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Paul Kiesel
Paul Kiesel
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Mortgage Mess: Privatized Profits and Socialized Risk

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As lawmakers make final adjustments and revisions to the House and Senate Housing Bills that will head to President Bush’s desk in the coming weeks, I have to ask: Why is it taking this long to help borrowers/homeowners?

When Bear Stearns and its stock crashed back in March, the Fed was very quick to act in helping JP Morgan Chase acquire and, therefore, rescue the hemorrhaging financial firm. Need $29 billion to complete the transaction? Sure thing. Fannie and Freddie Mac also need to raise capital? How about taking $200 billion of government backed money and investing it in the troubled mortgage market (money that is typically reserved for major loses, therefore, curbing Fannie’s and Freddie’s financial risk).

The Washington Post reports today, that both Fannie and Freddie, with some nudging by the HUD, helped promote risky lending. “Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more ‘affordable’ loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing,” (The Washington Post, 6/10/08).

And what about Bear Stearns — The hubristic lender aka packager of securitized “junk” mortgages (see Repackaging Risk)? A company that knowingly sold B-paper loans to investors that were likely, if not certain, to default. Bear Stearns was rescued in order to keep the company from completely bottoming out and to also entice JP Morgan to step in and acquire its debt, however, with little risk. That’s because most of the risk falls on our government, as it is now financially responsible for 97% of the risk involved in JP Morgan’s acquisition of Bear Stearns. Granted, this transaction helped parry more financial disaster for Wall Street, but again: What about Main Street and its borrowers?

Many banks on Wall Street reap the benefits of socialized risk and, obviously, privatized profits. The Washington Post’s Kathleen Day, who has written on the Savings & Loans scandals, sees similarities between the financial institutions involved inthe S&L fallout and the lenders who helped originate the mortgage crisis, however, she hopes the end results are very different.

Kathleen Day is a Spokeswoman for Center for Responsible Lending

“As a reporter for this newspaper, I covered the savings and loan mess in depth and later wrote a book about it. Watching the current crisis unfold, I see much of the same behavior that led to the “S&L Hell” of two decades ago. … Once again, too many people had access to other people’s money with too little oversight. Once again, the White House, Congress and federal bank regulators failed to police the financial services industry because they mistook deregulation for a system without any reasonable rules. And now as then, our saga is chock-a-block with people and institutions deserving special mention in the Subprime Hall of Slime.”

“Many of the culprits here have been given multibillion bailouts even as they wail against helping the borrowers caught in this mess. I hear much talk about personal responsibility but don’t hear the perpetrators taking any. This is also a case of drinking the Kool-Aid — securitization and derivatives, etc., are complicated financial instruments that when used correctly allow an investor to manage risk. In this case, those high-paid Wall Street lenders and investors misunderstood their own products and came to believe these complex instruments did away with risk –or maybe they knew very well the risks but, because they could pass the buck by selling this stuff, they didn’t care. The losses financial institutions have suffered in some cases can be attributed to their being stuck with this junk because the music stopped before they could unload it.”

“Default Deja Vu,” The Washington Post, 6/2/08

Regardless of how people view the “mortgage mess,” what can’t be ignored is the White House’s inaction over the last eight months in regards to helping borrowers. Bush has threatened Congress with vetoes. Secretary Paulson has been akeen observer of the housing crash, and has even mentioned the need for more oversight and regulation of lenders and Wall Street in general, but he has not brought forth any plans to execute this oversight or mitigate the foreclosure crisis. And now we have an apprehensive House and Senate that is set to present the President with a reasonable housing bill, but is fearful that Bush will kill it due to partisan politics.

Both Democrats and Republicans are realizing that the mortgage/foreclosure crisis is not coming to an end anytime soon (the foreclosure nadir and/or bottoming-out of home prices is predicted to occur somewhere between 12 to 18 months from now), and because of this stark realization a more bi-partisan effort is beginning to take place amongst House and Senate members. The White House needs to take note of this and do SOMETHING to ease the financial pains of many borrowers, as they have for lenders, before they leave office in January and that something needs to happensoon, if not now.