Deep in a Washington Post story on the financial meltdown:
No matter how many times crummy mortgage loans are recombined into clever packages, they’re still crummy.
That is what is at the heart of our financial crisis: banks that should have known better, making massive loans to people who had insufficient verified income, assets, or collateral, to purchase houses and later being surprised to learn these people would not repay them. The repackaging and recombining all grew out of the original decision to approve loans that had little or no chance of being repaid.
There are a lot of reasons why banks started offering these loans, but among them was a bipartisan sense that increasing the number of Americans with a mortgage instead of renting was a national priority. The Washington Monthly, back in 2004:
Both political parties have bought into the idea that a vast, unfettered Fannie and Freddie are good for the country, and have only amplified the GSEs’ “American Dream” rhetoric. Republicans are still invested in the deregulation of Fannie and Freddie they helped engineer in the late 1980s. Democrats, generally the party of more regulation, have historically been Fannie and Freddie’s best friends, and the GSEs’ lush executive suites are packed with former Democratic staffers: Raines was Clinton’s director of the Office of Management and Budget, and his predecessor, James A. Johnson, a longtime aide to Walter Mondale, is now leading John Kerry’s search for a running mate. In the hearings on the Hill, neither Democrats nor Republicans have seemed favorably disposed to strict regulation of Fannie and Freddie, and American Banker has concluded that the GSEs’ lobbying power is strong enough that no regulatory bill will pass without their okay.
(Note Jim Johnson was Obama’s original pick to head up his veep search.) There were also arguments that loan rejection rates and the interest rates charged for mortgages were reflective of institutional racism. Once major financial institutions like Frannie and Freddie started reaching out to the sub-prime market, others didn’t want to get left behind. This generated a boom in housing prices that was swell for homeowners, for sellers, for the real estate industry, for homebuilders – for everybody except first-time home buyers.
In the end, this financial crisis began because not enough people in authority said “no” when members of the general public said they wanted a loan. They went to the banks and effectively asked for something for nothing. And the banks said “sure.”
This crisis’ trigger was people with major responsibilities being unable to deliver that unpopular “no”… raising the question of which leader will be capable of making that hard call in the future.
Which party do you trust to make that unpopular call? Who do you trust to shake their head when members of the public come to Uncle Sam and say, “save us from the consequences of our actions”?
Recall the legislation that Obama endorsed earlier this year:
Representative Barney Frank (D-MA) and Senator Chris Dodd (D-CT), the Chairs of the House and Senate committees, respectively, with jurisdiction over housing, have proposed a plan using the FHA under which lenders that chose to take part would agree to reduce the loan amount and refinance the mortgage at a lower interest rate in return for a cash fee. Refinanced loans would be guaranteed by the FHA, and the lender would have no further credit exposure if the borrower subsequently defaulted. This means that if a refinanced loan later defaulted, the taxpayers would cover any losses.
And remember which candidate’s first response was, “They stopped asking basic questions of their borrowers like “can you afford this home? Can you put a reasonable amount of money down?” Lenders ended up violating the basic rule of banking: don’t lend people money who can’t pay it back.”