I wonder if the mortgage and credit debacle is a clue. Could it reveal one of the reasons poor or working people voted for Bush last time around? I wonder, because for working folks voting Republican is usually and traditionally a vote for Big Business, and therefore against the working man’s self interest.
In writing the following explanation of the current mortgage/credit collapse, I’m explaining it to myself as best I can. As I understand it, this is what happened. Loans, lines of credit and mortgages are all essentially lending money at interest. As long as it is guaranteed that the loans will be paid back, the loan is as good as money — better actually, as it accrues interest. I can therefore sell a loan I originally made to you to my pal Bob, a third party. And if you are good for repayment, the sale is as good as a money transfer and Bob is happy to purchase this promissory note. My pal Bob’s worth will increase in the future as you the debtor repay the loan, and my worth has gone up immediately, as Bob just paid me.
So, in various ways making mortgage/loans is like printing money — easy to do, and secure, if the payback is guaranteed. Prime Loans are so named because the risk of default is very low and repayment a pretty sure bet. The more loans one makes in this scenario the richer you can become. I can take the money Bob paid me for your promissory note and lend the money to someone else — I don’t even need more cash or capital.
One of the reasons this all worked, or seemed to work, is because of the housing and real estate boom. I know that loans — a mortgage for example — use a person’s house as a guarantee. Over the past years, the values of houses and condos were continually rising. So, if a mortgage holder defaulted on a loan, chances are the house, now the property of bank or note holder, would be worth more than the money that had been originally lent out. It paid to have suckers default on their mortgages(!), as long as the value of their assets continued to rise. And of course, no one believed that the rising cost of real estate and the boom in housing could ever end. Easy for me to say this in retrospect.
However, as one can imagine, anything akin to printing money is awfully tempting — maybe even irresistible — to avoid abusing. As assigning loans and mortgages became easier and easier, the temptation arose to give mortgages to people who in all likelihood wouldn’t be able to repay the loans. Subprime lending, which entailed a higher degree of risk, was redefined. Subprime rates are given to borrowers who do not qualify for the best interest rates because of their deficient credit history.
The recipients of such loans are often described as NINJAs — No Income, No Job, No Assets. Others were known as “liars”, because their claims of income and employment were never crosschecked. (I would think the burden for cross checking falls on the institution, no?) It seems that some banks were relaxing the standards for subprime mortgage loan approval, and assigning the loans in a way that increased the likelihood of borrower default or other loss to the bank. (See the Federal Deposit Insurance Corporation’s testimony before the senate for further reading).
According to my business managers, this problem was compounded by the effect of the interest-only loans that everyone was signing up for: “These allowed home-buyers to pay only interest at a very low ‘teaser’ rate for two years, but after the two years, the rates can double and the payment will include principal as well. The result is that the homeowners can't afford the payments, and if they had planned to refinance after two years based on appreciation in the equity of their homes, that hope is gone because home prices have only dropped.”
In their heady euphoria, the institutions charged with monitoring the lenders and wheeler-dealers looked the other way as these iffy deals were made. It was just too tempting, I guess.
So, if one can sell a mortgage from a NINJA or a liar to Bob (without Bob knowing that’s the status of his supposed asset?), then the incentive to make more loans — to everyone — and sell them to Bob and to Bob’s friend is immense. The “value” of these companies and banks making, buying and selling these loans skyrocketed. And, why not? Very few people want to be spoilsports and actually look at whether or not these loans and mortgages have a good change of being repaid. Huge fortunes were being built on air — or on self-deception — like Enron and Tyco a few years ago.
Meanwhile the recipients — the workingmen and women who are barely eking by — suddenly have loan offers thrown at them by the truckload. They feel richer, more flush; things are going well it seems, and their situations improving. It’s not so hard to pay the bills. They worry less and sleep more. A sense of blissfully ignorant well-being pervades the land. The working class and the under- and unemployed assume that the Republicans are somewhat responsible for this new (virtual) wealth — and maybe they were. It would follow that Mr. Joe Average might vote for the administration seemingly responsible for his new sense of well-being. Now, the bills are coming due — the housing market stalled, as I understand it, triggering the collapse of the whole house of cards.