When I see something like that, I understand that the person does not really understand what really happened with the mortgage and housing crisis. There were a number of causes for the crash, and some part of that does indeed rest on stupid and irresponsible borrowers, but not all of it does. To say that the only reason people ran into trouble with their mortgages was because they were stupid or irresponsible, is a rewriting of history, at the very least.
There was predatory lending by the mortgage companies. There was irresponsible lending by the mortgage companies. There was fraudulent lending by the mortgage companies. All of that has been proven. The banking company of J.P. Morgan Chase paid $13 billion to settle claims of improper activity in mortgages, while Bank of America is paying almost $10 billion for improper mortgage activity, and they are only two examples, albeit the largest to date.
What did those companies do? First, they issued mortgages without making certain the borrowers had sufficient income to pay. Second, they pushed borrowers into variable rate mortgages, even when they qualified for fixed rate mortgages. Third, they encouraged the borrowers to borrow more than the property was worth, then getting appraisals to ‘validate’ the property value.
At the time, property values were climbing steadily. So the mortgage issuers figured they would either dump the shaky mortgages on someone else, or when they foreclosed the property would be worth more than the mortgage anyhow. What did the mortgage issuer have to lose? The borrower, that is a different story, but they were not concerned about the borrowers as long as they made their profits. Then they insured those mortgages, to make it even harder to lose money on them – look at AIG, etc.
What about the complicity of the borrowers? Didn’t they know they were getting in over their heads? Well, in many cases, they were not getting in over their heads, as the mortgage began. The variable rate mortgages, started with a lower interest rate, and they could quite often make their payments with no problems. The problems came down the road, after a few years, when the initial rates were jacked up by the mortgage holders. At that point, folks began to have trouble continuing to make their payments – even though they had often been just fine previously.
But weren’t those borrowers complicit for taking on variable rate mortgages with the possibility of interest rate increases? Often they were suckered into those mortgages, for the simple reason that those mortgages are more profitable for the lender. Shouldn’t they have known or been more savvy? Perhaps we are blaming the victim. Do we hold people responsible when they are taken in by con artists? Should we tell the victims of Bernie Madoff that they should have known those returns were not reasonable? These people were dealing with major banking and lending organizations when they took out those mortgages. Should the borrowers be held responsible because they were being suckered?
But that is the setup. That is how we got into the problem. That is not the solution, and it is the solution that some people seem to object to. So, what is our solution, and what was being proposed? The protestors seem to think that what was proposed was to take ‘their’ tax money either to make mortgage payments for those folks, or to pay part of the mortgage balance for them. To my knowledge, that was never the proposal – it was certainly not anything I endorsed.
What then should have happened? I say ‘should have’ because it should have happened six years ago before all the damage was done. First, we have to remember that the government spent hundreds of billions of dollars to buy ‘troubled’ mortgages. Your tax dollars were already being spent – to bail out the crooked bankers who contributed to the problem in the first place. When the government bought those mortgages, instead of simply allowing defaults and foreclosures to proceed, they should have intervened. The intervention should have consisted in rewriting many of the shaky mortgages. Issue fixed rate mortgages at more reasonable rates. There should have been write off of penalties and back interest, not necessarily of principle.
I know some folks are saying that we are bailing out irresponsible people. What though do our bankruptcy laws do? They allow people to walk away from most indebtedness. And the fact is that we had already bailed out the irresponsible bankers. Further, I suspect the loss from doing what I recommend is less than the loss on the defaulted mortgages. Think about it – first, you keep a lot more people paying on those mortgages, instead of defaulting. Second, you reduce the number of foreclosed properties.
So how does reducing foreclosures benefit taxpayers? We ended up with something of a snowball effect. As more properties were foreclosed, more properties were put on the market, which pushed down the sales prices and values of those properties. As the values dropped, some folks who might have been able to hang on until they could sell, instead could not sell for enough to cover the mortgages, if they could find buyers at all. It pushed down the value of everybody’s homes.
Where we had an upward spiral in home prices before that, then we had a sharp downward spiral in home prices. By renegotiating the mortgages, we reduce the downward pressure on home prices, benefitting everyone. When home prices collapsed, new home construction collapsed with it. Why build new when so many bargain properties were on the market? As home construction collapsed, it pushed unemployment up, putting more people in financial trouble who would not otherwise have been in trouble.
As more people became unemployed, more homes and mortgages went into default. The downward pressure from the ‘bad’ mortgages created even more bad mortgages. By turning some of those bad mortgages into good mortgages, we cut the losses on the bad mortgages, and reduce unemployment, which means even fewer additional bad mortgages. Folks didn’t want to bail out ‘those’ people, but caused more people to become ‘those’ people who need not ever have been. Further, we ended up with everyone’s home values dropping more than they need to have dropped, and ended up with more foreclosures and unemployed people than we otherwise would have had.
It is economics. We did not pay to bail out ‘those’ people. Instead we paid because we did not bail them out, and paid a lot more than bailing them out would have cost.
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