Mortgage ...
Sub-primal Fear
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As rates increase, homeowners seek refinancing only to find there is none except at rates they cannot afford--lenders have suddenly become far more circumspect in their lending policies. The result: a crisis in credit.
Sub prime loans are typically granted to people with less than perfect credit. The loans have low interest rates for the first two or three year. In some cases, the loans are then adjusted to a higher rate every six months to a year, making the monthly interest payment higher than the borrower may have initially planned for (but certainly should have been aware of). However, if and when willful deception is involved, the matter takes on a different complexion and raises the question of predatory lending the legal implications of which are some what hazy.
Not too long ago, former Fed Chairman Alan Greenspan was virtually canonized for creating a low interest-rate, "easy money" environment. Borrowers with poor credit histories were able to take out the types of exotic mortgage loans that are now defaulting. There were many exotic creations; for example. the "2 and 28," an adjustable mortgage with low interest payments the first two years that explode into larger fees for the next 28. However, while Greenspan's loose (easy) monetary policy was primarily designed to energize the doldrums that then existed in the stock market, his multitudinous rate cuts didn't boost the stock market as much as they fostered a boom in the housing market and inadvertently contributed to the current credit crisis in my view. As demand for housing grew because of favorable mortgage rates, housing construction and values jumped, encouraging people to use their equity in a fiscally profligate way.
These "financial breakthroughs" gave everyone across demographic lines a chance at the American Dream of home ownership. For some speculators, it even gave them multiple dreams, as they bought and sold (flipped) homes within a short period of time. But heck, that just made good sense because homes always increase in value and there will always be willing buyers with ARMs.
Once again, we are reminded of the age-old lesson to wit: what goes up must come down. The lesson is a grim one indeed.
Of course, all this has caught the opportunistic attention of Congress. Senate Banking Committee Chairman Christopher Dodd called the lending practices "unconscionable and deceptive" at a hearing last week to investigate the crisis. As defaults increase, we will increasingly hear denunciations of lenders for having loaned money to people who had no means of paying it back or who had no understanding of the concept of "buyer beware."
But these denunciations suggest a disturbing double standard. For years, lenders were pressured by politicians not to discriminate against those with poor credit history and shaky finances. Now these same spineless politicians are lining up like jackals to accuse lenders of not having discriminated enough and of having made too many risky loans.
The lenders are damned if they do and damned if they don't. Politicians should stop being hypocritical; they should not fix blame, they should help fix the problem by supporting Fed Chairman Ben Bernanke in his efforts to stem this crisis and ensure that it does not derail the economy. They should buffer him from an Administration that seems to be clueless as to the potential magnitude of this crisis.
In my view, an extraordinary policy shift is needed to contain the sub prime-mortgage collapse that is happening in plain sight and Chairman Bernanke may be the one to lead us through such a shift. As it plays out, I am betting he will be a major improvement over Alan Greenspan. Time will tell.
Keywords: Sub prime mortgage crisis,“easy money,” predatory lending, Christopher Dodd, Alan Greenspan, Fed Chairman Ben Bernake
About the Author
Ted Sares
tedsares@adelphia.net
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