Friday, September 26, 2008

Housing Crisis

A lot of the crisis comes from what some have dubbed ninja loans. Its all too easy to get into these loans as I recall when I bough my house. I went to several people and and every single one of them said a ARM would be my best option. They twisted my arm to go with an ARM (no pun intended) and almost refused to let me go with a fixed. Most actually said they could "help" me by getting me lower payments by doing an interest only loan. As hard as I had to work at getting a 30yr fixed, I can really see the greed and corruption that caused the banks to acquire so many defaulted loans.

These quotes sums up a lot of what I've been reading.

For those of you who lack the advanced financial expertise necessary to decipher news surrounding the current mess, I’ve interviewed an expert to help us make sense of the headlines.

Q: How did we get into this mess?

A: Two entities created and overseen by Congress, Freddie Mac and Fannie Mae, flooded the mortgage market with cheap, taxpayer-backed money. Plus millions of Americans accepted the crazy idea that it’s okay to finance more house than you can really afford, using 95/5 and even 99/1 mortgages. It was a toxic mix of incompetence and greed.

Q: Doesn’t Wall Street have some culpability here?

A: Didn’t you hear that part about incompetence and greed? Besides, “Wall Street” is an abstraction. It’s kind of like The Force in Star Wars, or . . .

Q: Congressional oversight?

A: Exactly.

Q: What’s the government’s plan to fix this mess?

A: They’re going to buy all the troubled assets, and then create lots of rules that give them more authority to oversee financial institutions.

Q: You mean oversight like the kind that encouraged Freddie Mac and Fannie Mae to back millions of housing equivalents of the Bridge to Nowhere?

A: You got it.

Q: How does the average American get in on this “buying of troubled assets” deal?

A: It’s simple: you either need to be the overpaid CEO of a firm that stupidly overleveraged itself in marginal mortgages and their derivatives, or one of those home speculators who bought three houses in Florida hoping to flip them, and is now claiming to have been misled, abused, etc.

Q: What about those of us who only bought a house we could afford, and have been working diligently to make payments?

A: Well, you’ll have to work a little harder to bail out the rest of us.

Q: It sounds like we’re rewarding the guilty and punishing the innocent.

A: Welcome to Washington.

We shouldn't be surprised. Even the founders knew such corruption was not only possible, but likely. As far back as 1897, we had this warning:

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship. The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependency, from dependency back to bondage. -- Alexander Tyler (A Scottish professor)

And even before that, Thomas Paine said:

If, from the more wretched parts of the old world, we look at those which are in an advanced stage of improvement, we still find the greedy hand of government thrusting itself into every corner and crevice of industry, and grasping the spoil of the multitude. Invention is continually exercised, to furnish new pretenses for revenues and taxation. It watches prosperity as its prey and permits none to escape without tribute. -- Rights of Man, 1791

No comments: