It seemed like a good idea at the time. But, just like junk bonds, selling bad paper eventually catches up with you.
The concept of making homes more affordable so that more Americans could invest in homes, which is where most Americans have the majority of their assets, in and of itself, was not a bad idea. In particular, to be able to expand home ownership to some parts of our society that had found many obstacles to home ownership was a noble and worthy idea. It was an effort to find a solution to overcoming the obstacles to home ownership for low-income minorities and the lower class, which are primarily their modest incomes and the inability to save large down payments or make high monthly mortgage payments given their modest incomes.
There is a relationship between Fannie Mae and Freddie Mac and the Congressional Black Caucus (http://www.youtube.com/watch?v=w1BOj6kTPgE) which helped inspire, or at least contributed to, these “loose” loans in order to get more minorities to qualify for home loans. It was an idea filled with good intentions and bad implementation, or, at least, poorly thought out. Combine that with corporate greed, and then spread the concept throughout the mortgage market, and you get the toxic combination that turned brokers into peddlers of bad paper, just like the junk bonds of the ’80s.
There are four reasons why minorities don’t get loans: (1) real racism; (2) bad credit, or (3) inadequate income to justify a mortgage and (4) lack of access to legal counsel when entering into contracts and mortgages.
The racism factor could be addressed with existing law and some industry education to brokers. The other three problems require a cooperative effort between individuals, community businesses and the government. Individuals must learn how to effectively manage their finances and credit, communities must encourage home ownership, help provide legal counsel at reduced cost and ensure sound lending practices, and the government must properly exercise its financial and regulatory arms.
The emphasis should have been on getting to high school kids and young adults early on to teach them about credit and how to manage it and why it is so important. Additionally, to teach a functional understanding of contracts and when it is time to consult a legal professional. It is important to catch them BEFORE they have ruined their credit and entered into injurious contracts. Once they have, it is, for all practical purposes, too late, or, at the very least, they will have to put their dreams of home ownership on hold for a very, very long time.
The inadequate income issue is a two-pronged solution:
(1) the government and private industry must work to create more jobs, which means there will be more competition for workers, thus higher salaries offered to job applicants; perform its oversight and regulatory responsibilities; AND generate better paying jobs, which brings in how we negotiate trade agreements to include labor, environmental and consumer protection standards; and
(2) the government, private industry and individual families must teach people to pursue an education and/or training to improve their career choices and potential income, live within their means, manage their credit and teach them to save and invest their money, which will ultimately increase their income.
In an economy that is working as it should and a housing mortgage market that is working as it should, people with lower incomes have to put up a higher down-payment to reduce the amount of the value of the loan they are financing. These standards and restrictions are not just to protect the industry, but to protect home buyers from committing to a mortgage they ultimately cannot afford.
The results we are facing are based on ALL factors failing: people did not behave responsibly in managing their personal finances and in entering into serious financial commitments without the proper information and preparation (or legal guidance); the market regulators did not do their jobs; the mortgage brokers sold bad paper to the banks, which did not do due diligence before accepting that paper. It failed at every step of the way.
It’s not just a “housing bubble.” A housing bubble bursting would have been absorbed by the market with a minor correction. This devastating blow that has taken place has roots that are deeper and more pervasive. This failure is a systemic failure caused by deregulation and corporate mismanagement. And now the taxpayers will be paying for this failure of our government and private industry for decades to come.
Now we are faced with bailing out private investment houses and Fannie Mae and Freddie Mac, both of which should not be Federally guaranteedin the first place ��” that was a huge mistake from the get-go. The taxpayers should not be required to guarantee profits to these failed companies. Likewise, the CEOs of these failed investment houses should not be allowed golden parachutes.
We need to fundamentally start from scratch with this one and make sure both the taxpayer and the investor are protected from this fraud and abuse by CEOs who get off scot-free with multimillion dollar seeverance or retirement packages when they are fired or retire in shame.
Whatever aid package the Congress and the President come up with must provide for not only market stabilization, but something to protect the devastating effect on homeowners who have been unfairly impacted by this debacle.