A Mortgage Fable

The Wall Street Journal ^ | SEPTEMBER 22, 2008

[Eric Blair 2084]

Once upon a time, in the land that FDR built, there was the rule of "regulation" and all was right on Wall and Main Streets. Wise 27-year-old bank examiners looked down upon the banks and saw that they were sound. America's Hobbits lived happily in homes financed by 30-year-mortgages that never left their local banker's balance sheet, and nary a crisis did we have.

Then, lo, came the evil Reagan marching from Mordor with his horde of Orcs, short for "market fundamentalists." Reagan's apprentice, Gramm of Texas and later of McCain, unleashed the scourge of "deregulation," and thus were "greed," short-selling, securitization, McMansions, liar loans and other horrors loosed upon the world of men.

Now, however, comes Obama of Illinois, Schumer of New York and others in the fellowship of the Beltway to slay the Orcs and restore the rule of the regulator. So once more will the Hobbits be able to sleep peacefully in the shire.

With apologies to Tolkien, or at least Peter Jackson, something like this tale is now being sold to the American people to explain the financial panic of the past year. It is truly a fable from start to finish. Yet we are likely to hear some version of it often in the coming months as the barons of Congress try to absolve themselves of any responsibility for the housing and mortgage meltdowns.

[Eric Blair 2084]

We all like a good Fairy Tale...especially those for who reality is too much to bear. The rest of the article summarizes the truth.

(Hint: Left wing social engineering big government policies started the mess that Left wing social engineering big government Dem politicians want to take advantage of.)

[Freedom4US]

Well the ones who have some knowledge or responsibility, they will try to act like SPECTATORS, bank on it.

[MarkeyD]

McCain’s weak response to this is starting to drive me crazy. He should be calling for Congress to investigate rather than trying to be bi-partisan. The Dry By Media’s lack of response/lack of laying blame on the Republicans shows me exactly where the blame should lie.

[Eric Blair 2084]

McCain’s weak response to this is starting to drive me crazy. He should be calling for Congress to investigate rather than trying to be bi-partisan.

In fairness to McCentrist, he is trying to win votes and this is an issue that leaves 95% of the population confused and befuddled.

It's much easier to pander to folks who bought a house they couldn't afford and are now facing payments they can't make in order to to get their vote.

A principled leader would take the time to explain it to them ... both pro's and cons. I'm not running for anything, neither are the 100's of financial journalists who are trying to explain what happened here.

[LiberalsSpendYourMoney]

Yeah, but innocent Americans should not be forced to bail out those who took out mortgates that they can't afford. I'm sorry that they're getting foreclosed on, but it's my money (and the money of other responsible people) that will go to these homeowners who bought too much house with their money.

I realize that a lot of Americans just don't understand this situation. That doesn't excuse the blatant pandering with our tax money, however.

[Aria]

What happens to me when I can’t afford my house because my taxes were raised to pay for all this?

[GOPJ]

What happens to me when I can’t afford my house because my taxes were raised to pay for all this?

That's my concern too.

[LomanBill]

[ A credit-rating oligopoly. Thanks to federal and state regulation, a small handful of credit rating agencies pass judgment on the risk for all debt securities in our markets. Many of these judgments turned out to be wrong, and this goes to the root of the credit crisis: Assets officially deemed rock-solid by the government's favored risk experts have lately been recognized as nothing of the kind.]

 

 

Of course they turned out to be wrong.   Falsified FICO scores have exactly that kind of effect.

 

 

Where's LEO?

[Eric Blair 2084]

Actually, as it stands, this is just a bailout of dumbass CEO’s and their boards who thought that packaging the loans they were forced by the government to make to homeless people, crackheads and waitresses who claimed to make 300k into a product and try to sell it to someone else would be a good idea as long as they were making Billions in underwriting fees and everyone was doing it....

Your part of the argument about bailing out the “innocent victims” who who took someone else’s money to buy a house they could never afford is what Barney Frank and Chris Dodd are trying to put into the bill as we speak...that plus limiting CEO pay to $7/hour.

[Eric Blair 2084]

That should be the subject of a Congressional investigation. How and Why did Moody’s, S&P and Fitch would put a AAA rating on a package of loans to homeless people sleeping on a park bench?

[Stentor]

McCain’s weak response to this is starting to drive me crazy.

Was grousing out loud about that at the Media rally and got shushed. He was doing it again. It's absolutely maddening. At least he took a shot about how Obama is absent on attempts to remedy the situation.

[MCH]

CONGRESSIONAL HEARINGS, NOW!!!!!
< crickets >

For a Demorat run congress that's probably crammed more Stalinist show trial hearings into a 2 year period than any other Congress in history, the lack of hearings for THE most deserving issue during their tenure is deafening.

[Eric Blair 2084]

That’s a great question.

That’s what homeowners here in the Democratic People’s Republic of NJ are realizing now.

The do-gooder legislators meant well. Now, with the highest in the nation property taxes thanks to Socialist egalitarian policies have caused here, people are fleeing. They can’t afford the taxes.

It’s a comfort to know their intentions were good. That’s all they measure themselves by.

[Aria]

So it isn’t as though we’re paying the mortgages for these people who couldn’t afford them in the first place, is it? Haven’t they been forced to leave their houses and we’re bailing out the institutions that are stuck with the bad debt?

I kept figuring that now there must be a bunch of empty foreclosed houses for sale cheap. Am I wrong? Are these people still in the houses?

[Aria]

Those of us who play by the rules and live within our means have been totally screwed by the people the majority elected.

I think the system has become rigged by the lowest common denominator and the crooks they elect.

[Ilya Mourometz]

Taxpayers shouldn’t have to pay, but they must. The problem is not defaulting mortgages, per se—the rate of foreclosures is not significantly worse than other difficult times we’ve had. The problem is the derivatives market and the federal reserve (i.e., Greenspan’s easy money policy). If all the bad mortgages were to go belly up, it would indeed be a problem for those banks that lent that money and their’s alone. That’s not the case anymore. What has happened in the past couple decades is the explosion of the derivatives market, specifically credit swaps, collateralized debt obligations.

In simple terms, Fannie and Freddie was required by law to buy up mortgages in order to lessen the risk to banks who were required by the Community Reinvestment Act to give mortgages to “historically disadvantaged persons”. Neither Fannie nor Freddie nor any other lending bank really wanted to absorb such risk (nor would their shareholders allow it), therefore they mixed jumbo, prime, and subprime mortgage debt obligations and sold shares of these bundled debts (”collateralized debt obligations”, or CDOs). These are investment vehicles that by and large are only available to commercial and institutional investors.

With the easy money policy of the Greenspan years, the real estate market boomed—so much so that in the sellers’ market, common rowhouses in Philadelphia, for instance, were selling for $600-700k when ten years prior they had a FMV of no more than $50k. Again, that by itself is ok, assuming that the bad loans would, in times past, be risks that the lending banks could absorb with higher interest rates, etc... But now, you have the real estate bubble burst and a higher than normal amount of defaults. Again, not exactly a typhoon by itself. Problem is, the CDOs are, along with related derivatives, spread throughout the financial system to the tune of about 34 trillion dollars.

What it means is that a few defaults out of the ordinary becomes a terrific storm because the valuations of all real estate have collapsed, which in turn means that no one really knows what the CDOs are actually worth now because the good loans are fused with the bad—everything is now devalued. That’s 34 trillion dollars invested in financial instruments where no one has any idea of the actual worth of the investments. The cascade effect began last year when the RE market collapsed. Then Bear Stearns, then the big one, Fannie and Freddie.

But Fannie and Freddie were really the tip of the iceberg—AIG not only invested in such CDOs, but they insured many of them—CDOs are like bonds, in that the payment is technically guaranteed. 34 trillion dollars in guarantees for something that may be worth half of that. Suddenly no one trusts anyone in the industry. Suddenly institutional investors flee the derivatives market and start pulling stakes out of the money market sector. Money markets provide the main source of capital for commercial lending banks, so with a big hit to the money markets after the Fannie/Freddie and AIG collapses, you suddenly have a situation where by the middle of last week, there was zero money available for commercial lending. None anywhere in the US financial industry.

There is no choice; something must be done. Doing nothing will not just cause a few banks to fail. It will lead to a total collapse of the entire US economy. I am a follower of the Austrian School of economics, but even I know that because the government created this mess, they must do something now because to let the entire US economy fail in order to prove a point is irresponsible.

I am not endorsing the Paulson plan per se; I happen to like McCain’s idea myself, but something must be done short-term or there will be no tomorrow upon which to reboot the system and do it right. Unfortunately, the taxpayers must step up to bring order to the chaos. Hopefully, a new system will be brought in under McCain-Palin, but the economy will be toast in as little as a week if something isn’t done or at least agreed to so that investors will have some confidence.

[Manic_Episode]

A lady I used to work with remortgaged her home twice to finance her Dads cancer treatments but he died anyways. She then bought another home then foreclosed on her triple mortgage.

I'm sorry about her Dad but she intentionally defrauded the lender.

[LomanBill]

[How and Why did Moody’s, S&P and Fitch would put a AAA rating on a package of loans to homeless people sleeping on a park bench?]

 

I don't know anything about loans to homeless people sleeping on park benches - but I do know a thing or two about falsified FICO scores.

[That should be the subject of a Congressional investigation.]

 

Yes, it should but...

 

 

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During the House Financial Services Full Committee Hearing on "Recent Events in the Credit and Mortgage Markets and Possible Implications for U.S. Consumers and the Global Economy",  Chairman Barney Frank left the hearing in order to attend a meeting in support of legislation that would force American employers to hire homosexuals.   That says a lot about Barney's priorities.

 

Barney "Fife" Frank.

Financial Services Watchdog

 

This watchdog only has one tooth.

Barney's boyfriend makes him keep it in his pocket

==================================================================

 

Me thinks we need a new watchdog?

[ProtectOurFreedom]

Not to worry if you live in Jersey. Your property taxes have already been raised so much you had to sell your house to afford the down payment on the house next door.

[Judges Gone Wild]

The taxpayers are being asked to pick up a $700 billion tab, “no questions asked”, with no reforms to prevent this from happening again, no recourse, and no responsibility. No freaking way! Both parties are giving the taxpayer the shaft! CALL YOUR CONGRESSMAN!