HermannM

Why Good Mortgages Go Bad

In Finance, Lifestyle on March 21, 2009 at 11:27 pm

There was a time when the banker who approved a loan was the banker who opened the account, handled deposits, accepted the payments and issued a handshake when the debt was retired. Those days have long gone.  With the advent of teller-less transactions and electronic transfers, the movement of money has become so fast that nobody can afford the time to get to know you anymore. The bank on Wall Street whose tagline was “The right relationship is everything” was a liar.  That statement couldn’t be farther from the truth, because there are no relationships in the financial sector anymore.  Everything is a transaction.  And this, my fellow Americans, is at the heart of our financial problems today.

Specialization of duties was supposed to improve efficiency in the banking sector. But instead all it did was add complexity to a system that was already hard to understand. The pace of financial innovation was too fast for even the smartest and brightest of accountants and financiers.  Sufficient checks and balances were never put into place and this vacuum of mutual accountability is what allowed the barons of greed to corrupt America’s once proud banking infrastructure.  I do not envy the challenges faced by Tim Geithner; he carries a heavy load.

There are so many moving parts that comprise a loan transaction.  While no one entity was responsible for creating the house of cards, an attitude of indifference at all levels was absolutely responsible for tipping it over.  In any mortgage transaction, there are even more moving parts and the risk of system collapse was greater which each successful transaction.  Everybody was making money and no one thought to ‘slow things the fuck down’ because they assumed some other entity would do it instead.

America’s financial collapse was a creation of our own undoing.  While it is easy to point to Bernie Madoff or AIG for the failures of the system, their trepasses don’t scratch the surface of what is at the heart of the problem.  We are the problem. We, you and me, can at times be our own worst enemies. Until we take a good look at our contribution in creating the monster, there won’t be anything Secretary Geithner, President Obama, Sarah Palin or Rush Limbaugh will be able to do to save us from ourselves.  So where shall I start? The following is my list of culprits and the reasons they are in desperate need of an attitude adjustment.

  1. homebuyers, especially the snot-nosed yuppies who want what they want, when the they want it and at any cost.
  2. the friends of homebuyers, who compete socially with their friends and one-up each other, resulting in peer-pressure to buy more house than they can afford.
  3. mummy and deddy, who spoil their kids with down payments for houses instead of teaching them the value of savings, trade-offs and deferred gratification.
  4. real estate brokers, who create a false sense of scarcity and urgency to drive up the values of homes and ultimately increase commissions.
  5. renovation contractors, who underbid to get a job then underdeliver until the promise of more payment is made from the proceeds of an unnecessary second loan.
  6. mortgage brokers, who steer borrowers into loan products, some of which may be unsuitable.
  7. home appraisers, whose payments are made by the mortgage brokers and lenders and whose compensation volume is tied to successful loan placements.
  8. boiler room telemarketers, who targeted the elderly with 30 year cash-back loans as a supplement to an underfunded retirement and social security.
  9. local governments, who don’t investigate local corruption because of the additional tax income generated by a corrupt system.
  10. lenders, who sell approved loans into a secondary market and bare little, if any, of the risk for the ones that go bad.
  11. subprime lenders, who compete with traditional lenders for traditional mortgage clients by offering ‘too good to be true’ teaser deals which end up being just that.
  12. moneycenter banks, who set up single-purpose corporate entities that package the loans into a new financial instrument that gets resold into a tertiary market.
  13. financial engineers, who bundle the new financial instruments with cute ‘tricks’ like credit enhancement, over-collateralization and tranches as a portable hedge against risk.
  14. insurance companies, who sell a credit enhancement product but don’t set up internal controls to limit exposures, monitor performance of the product or hedge the impact on the rest of the organization
  15. re-insurance companies, who use one financial ‘trick’ to hedge the risk of another financial ‘trick’ not realizing that, as a result of their being 4x removed from the original transaction, they’ve inadvertently doubled or tripled down on the same risk.
  16. rating agencies, whose investment-banker-wannabe underpaid salaried staff can’t tell the difference between a true credit enhancement and ‘lipstick on a pig’
  17. television networks, who canceled classics like One Day at a Time, Good Times, Alice & M*A*S*H in favor of aspirational shows like Dallas & Dynasty, effectively shaming the ‘have-nots’ for how little they actually have.
  18. financial regulators, underpaid, understaffed, underfunded beaurocrats who are  underinformed as to the newest financial innovations on wall street
  19. legislative overseers, who are as financially illiterate as homebuyers
  20. legislative aids, who spend less time on policy and governance issues (despite Ivy League political science degrees) and more time on raising funds and getting their boss re-elected so they don’t have to go into the private sector and ‘get a real job.’
  21. hedge fund managers, who think their Harvard & Wharton MBAs render them invincible so they start their own firms and lure investors by promising a higher return than is statistically possible, ceteris paribus.
  22. Robin Leach, whose Lifestyles of the Rich & Famous showed the ‘haves’ in America how little they actually have.
  23. hedge fund investors, who aren’t satisfied with the consistent 8% returns of the equity markets yet miraculously expect to achieve higher returns without higher risk.
  24. financial media, who are journalists at heart but eventually succumb to the market’s incessant demand for entertainment over information.
  25. lifestyle media, who stimulate demand for house and home products by encouraging a sense of entitlement while understating the responsibilities of homeownership with programs like ‘Extreme Home Makeover’ and ‘Design on a Dime.’
  26. real estate speculators, who played a game of hot potato by entering into ‘no-money-down, interest-only, balloon payment’ exotic (read toxic) loans but mistimed the market, abandoned the property, left the banks holding the bag and then pointed the finger at government-sponsored working class homeownership programs when the crisis was made public.
  27. people, who believe everything they see and hear, then act on what they believe; all without applying a scintilla of common sense or asking someone who knows better.
  28. Other _____________________________________

I can’t stress it enough. America’s financial collapse was a creation of our own undoing.  While it is easy to point to Bernie Madoff or AIG for the failures of the system, their trepasses don’t scratch the surface of what is at the heart of the problem.  We are the problem. We, you and me, can at times be our own worst enemies. Until we take a good look at our contribution in creating the monster, there won’t be anything Secretary Geithner, President Obama, Sarah Palin or Rush Limbaugh will be able to do to save us from ourselves.

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  1. Great post! Glad to say I neither bought into the American “dream” (henceforth called the American Nightmare) nor convinced others to do so. When everyone was running around buying up expensive houses like they were bottle of water and when people tried to convince me that I should “own real estate because without it you’re nothing”. I chose… nothing. I didn’t want the hastles, I didn’t want the hype and, as someone who enjoys complete freedom to come and go as I please, I didn’t want the burden of the responsibility of managing a home (which research shows DOES NOT make us happier). Yet, none of this matters per se for (while I am not suffering personal financial loss at the hands of a dopey mortgage or demonic credit cards) I AM living here as an American and will have to suffer along with the idiots who brought down the freaking economy with their inherited dumbness and greed. Thanks.

  2. […] sharp and cutting) is always wrapped in a well-researched, thoughtful essay. His very first post is Why Good Mortgages Goes Bad (warning: he spares no one (dead or alive) in this analysis of what really led to America’s […]

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