Friday, August 7, 2009

Foreclosed – a few words about my Wordless Wednesday entry


Yes, it seems like just yesterday (in fact it was just yesterday) when I submitted the photo on the left as my Wordless Wednesday entry.

I didn’t take that photo or come up with the nifty “speech bubble,” but I had to share the picture. Why? I make my living as a public relations guy (I prefer the term “media cat” but that hasn’t caught on) and have heard a lot about foreclosures over the past couple of years.

That photo was sent to me by a fellow in my office (the technology cat, to be precise) as he’s heard a lot about foreclosures, too.

There are a couple of things about the foreclosures topic that are worth mentioning. For one thing, we’ve had our share of those things in Arkansas, but our troubles have been few compared to a lot of other states. One of the primary reasons for our good fortune in that regard has to do with the conservative nature of our lending institutions.

The National Association of Realtors tells us that the majority of foreclosures involve subprime mortgages. A lot of banks in this state simply refused to deal with those mortgages, so we’ve not had as many defaults as some other areas. Arvest – the largest bank in Arkansas – is one of those that simply refused to deal with subprime mortgages.

Second, I’m sick to death of the bickering over whether Republicans or Democrats are to blame for the collapse of the subprime mortgage market. The simply truth is that this mess has been brewing for 30 years and both political parties had a hand in it.

Yes, back in 1977 the Jimmy Carter administration pushed through the Community Reinvestment Act to encourage more relaxed credit standards so as to make it easier for people to take out mortgages. The thought was that poor folks and minorities were being discriminated against by banks that wouldn’t give the money. Equity, seemingly, demanded a remedy.

Some of that risky lending, as you might recall, was a contributor to the savings and loan crisis that beat the hell out of the financial system from the mid-1980s through the early 1990s. Rather than learn from the mistakes made, Bill Clinton announced in 1999 that everyone has the right to own a home and his administration pushed through measures that further relaxed lending standards for Fannie Mae and Freddie Mac.

Jump forward to the first term of the George W. Bush administration and you may recall that the only thing going well in the economy was the housing market. In an attempt to keep that rolling, lending standards were relaxed a bit further. They might not have been actively pushed for Bush, but you’d better believe his administration didn’t have much motivation to say “boo” about the alarmingly lax standards.

The key to the whole mess, of course, is the mortgage backed securities market. A mortgage backed security is exactly what it sounds like – an instrument that behaves like a bond and is backed by mortgages.

For awhile, investors lined up in droves to buy those things. Local banks generally didn’t have much call to scrutinize loan applications to closely – all they knew was that Fannie Mae and Freddie Mac would guarantee those mortgages. Meanwhile, Fannie Mae and Freddie Mac could simply dump those loans on the mortgage backed security market and everything would be dandy.

Well, it didn’t turn out so dandy, did it? When you float a bunch of risky mortgages out there with terms that are too much for borrowers to bear, you wind up with a lot of foreclosures. Some of the mortgages being written just a few years ago were downright odd. We’re talking about thing like mortgages on which borrowers paid interest only for a period of a few years. When those few years ran, borrowers had to pay both interest and principal and simply couldn’t afford mortgage payments that went up by hundreds of dollars overnight. Adjustable rate mortgages often contained such unfavorable terms (i.e., locked in at a low rate for a few years then the mortgage would float) and we saw a lot of foreclosures from that end, too.

So a lot of the subprime mess was brought on by government interference and downright greed on the part of a lot of the financial industry. Borrowers, too, jumped in over their heads and were convinced the could sell their homes for a profit before the unfavorable terms of their subprime mortgages took hold. As we’ve seen, that was just not a safe bet – housing values plummeted due to overbuilding, downward pressure on prices, a souring economy and a host of other problems.

Oh, and here’s more great news – default rates on prime mortgages have increased dramatically this year according to the Federal Reserve. Great.

The good news here is that banks seemed to have learned a thing or two over the past couple of years. They’re looking hard at credit reports and are generally insisting on down payments from people wanting to take out mortgages. It’s worth mentioning that Arvest – and a lot of other banks that didn’t take any bailout money – had those policies in place for years.

Perhaps other lenders – and the federal government – can learn a thing or two about the value of conservative lending and taking as few risks with investors’ money as possible.

This post is part of the oh-so-dandy Tell Me Thursday event. Bump the link to find out more about Tell Me Thursday!

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