Trying to blame this mess on either party is obtuse. Both parties had a small hand.
I'm a firm believer in the market, but the market requires good information to allow two parties to exchange value.
Some 3 or 4 years ago I recall listening to an NPR story about odd doings in the mortgage business. The Community Reinvestment Act was being used by bank regulators to encourage banks to lend outside their normal zone (comfort, geographic, whatever). This was done by refusing new branches to banks who didn't play ball. So if the Bank of North Pudunk wants to open a branch in South Podunk, they need to loan ol' Southside Joe money for new home.
Joe only makes $40,000 a year. But, lucky for BoNP, Joe's loan was brought in by a mortgage broker, Dickie Flatt. Dickie, without telling BoNP, has put Joe onto a nifty website called www.confirmmyincome.com I'm not making that up, it was in the NPR story.
Joe can augment his loan by paying a small fee to confirmmyincome.com and they'll snail mail a real piece of paper that says Joe is one of their consultants and that he made $92,000 last year. BoNP makes the loan. Then they sell it on the secondary loan market. Do they know it's trash? They suspect, but they are counting on the home's value increasing enough that by the time they foreclose they don't lose any money.
If markets go up forever, then nobody is really hurt. But the market likes to know what it's getting, and these mortgage backed securities started to stink the moment the first west coast real estate market stalled. Y'all may recall about a year ago, maybe April, when one French bank said "We can no longer trust packages of US mortgages"
That was the market saying that the info was no longer good enough to guarantee an honest exchange of value. Poof went a couple of trillion.
The website closed down shortly after the NPR story, but I'm not naive enough to believe there was only one. But I have never heard that anybody connected with false income confirmation has ever been prosecuted.
Dickie Flatt got his commission. Joe got his house. For a while. BoNP maybe got their branch in S. Podunk. But some financial institution bought a batch of loans like that, and with the credit market frozen and foreclosures up 81% that batch of loans is selling way below it's face value. And that financial institution saw its capital reserves dang near disappear.
The CRA is decades old. Both parties flubbed chances to fix it.
At the moment our solution is to move closer to Euro style govt. Meanwhile bankruptcy proceedings would have been a great way to separate the wheat from the chaff, but it looks like the govt is going to just buy the chaff instead.
Yay. :p
Put me down as 37% in favor of the stimulus package. That's the tax cut portion. Another 8 or 9 bucks per paycheck will get spent; a one time check will get saved. Consumer spending is what drives our market. Especially when our savings accounts are in the Bank of North Podunk.
posted by quash @ 9:35 PM
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