On the afternoon of August 17, “googling” the words “sub prime mortgage” delivered a list topped by the following words: Country Wide; No Closing Cost Refi – No Junk Fees Ask the Experts. 4 of 5 Approved.
The roller coaster ride in our markets, their effect on wider, global markets; the fears of recession and decline are all being caused, some “experts” tell us, by the crisis of credit confidence brought on by the seriously high levels of default in the “shaky sub prime mortgage market”. In case any one out there still doesn’t know what that means, it means that loans that were risky in the first place are coming home to roost. The people who took them out can’t make their payments; especially now that the come-on rates of 3%, 4% and 5% are being replaced by the realities of “sorry your ARM’s run out and your rate’s now 9.8%”. Then, all of a sudden the massive mortgage lenders need massive infusions of cash to stay alive; the hedge fund managers who thought the massive mortgage lenders were God’s gift to gazillionaires get panicky; the gnomes of Wall Street start to quake and quiver and the NYSE looks more like an out-of-control five year olds’ ping-pong tournament than the economic driving force of the free world.
The Chairman of Country Wide told the Mortgage Lenders Association that their/his industry should not accept any of the blame for the mess. He blames the Fed for rate hikes; he blames speculators for raising property values too high and, incredibly, he blames the housing market for declining! Yet, it’s been his firm and scores like it and almost all the big banks too, who’ve hitched a ride on this gravy train, licked their chops all the way to (pardon the pun) the bank and now that the gain seems to be replaced by pain, they accept no responsibility for their part in the greed feed. Country Wide has been ranked as the most consumer-friendly lender in America. Wonder how it would rank in research about the most “responsible” (in the very best sense of the word)?
It’s wrong to just single out the lenders and I only refer to Country Wide because they are the ones who at the same time suggest they are blameless while telling us all that there’s a huge and dangerous crisis. But it’s not just them. In the same period of unprecedented growth in the real estate and housing market, a huge proportion of unbuilt lots and unoccupied condos and homes across the country are owned by real estate brokers who often make way more money trading up the value of property before selling it, than they do when they finally get their sales commission. There are examples everywhere of entire projects where the developer never got to offer lots to consumers because they were all bought by real estate agents who then put them on the market at significant increases over the developers’ initial price. There’s nothing illegal about that. It’s commonplace and accepted. But when things turn around, too many “for sale” signs on too many houses just not selling at prices that are just not acceptable also become commonplace. It’s a crapshoot. You win some. You lose some. A great deal of the mortgage money owing in the prime and sub prime markets is owed by over-extended real estate brokers and agents who bit off more than they could chew.
Home ownership is one of the grandest things about America. It is so deeply entrenched as a value, that we even get to deduct our mortgage interest from our taxes. That does not happen in too many other countries. The enormous scope of American home ownership means the dollars involved are also enormous and any serious disturbances can be like an earthquake.
So, also on the afternoon of August 17, in an attempt to stop the tsunami, the Fed announced, to the delight of the markets, a 1/2% drop in the rate it charges its institutional borrowers. While this sent the Dow soaring nearly 300 points, it’s important to remember that most banks and major mortgage lending institutions find their money elsewhere and at even lower percentage interest than the new Fed discount rate and so, this was meant more as a reassurance and stimulant, than as any sign that the “crisis” is over.
The essential challenge for us “ordinary” folks, is to ensure that the crisis being caused and being faced by large mortgage lenders and by debtors who “rolled the dice” on way-too-attractive deals with don’t-have-to-think-of-it-today consequences, doesn’t turn into a crisis of confidence that extends its tentacles into every facet of our lives.
Maybe we have to help the real estate industry and the lenders see that they do have to accept some of the blame. Watch TV for the next three nights. See how many of the major players are still offering mortgage refi’s with sales pitches like $100,000 for only $250 per month. Then, read a mortgage interest chart. It’ll show you that’s an interest rate of about 2.5%. If you have the ability to record and rewind, do so and read the small print in the lenders’ ads. It will talk about how there’s either a massive balloon payment due on a date certain; or how this is a no principal reduction, interest only loan, valid for one year after which the rate is prime plus 2.5%. If the very products that helped create this crisis are still being offered, how does that possibly make the situation better?
There’s this bad joke about telling your friend you got a new dog. “What kind” he says. You reply; “It’s a cross between a pit bull and a collie. First it tears your face off; then it runs for help.” If you actively market and push and approve trillions of dollars in come-on loans to people who won’t be able to pay the freight down the line and then have the gall to blame them for defaulting, maybe you don’t come to the American people and ask to be bailed out. Maybe you apologize for your greed and you figure out how you can help people keep their homes while you still make a profit; not just a killing.