can’t work  at least, not until capital itself becomes capable of caving to emotional appeals.
Other than the numbers tend to be written in black ink and paper tends to be white, there was no dedicated or dictated class-based lending, and no social engineering – not even close, pal.
Rich people bought homes and condos with no money down, middle-income and lower-income as well. Every race and class and ethnicity are reflected in the pool of defaulted borrowers who accessed the spectrum of mortgage products.
You’ve fallen into a finger-pointing delusion. A protracted decline in home prices and lenders who were not not prepared for such a decline (except for Goldman and JP Morgan, ooops!) caused the debt crisis, as well as worthless derivative securities that nobody (except Goldman, et al) predicted would become, at one point, confetti.
This is, basically, a math problem.
>>This is, basically, a math problem.
Well its some kind of problem, thats for sure
Possibly the worst thing I’ve heard over the last few weeks is the insistance that something be done to bailout the people in default. That CNN idiot, Lou Dobbs, called it “Foreclosure assistance”, not that any of these people actually needed help getting foreclosed on.
If something like that happens, expect the cost of mortgages to increase exponentially over the next couple. Our kids won’t see a 30-year fixed without a government guarantee, mandatory federal mortgage insurance, and an interest rate in the low teens.
Janet Albrechtson wrote:
“[,,,]the American way has been to send in a couple of quasi-government agencies to fill the gap.”
California’s legislature has constructed an equally corruptible method to absorb its deliberately generated glut of humanities credential-holders.
In order to place its state-university graduates into paying ‘jobs’ (that, incidentally, were promised to the incoming students as their avenue to repay the state’s mediated student-loans) California’s legislature encouraged local “social entrepreneurs” to create hundreds of so-called “private” service-providers whose only paying client is the State of California.
The fact that these hiring entities rely on the legislature’s largesse, just as Fannie and Freddie did, and not on competitive, private markets, makes these corporations into quasi-governmental agencies.
And, the raft of outcomes at the state level are eerily similar to those we’re all paying for at the Federal level right now.
1. Just as the CBC and the Dem’s milked the desires of the chronically poor in cities like Detroit, Chicago and New York for political gain, individual legislators in Sacramento ‘game’ their state’s GSE’s for political gain. Obvious examples where politicians attempt to leverage needy constituents into personal electoral gains are their cyclical calls for lowering student loan interest rates by fiat, and their widely publicized efforts to proliferate the state’s civil service positions, also by fiat.
2. The other similarity is, the target demographic of California’s scheme is trapped. Just as the urban poor are largely sedentary – that is, they are confined to a single, stagnant locus (ex, South Chicago’s slums), the beneficiaries of California’s GSE-hiring entities are trapped under hard-fought credentials of dubious value from “prestigious” state universities, and most are permanently yoked to paying back the tens of thousands of state-mediated debt that secured the credential for them.
The parallels with the Democrat’s Fannie/Freddie scheme are illustrative, and they suggest California’s economy suffers from a larger, self-inflicted problem that most in its hallowed halls of government would prefer to avoid fixing.
Heaven knows, California is soooo underregulated!
Also they don’t allow condo conversions in Los Angeles. Even Mexico City allows condo conversions. But they have a free market there is why.
Rich people (and middle class people) took advantage of favorable lending. No doubt.
But if you don’t think that favorable lending had anything to do with government social policy from Carter through Clinton, I’m not interested in talking to you about it.
Pal.
Psssttt…he doesn’t. I used to think Thor was kind of, you know, complex. Turns out he’s nothing but a racist, sexist pos. Too bad. But, he does bring up one point worth looking into. Does anyone have a breakdown of the percentage of foreclosures for each income group?
I agree with the net of your article but I’d like to offer some corrections re mortgages.
Virtually all subprime mortgages have prepayment penalties typically for the first 3 years, sometimes up to the first 5 years. The penalty is usually 1% for each year of the prepayment penalty period remaining.
Also, in some states like California only the initial mortgage used to buy the peoperty (called a purchase money loan) is non-recourse. What many borrowers are learning the hard way is that refinanced mortgages in CA are in fact full recourse loans which puts all your personal assets on the line as collateral for the loan or any shortfall in the event of a foreclosure.
You’d have to have inquire locally [maybe county-level], OI. Here is one for Cleveland, as an example
Too many have’s in there.
Is the MSM protecting Barney Frank and his relationship with Fannie’s Herb Moses? My research shows they’re painting any investigation into a connection as “right-wing.”
http://redgirlrising.blogdns.net/the-gay-news-story-you-didnt-hear-this-week/
Public financed campaigns? Like Mr Hope’NChange reneged on? Shady money?
The problem isn’t the money. The problem is the people that some candidates associate with, and the source of THEIR funding. That’s why a candidates associations matter.
Thanks, urthshu. Very much appreciated and kind of funny as I live in the Cleveland area. From the link:
“Foreclosure rates are much higher in the lower-income tractsâ€â€19 per 100 mortgaged units compared with only two per 100 in the highest-income tracts. African-Americans make up most of the population (71.1%) in the lowest-income tracts but just 6 percent in the highest-income tracts. High-cost loan originations dominate in the lowest-income quartile, making up 60 percent of all originations, compared with just 16 percent in the high-income quartile. This may not be so surprising, given that lower-income borrowers presumably have characteristics that tend to pose a greater credit risk to lendersâ€â€for example, blemished credit histories, higher debt, and higher loan-to-value ratios.”
However, this is something to illustrate that thor was kind of right about one thing.
“When comparing the 2007 foreclosure filing rates in each of the income quartiles to those in 2006, we find increases in the filing rates in all but the lowest-income quartile, where there was a slight decrease in the filing rate. The largest increases occurred in the third and highest-income quartiles, where foreclosure filings grew by 406 and 116, respectively, reflecting rate increases of 11 percent and 6 percent. These numbers tell us that although the greatest numbers of foreclosed homes are still concentrated in the county’s lower-income tracts, the growth rate of foreclosure filings in the upper-income quartile, primarily suburban census tracts, appears to be increasing.”
Well urthshu, the Cleveland study certainly bears out Thor’s point. Not.
Could be a combination of 2 factors:
-Lower income buyers reached a plateau, and
-Higher income buyers may represent late-comers to the house-flipping craze.
Now that McCain’s leveling his “associations” gun, the Thorbama talking points will want to distract from the importance of Obama’s reckless associations.
So, now they’re talking about campaign finance laws, racism, and the weather – any topic except O’s cozy friendships with some of Chicago’s most inhumane crony-crats.
RE the Keating Five: ain’t gonna work. It’s oooold history, today’s corruption is here and now. Also, McCain’s court and committee records from that time exhonerate his character.
I’m not sure O’!’s media team really wants to re-up a record that accrues so clearly to his opponent’s character. But, whatever.
Children will play!
Obstreperous Infidel —
What do you make of the stat that only 42.6 percent of the houses in the lowest income/highest foreclosure quartile were owner-occupied, as opposed to 76.5 owner-occupied in the highest income/lowest foreclosure quartile?
Jbean, I see that and obviously there is a much greater “chance” of a foreclosure in the higher quartile, so the numbers are even more telling. I guess I was being charitable to thor. Why? I’m not sure.
I suppose there’s a beginning for a pub post in there, someplace. Maybe getting representative/equal population stats for different regions, then comparing them… Probly need New England, somewhere Southern, western place, then Witchita or something, etc.
This was the first of what proved to be many good posts today. I animated a PowerPoint slide and then sort of lost momentum. Not Jeff.
RE: Fanny, Freddie and Who Should Own A Home:
I have very conflicted emotions about this, and the conservative/Republican vs. liberal/Democratic “pundits” aren’t making it any clearer to me where the fault lies. I suspect that there is enough blame to cover everyone. The fact is that I could never have bought my home if not for FHA (and I don’t know how that relates to Freddie/Fannie, but I do know its a Federal program to help those like me to buy a home). At the same time, I had to come up with a decent (10%, plus closing costs… etc) to buy. When the “re-finance! get cash now!) trend started, I did refinance… AT A FIXED RATE!
I asked questions… I did my homework… I put my “lending agent” on the spot BEFORE I signed any papers. So, while I am equally angry at borrowers who pretended they didn’t know they were buying homes they couldn’t afford (especially when “ADJUSTABLE” rate should have clued them in), I am equally angry about trying to pin this on Federal programs designed to help those of us without a lot of capital to get into our first home. Yes, there are some folk who should not have been given the credit to buy homes. But, is this the problem of those folks (I’d say yes) or the financial institutions who created exotic “investment instruments” in order to make it possible to buy a house with Zero Down! Choose to pay Principal or Only Interest! (again, I’d say yes).
It feels like everyone is to blame, but both Conservative and Liberals want to pin it on one party (the other, obviously) when that isn’t reality. The truth is EVERYONE, from law-makers to markets to banks to debt salesman/bundlers to realty ‘specialists’ to the home-buyers are at fault. Everyone decided that reality no longer applied because, somehow, home prices would just go up forever and ever and ever, despite the fact that has never happened in the history of ever.
To say it was the democrats fault for enabling Freddie/Fannie or that it was the Republicans fault for loosening/eliminating oversight is both correct and wrong. The system worked together to bring us this mess and there is too much blame to worry about proportioning. You all need to stop being partisan about it, because both of your chosen parties have mud on their faces this time.
STFU
You do make some sense rob, except I want those most guilty exposed if not punished. Those greedy home flippers were worried they might lose, but not that they might damage the whole freaking world economy.
Those asshats in congress got told twice disaster was coming, and prevented the fix!
I am almost atraid to post, but I agree.