Not as Sub-Prime as You Think

Republicans like to say the Community Reinvestment Act caused all the trouble in the sub-prime mortgage market, as “those people” had to be given mortgages they were never going to be able to pay off. That’s bullshit, but it’s still the kind of thing they like to repeat ad nauseum under their current sole political philosophy, which can be summed up as, “Tell big enough lies often enough and maybe people will believe you.”

I hate to pile on in their hour of darkness—and it doesn’t get much darker than your party chairman feeling he has to apologize to Rush Limbaugh—but it occurred to me over the weekend that I have a sub-prime mortgage. It’s true. Me, Mister Middle-Aged White Guy, didn’t have 20% down when I bought my house three years ago. I was able to come up with 10%, and my credit score was over 700; a fifteen-year second trust loan had to be taken out, at a considerably higher interest rate.

Well, the fifteen-year loan was paid off last week, in almost exactly three years. You are not bailing anyone out on my account, including me. I suspect I am not alone here. There are as many reasons for people to need sub-prime loans as there are sub-prime loans. Some of them should never have been made; that’s on the lenders. The government never told them they had to lend money to people who couldn’t pay it back.

Sub-prime mortgages became a crisis because banks were lined up to issue non-documented loans to people who never should have been considered. Pitching a $400,000 mortgage to a chambermaid making $14,000 a year hardly qualifies as sound business practice. Nor does buying securities consisting of bundles of such loans without performing the due diligence necessary to make sure those were performing loans.

I’m old enough to remember when the lenders kept loan defaults from becoming a problem by not lending unless they were damn sure you could pay it back. Lenders stopped doing that, and started believing in their own Ponzi scheme. That’s where the problem was. Not with the overwhelming majority of borrowers.

And sure as hell not with me. So let’s be careful who we tar with the sub-prime brush.

Misguided

Yesterday Representative Michele Bachman (R-MN) blamed the current financial crisis on the Clinton-era Community Reinvestment Act for pushing “homeownership as a way to open the door for blacks and other minorities to enter the middle class.”

It’s difficult to believe even someone as conservative as Rep. Bachman could believe such a baseless canard, let alone say it for public attribution in this, the Year of Their Lord 2008.

Everyone knows the mortgage crisis was caused by the legalization of gay marriage.

Economics 102

Let’s get this straight: Business, as a class of American society, wants the government to allow the free market to operate. True capitalism is messy, they say, but it works in the end. People will lose their jobs and houses, college educations may have to be skipped, retirements gutted by lost pensions, but the general trend will always be upward if business is left alone to let things shake themselves out. The better and stronger ideas will, eventually, overcome the lesser and weaker.

Until it’s them with their tit in the wringer.

Now we can see what it means for the government to keep its hands off business. It means business is free to do what it wants, take what it wants at whatever expense to the general welfare, then run to the same government it vilifies when its unsustainable greed comes around to treat them as it treated all the others who constituted collateral damage when times were “good.”

It is said the institutional investors can’t afford to lose too much of their investment in Bear Stearns. The stock’s fifty-two week high was $159.36; the buyout is for $2. The stock lost 99% of its value, and we’re going worry that California’s pension fund will go broke over the last one percent?

We can’t afford the ripple effects on the rest of the economy? How about the people who have already lost everything? What are we to tell them? I’ve said before, people who got into mortgages they couldn’t pay don’t deserve much sympathy. How much do the people who wrote them deserve, or, more to the point with Bear Stearns, how much sympathy is due those who based their securities packages on mortgages they never bothered to verify were liquid?

The stockholders – and taxpayers, for that matter – should have recourse to sue the hell out of the Bear Stearns managers responsible for this. They’ve banked their hundred million dollar packages and bonuses. They’ll get by if they’re fired. Still advocate reduced tax rates for fund managers? Why? They appear to have no risk. Take any chances – Bear Stearns’ culture demanded it – and walk away with however much you can carry before the music stops, in case you’re the guy without a chair.

September 11. Iraq. Katrina. Now this. Will January 20, 2009 for Chrissakes hurry up so there will be something left to hand over to the next guy?

The American Dream

The local sports radio station is playing a series of ads promoting the newest get rich quick scheme: foreclosed real estate. There’s a testimonial from a guy who paid $25,000 for a house and sold it a month later for a $65,000 profit. It’s a reasonable assumption he was looking for three more 25 grand specials on his way home from the settlement.

This is great for those who have the cash on hand to pay for these discount houses. Period. No one else. It does not help the economy. The banks took a bath, and the construction industry isn’t going to build something new when you can pick up something almost new – that the original owner worked the bugs out of – for ten cents on the dollar.

It also doesn’t help those who are trying to get into the housing market for the first time, unless they were fortunate enough to have their financing lined up well in advance. More likely they’ll pay the speculator three to five times what he paid for it. His value add? Call me if you think of something.

What we have here is another wedge driving incomes apart. Those with money will make more; those without have probably already lost it through the mortgage payments they were able to make before the ARM went up, or the balloon payment kicked in. No sympathy here for them; they accepted terms they couldn’t afford. That’s life. Others shouldn’t get rich from their misfortune.

This is a golden opportunity for Congress to take action that won’t cost a cent, and will actually do some good. Since housing prices are going to fall anyway, let’s stabilize them and get some new homeowners set up. Impose a confiscatory tax rate on any property bought at a distress sale that is flipped in less than five years. If you bought it to live in, you’re cool. If you bought it solely to get someone else to pay you more for it, then who is it really hurting if you don’t make all that much off of it?

They won’t, though. Know why? Because they have money, and most people figure they will too, someday. They don’t want to lose their opportunity to screw someone else when it’s their turn. It’s what’s made America what it is today.