Who's to blame for the foreclosure mess that's tanking the U.S. economy and bearing down hard on markets around the world?
Why, those nasty, greedy bankers, of course!
Honestly, that's about half the story. Yes, some banks took on far too much risk and are partially to blame. We've watched the likes of Countryside fall into financial ruin and let's not forget that the pinheads running Fannie Mae and Freddie Mac contributed to the mess we're in, too.
Amazingly, however, the media and the government have almost entirely overlooked how Congress contributed to the whole mess. One of the best and most concise articles you'll find on the government's roll in the death of the subprime lending market can be found right here. Read it and Digg it, or at least consider what the author has to say about the government's role in subprime lending. Sadly, that analysis was written a year ago and has largely been ignored.
In a nutshell, the subprime lending market has its roots in the 1977 Community Reinvestment Act, which was pushed for by that walking disaster known as Jimmy Carter. That act, in essence, encouraged making mortgages available to people with bad credit. The idea was that it was somehow discriminatory and/or downright unfair for banks to look solely at economic criteria and seek to minimize risk when granting mortgages.
The act has been refined over the years and, eventually, led to the authorization of subprime mortgages (via an revision to the act signed by the perpetually addled George Bush -- he also signed that hideous bankruptcy reform junk into law, so an argument can be made he'll approve damn near anything stuck in front of him).
So, banks were encouraged and, at times, compelled to extend those wretched subprime things in an attempt to make it easier for more Americans to own homes. Thank God for banks like Bentonville, Ark.-based Arvest which refused to have any part of that nonsense.
I point at Arvest as an example because that bank is still doing well. It's the largest bank in Arkansas and is rapidly spreading to other states, as well. An Arvest official told me a few months ago that shareholders and customers put the bank under a lot of pressure to give out subprime loans, but cooler heads prevailed. Thank goodness for those cooler heads.
At any rate, there was another disastrous trend that emerged years before the birth of the subprime market -- the elimination of usury laws. Those laws, of course, put a cap on interest rates and mostly impacted short-term rates.
There is a significant distinction between the traditional, 30-year, fixed-interest rate mortgage and the more variable packages put together for the subprime market. Forget about the notion that long-term rates will be impacted when the Fed cuts the federal funds rate. That long-term mortgage rate moves along with the bond market and tends to behave independently on what the feds are doing.
Contrast that with, say, an adjustable rate mortgage that's part of a subprime package. That rate will typically be low for an initial period and then float along with a short-term index.
In other words, you had usury caps removed and a national policy that encouraged (and, in some cases, bullied) lenders into assuming risky loans. Banks, when they assume risk, pump up that interest rate and were allowed a lot more leeway without usury laws standing in their way.
So, everything looked great when the subprime market was booming as loans were getting written, people who thought they'd be renting forever were able to purchase homes and a lot of money was flowing through the economy. The problem of that entire system was masked -- all those subprime mortgages came with outstanding initial terms and rates.
Reality set in, however, when that initial term expired and higher rates and more unfavorable terms kicked in. All of the sudden, a lot of people couldn't afford their mortgage payments and were forced into foreclosure.
It's worth pointing out that the people who saw disaster looming when everything appeared to be great on the surface were told to shut the hell up and quit being so "negative."
At any rate, here's the point -- the government had a significant role in creating this mess. How much do we believe the people stupid enough to put us in this position will fix it? Yes, Congress may come up with a solution but we should be wary and really should pay more attention to what's happening.
Too much government involvement will often lead to disaster. Want to keep this kind of thing from happening again? Leave the lenders alone and let them go back to the "bad old days" when fixed interest rate mortgages were one of the few things available and you'd better have a down payment of some sort and a decent credit history if you want to borrow money from a bank.
If that too restrictive? Maybe, but setting up a system in which high risk loans are encouraged and the feds will be there to bail out banks when the very foreseeable mortgage defaults take place just ruins the economy, hurts tax payers and invites a future rash of foreclosures.