Contrary to your belief, Fannie and Freddie weren't the cause of this mess... Funny how you ALWAYS seem to leave out THE real players... Morgan Stanley, Barclays, Merrill Lynch, Bear Stearns, Goldman Sachs, Deutsche Bank, Credit Suisse, RBS, Countrywide, JP Morgan, Bank of China Ltd, Citigroup, Countywide, New Century, Option One, Fremont, Washington Mutual, First Franklin, RFC, Lehman Brothers, WMC Mortgage, Ameriquest .. just to name a few.... notice how the "color" of the argument changes once you focus on the real players... And all you can name is Fannie and Freddie?
? You're bent on pining this thing on the "undeserved" and then the next day it's the "underserved"...
Puleeeze.... See, you should stop watching Fox News for one Sunday and see how many brain cells actually regenerate...
Here's a primer you should read BEFORE honking your horn for the Short-Bus Express....
Everything you ever wanted to know about the mortgage meltdown but were afraid to ask. (cut and pasted - full article altered for space reasons by me)
The Conservative Origins of the Sub-Prime Mortgage Crisis
John Atlas and Peter Dreier | December 18, 2007
Hardly a day goes by without a news story about the accelerating number of foreclosures, an economic tsunami that is causing chaos in the housing and stock markets, the banking industry, and the global money markets, not to mention upending families and neighborhoods. Business leaders, activist groups, and Democratic presidential candidates are calling for our government to do something before the situation declines even further. The problem is worsening in every part of the country, but two early primary states -- Florida and Nevada -- are among the hardest hit.
The crescendo of criticism recently pushed President George W. Bush to announce a plan to freeze interest rates for up to five years for some homeowners who purchased homes with high-risk adjustable rate mortgages (ARMs) that are scheduled to be "reset" at higher rates, in many cases, by hundreds of dollars a month.
The Republican candidates for president generally supported the Bush plan but were reluctant to call for further regulations to protect borrowers...."Wall Street has made billions and now they're hardly paying anything at all" for their role in the sub-prime crisis.
Bush, who once touted his administration's goal as creating an "ownership society," may now go down in history as the president on whose watch ownership declined. The nation's homeownership rate has fallen during the last two years and will plummet further next year. Moreover, Bush's unwillingness to take bold steps to regulate lenders, brokers, and investors will guarantee that the next president will inherit a much bigger mortgage mess.
To many Americans, the crisis seems too complex to comprehend. To understand it, we need to know: What is the problem? Who benefited? Who got hurt? Who is to blame? Who should we help? What should be done? Although the immediate cause is the widespread use of sub-prime mortgages,
the root cause is a decades old failure of government to adequately regulate the banking industry. What Is Sub-Prime Lending? Sub-prime lending is a fancy financial term for high-interest loans to people who would otherwise be considered too risky for a conventional loan.
These include middle-class families who have accumulated too much debt and low-income working families who want to buy a home in the inflated housing market. To cover their risk, lenders charge such borrowers higher-than-conventional interest rates. Or they make "adjustable rate" loans, which offer low initial interest rates that jump sharply after a few years. Only a decade ago, sub-prime loans were rare. But starting in the mid-1990s, sub-prime lending began surging; these loans comprised 8.6 percent of all mortgages in 2001, soaring to 20.1 percent by 2006. Since 2004, more than 90 percent of the sub-prime mortgages came with exploding adjustable rates.
With interest rates low, housing prices on a steady rise, and practically no government regulation, mortgage finance companies devised high-interest, high-fee schemes to entice families to take out loans that traditional savings banks would not make. Many of the lenders were legitimate operations providing a market for credit-risky people.
But there also were huge corporations, such as Household Finance, that sought extraordinary profits through unsavory means, called predatory loans. Not subject to government regulation, they bent the rules, lowering normal banking standards.
Mortgage brokers, the street hustlers of the lending world, often used mail solicitations and ads that shouted, "Bad Credit? No Problem!" "Zero Percent Down Payment!" to find people who were closed out of homeownership, or homeowners who could be talked into refinancing. They seduced millions of people into signing on the dotted line.
Although sub-prime lending has been concentrated in minority and low-income urban areas, it has spread to the middle-class suburbs. The sub-prime lenders didn't hold on to these loans. Instead, they sold them -- and the risk -- to investment banks and investors who considered these high interest rate, sub-prime loans a goldmine. By 2007, the sub-prime business had become a $1.5 trillion global market for investors seeking high returns.....
Who Benefited and Who Got Hurt?
Mortgage brokers, who occupy an unregulated niche of the lending world, made a commission for every borrower they handed over to a mortgage lender. These brokers are like the drug dealers on the street corner. They are the smallest link in a lending chain that includes some of the largest and most respectable Wall Street firms.
Large mortgage finance companies and banks made big bucks on sub-prime loans. Last year, 10 lenders -- Countywide, New Century, Option One, Fremont, Washington Mutual, First Franklin, RFC, Lehman Brothers, WMC Mortgage, and Ameriquest -- accounted for 59 percent of all sub-prime loans, totaling $284 billion. Wall Street investment firms set up special investment units, bought the sub-prime mortgages from the lenders, bundled them into "mortgage-backed securities," and for a fat fee sold them to wealthy investors around the world. According to The New York Times, China's second-largest bank, Bank of China Ltd, held almost $9.7 billion of securities backed by U.S. sub-prime loans. These investors, who bought the collateralized securities, were happy as long as they got paid their higher interest on the bonds or other investments.
With the bottom falling out of the sub-prime market, more than 80 mortgage companies went under in the past six months. Major Wall Street firms took billion-dollar losses as the crisis ripped into foreign money markets, from London to Shanghai. Lehman Brothers underwrote $51.8 billion in securities backed by sub-prime loans in 2006 alone; as of September, 20 percent of those loans were in default, the Times reported. Similarly, about
one-fifth of the sub-prime loans packaged by Morgan Stanley, Barclays, Merrill Lynch, Bear Stearns, Goldman Sachs, Deutsche Bank, Credit Suisse, RBS, Countrywide, JP Morgan, and Citigroup are 60 or more days delinquent, in foreclosure, or involve homes that have already been repossessed. The executives and officers of some mortgage finance companies cashed out before the market crashed. The poster boy is Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender. He made more than $270 million in profits selling stocks and options from 2004 to the beginning of 2007. And the three founders of New Century Financial, the second largest sub-prime lender, together realized $40 million in stock-sale profits between 2004 and 2006. Paul Krugman reported in The New York Times that last year the chief executives of Merrill-Lynch and Citigroup were paid $48 million and $25.6 million, respectively.
The hardest hit are the innocent borrowers of sub-prime loans. Many of them are working- and middle-class families who fell victim to the country's economic squeeze, a hardship not of their own doing but a symptom of the Bush years. They faced layoffs, stagnant wages, and rising costs of home heating, gasoline, utilities, food, and child care. For those without health insurance, one serious medical problem wiped out their savings.
At a time when soaring housing prices were out of whack with the rest of the economy, sub-prime loans were the only way they could purchase a home. But when they could no longer keep up their mortgage payments, they had no safety net. They began skipping their monthly mortgage payments, especially after the adjustable-rate mortgages kicked in with higher interest rates, as high as a 30 percent spike for some borrowers.....
Those who deserve our greatest sympathy are the victims of predatory lending, a segment of the sub-prime market that involves deceptive practices by lenders, as well as unconscionable high fees and interest rates, sometimes running well over 22 percent. Predatory lenders range from sleazy operators in the financial netherworld to mainstream financial institutions like Household Finance. These lenders typically have salespeople who hound vulnerable families for months, soliciting and encouraging them to take out a loan to buy a house or refinance. Borrowers are charged hidden high fees, labeled with confusing terms like "discount points," suggesting that the fees will lower the interest rates, which they don't.
Predatory loans sometimes involve a conspiracy between loan agents and unscrupulous home-improvement contractors, as well as appraisers who inflate the value of a house so that families will borrow more than the houses are really worth. Predatory mortgages often include last-minute, hidden second mortgages. Using bait-and-switch tactics, predatory lenders tout low interest rates in ads targeting the elderly and residents of low-income, working-class, and minority neighborhoods, without explaining the actual interest rates or that adjustable-rate mortgages mean that the rates will increase.
Borrowers are enticed with deals that require them to pay little or nothing down. The unscrupulous lenders approve borrowers for loans even if they've recently been bankrupt or don't have sufficient income to keep up the payments. These lenders don't document an applicant's ability to pay back a loan. They often just accept the borrower's word about his income and expenses. "You could be dead and get a loan," a mortgage broker told Holden Lewis of Bankrate.com, a leading Web source for financial rate information.
Predatory lenders turn lending logic on its head. Instead of cautiously making loans to people who can repay them, they get their money by lending to people who are unable to repay.
The loans are structured to guarantee failure. Predatory lenders get borrowers to agree to an adjustable-rate mortgage without explaining how it works, including the big bump in rates with a few years after taking out the loan. Borrowers suckered by predatory lenders often wind up having a monthly mortgage payment that is more than half their income. A predatory loan is often for more than the value of the house. The victims of predatory loans frequently don't realize they've been snookered until they're about to lose their homes. Not all sub-prime borrowers are innocent victims. Some were speculators themselves, seeking to profit from the real estate housing bubble, and had their eyes wide open. They expected to rent their houses or quickly "flip" them to another buyer in a rising housing market. Others were simply living dangerously above their means, taking on too much debt and occupying houses that, by any reasonable standard, they couldn't really afford.
These borrowers should live with the consequences of their behavior, not be rewarded with any help. Where Do We Go from Here?
What should government do to address this crisis?
Public officials need to distinguish legitimate sub-prime lenders from the scam artists who engage in predatory lending. ...
Government needs to help the victims of predatory lenders who are at risk of losing their homes, but it must also adopt preventative measures to stop the crisis from getting worse and prevent it from happening again. Congress should enact legislation to protect victims of predatory loans from foreclosure. The victims should have a right to a nonprofit loan counselor or lawyer who can help them renegotiate the loan or sue banks, including big Wall Street firms, for violations of state and federal consumer protection laws. Indeed, Congress should require lenders to restructure predatory loans and provide more funding to nonprofit groups that help homeowners renegotiate loans.
This is a bailout for failed regulatory oversight. Infectious greed and malfeasance by lending institutions is the overwhelming culprit, not consumer misbehavior."
These activist groups have made some headway, but without a federal mandate they have to rely on protest and other threats to get banks to cooperate. .. Advocates say that the Miller-Sanchez bill could help as many as 600,000 homeowners avoid foreclosure, but the Mortgage Bankers Association is fighting the legislation.
Looking forward, we need the federal government to be a lending-industry watchdog, not a lapdog. Step one is to stop predatory lending...
Congress should simply outlaw adjustable-rate mortgages, which basically ask borrowers to treat their home mortgages like stocks, just like Bush wants to turn Social Security into individual accounts that people can invest, and risk losing their retirement savings.
Congress should also ban private lenders and brokers from issuing sub-prime loans of any kind. Instead, the focus should be on strengthening nonprofit lending institutions to serve the credit needs of high-risk borrowers. Like the old savings-and-loan (S&L) companies, these nonprofit lenders are highly regulated and devoted entirely to helping people purchase homes with transparent, stable loans.
Nonprofit lenders actually do better than their for-profit counterparts.... These NHS borrowers don't have the same mortgage problems as sub-prime borrowers in private sector. In fact, NHS' delinquency rate is only 3.34 percent -- well below the national rate of 14.5 percent for sub-prime loans in the private sector. The same is true for foreclosures. Only one half of one percent of NHS loans went into foreclosure during the second quarter of 2007, one fifth the foreclosure rate (2.45 percent) among private lenders.
NHS succeeds for two reasons. It has an effective mortgage education program carried out by its own loan counselors. It requires every borrower to participate in its counseling program before and after a loan is made. Moreover, and importantly, NHS makes no adjustable interest rates loans.
And It All Started with Deregulation There was a time, not too long ago, when Washington did regulate banks. The Depression triggered the creation of government bank regulations and agencies, such as the Federal Deposit Insurance Corporation, the Federal Home Loan Bank System, Homeowners Loan Corporation, Fannie Mae, and the Federal Housing Administration, to protect consumers and expand homeownership. After World War II, until the late 1970s, the system work. The savings-and-loan industry was highly regulated by the federal government, with a mission to take people's deposits and then provide loans for the sole purpose of helping people buy homes to live in. Washington insured those loans through the FDIC, provided mortgage discounts through FHA and the Veterans Administration, created a secondary mortgage market to guarantee a steady flow of capital, and required S&Ls to make predictable 30-year fixed loans. The result was a steady increase in homeownership and few foreclosures.
In the 1970s, when community groups discovered that lenders and the FHA were engaged in systematic racial discrimination against minority consumers and neighborhoods -- a practice called "redlining" -- they mobilized and got Congress, led by Wisconsin Senator William Proxmire, to adopt the Community Reinvestment Act and the Home Mortgage Disclosure Act, which together have significantly reduced racial disparities in lending.
But by the early 1980s, the lending industry used its political clout to push back against government regulation. In 1980, Congress adopted the Depository Institutions Deregulatory and Monetary Control Act, which eliminated interest-rate caps and made sub-prime lending more feasible for lenders. The S&Ls balked at constraints on their ability to compete with conventional banks engaged in commercial lending. They got Congress -- Democrats and Republicans alike -- to change the rules, allowing S&Ls to begin a decade-long orgy of real estate speculation, mismanagement, and fraud.
The poster child for this era was Charles Keating, who used his political connections and donations to turn a small Arizona S&L into a major real estate speculator, snaring five Senators (the so-called "Keating Five," including John McCain) into his web of corruption. The stable neighborhood S&L soon became a thing of the past.
Banks, insurance companies, credit card firms and other money-lenders were now part of a giant "financial services" industry, while Washington walked away from its responsibility to protect consumers with rules, regulations, and enforcement. Meanwhile, starting with Reagan, the federal government slashed funding for low-income housing, and allowed the FHA, once a key player helping working-class families purchase a home, to drift into irrelevancy.
Into this vacuum stepped banks, mortgage lenders, and scam artists, looking for ways to make big profits from consumers desperate for the American Dream of homeownership. They invented new "loan products" that put borrowers at risk. Thus was born the sub-prime market. At the heart of the crisis are the conservative free market ideologists whose views increasingly influenced American politics since the 1980s, and who still dominate the Bush administration. They believe that government is always the problem, never the solution, and that regulation of private business is always bad. Lenders and brokers who fell outside of federal regulations made most of the sub-prime and predatory loans. Those who profited handsomely from the sub-prime market and predatory lending, the mortgage bankers and brokers, are working overtime to protect their profits by lobbying in state capitals and in Washington, DC to keep government off their backs. The banking industry, of course, has repeatedly warned that any restrictions on their behavior will close needy people out of the home-buying market.
