Who's to answer for the mortgage mess?
TERRY SAVAGE email@example.com May 4, 2008
You're entitled to take a new approach to your investment and personal finances with the new year. Don't kick yourself for past mistakes. Now is your chance to start over.
Updated: May 3, 2013 12:14PM
As the housing crisis and mortgage mess move off the front pages, some nagging questions remain. Many revolve around how so many smart people -- not the home buyers, but Wall Streeters -- could have been so dumb or blinded by greed to the eventual results of what they were doing. I wonder how they can complain now that they're losing money.
Here are a few of my questions:
Why is Greenspan surprised?
Alan Greenspan has been publicly lamenting the fact that he's being blamed for the mortgage mess. That's the same Greenspan who flooded the credit markets with liquidity and pushed rates down. It's the same Fed chairman who acted as cheerleader for the refinancing boom that fueled the economy, and his legacy of "growth."
In a Feb. 23, 2004, speech to the credit industry, Greenspan actually endorsed adjustable rate mortgages, noting that while "American homeowners clearly like the certainty of fixed mortgage payments ... American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."
And in the same speech : "The ability of lending institutions to manage the risks associated with mortgages that have high loan-to-value ratios seems to have improved markedly over the past decade." No wonder he's surprised!
Where are the mortgage brokers?
If we can't pin the blame on Alan, or the bankers, or the bank regulators, or the investment bankers, or the rating agencies, why can't we find the individual mortgage brokers who made the worthless loans?
That's not an idle question. The financial institutions seem quite able to find the borrowers when it comes time to collect or foreclose. Surely the banks or servicers have the documentation from the initial loan, noting the names and addresses of the mortgage brokers who talked families into these great adjustable rate deals, and collecting $1,000 per deal. Surely someone has considered tracking them down on their yachts -- and charging them as individuals with fraud.
(Let me make it clear that I'm only referring to those jerks who made loans to people who clearly had no income to make the monthly payments once the initial, low rates wore off. I don't see how we could get their bosses -- now departing with big severance checks -- indicted as co-conspirators.)
Where was the PMI?
What happened to Private Mortgage Insurance? Lenders used to require this dreaded extra payment, typically 0.5 percent of the loan amount, to be paid by borrowers who had less than 20 percent equity.
This insurance was there to protect the lender from default, not to protect the borrower from loss. It was required for loans sold to Fannie Mae and Freddie Mac. The Web site of the Federal Reserve Bank of San Francisco still posts as an explanation for PMI:
"PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment."
Since PMI was designed to protect the lenders, surely those insurance policies should mitigate the banks' losses on the loans that went bad. Except that most of those loans didn't have PMI.
In their eagerness to make and securitize loans, the banks devised ways of splitting a large mortgage into separate, smaller "piggyback" loans, and packaging them as securities instead of selling them to the housing agencies -- avoiding the PMI requirement. Those same banks are complaining about losses?
Oh, and I have one last question. This one is directed at property tax assessors: You were quick to raise property taxes when home prices were soaring. Will you be equally quick to cut those property taxes in the midst of the huge price drops we've seen? Just wondering. And that's The Savage Truth.