Economic Diffusion Works

The more things change, the more they stay the same- Alphonse Karr

I’ve been writing and/or speaking about the need for major mortgage reform and the industry’s pending demise for well over 3 years.   There’s really little left for me to say or bitch about.  Most of all that was wrong with the industry has been eradicated.  Really?  Really.

Jay Thompson wrote a post awhile back about some of President Elect Barack (Barry) Obama’s proposed policy changes for, about and around the real estate and mortgage industries.  Apart from writing a resourceful article, Jay made the insightful statement:

There are some fundamental laws of economics that will lead to a correction of the mess we’re in.

I couldn’t agree more…Case in point.

Mortgage Industry (c)1998:

• FHA underwritten loans were the primary mortgage source for first time home buyers and borrowers who had less than perfect or limited credit.
• Fannie Mae and Freddie Mac maintained the bulk of the rest of the mortgage market.
• A borrower needed good credit and at least a 3%-5% down payment (or equity) to secure a mortgage.  Better credit and/or more money down (or real equity) yielded better terms.
• Borrowers had to prove they had a job and income sufficient enough to ::wait for it:: MAKE THE PAYMENTS.

The overall industry was manageable enough in size to effectively counter against greed and other grievous practices.

(c)2000 – 2007

• Wall Street begins mass commoditization of Mortgage Backed Securities, literally creating a new market that overtakes Fannie, Freddie and FHA as the largest loan class sectors of the mortgage industry.
• No Income, No Asset, No Job mortgage programs…Free Money!…becomes the rage of the housing industry’s.
• There is next to NO regulation and a once stable industry is lit with the fire of open market volitility.

2008 going forward…see: Mortgage Industry (c)1998.

As I commented on Jay’s post:

The irony of it all is that the crap that’s hitting the fan right now (’toxic’ mortgage backed securities) is what kept the economy rolling a few years ago…we’re blessed and cursed with short term memories.

Many people danced with the devil and now he’s hung them out to dry…

I think President Elect Obama’s plans are admirable and should soften the blow for many homeowners but the market will eventually, innately shake itself out…100% NINJA loans and the lenders who provided the pitchforks that everyone stuck themselves with are already gone…now its time to clean up the mess from one epic party with one epic hangover.

For what it’s worth, I’m of the opinion that blame ought to be shared pretty evenly for the ‘mortgage mess’ between bank, broker and consumer.

Everyone from the top down was proliferating the ‘American Dream of Home Ownership’ and using your home like an ATM machine was almost as common as using an ATM machine. Most consumers simply wanted to know one thing…how much home they could afford or cash could they take out right there, right then…all other rhyme or reason be damned.

During the housing boom the rest of the economy was sucking sh*t through a straw much like it is today.  Without Wall Street creating these now ‘toxic mortgage assets’ we were likely headed into a similar economic situation that we are faced with today.

If consumers didn’t have access to all the new debt (or wealth as it used to be referred to) that the housing boom provided, would we have already gone through what we’re facing today?  Maybe things wouldn’t be this bad as the housing bubble *pop* has exacerbated the situation..?  In any case, the mortgage industry moved back from ‘crazy’ to sensible.

As an aside, the recent ramblings regarding the Fed possibly buying down mortgage rates into the 4.5% range makes for nice press, yet the underwriting requirements to qualify for such rates and programs are such that a relatively small % of homeowners, prospective and/or existing, will actually qualify.

The 720 credit score, 80% LTV, full income documentable borrower isn’t the demographic in economic peril, on the verge of losing their home.

Give them cake, watch them eat, then vomit…

Many Americans are ‘anti-government’, we like to claim we’re a country of Capitalist’s preferring to keep Big Brother and his Socialist agendas separated from our daily lives as much as possible, until the sh*t hits the fan.  Then, hypocritically enough, we blame our government for not protecting or helping us out enough.

Let me rhetorically ask: ‘What if ‘Government’ stepped into the middle of the housing boom and proposed to start regulating lending like they are now retroactively implementing?  Its plausible to believe that this could have helped millions of homeowners avert the pains of foreclosure and resulting economic stress.  However, the money consumers were borrowing and spending during the housing boom fueled our economy to historic highs.  So let me fare to answer stated question: Effing Anarchy.

Can you imagine the Administration and the policy makers of that time standing up and telling Wall Street as well as the American public that they were going to implement new legislation that effectively didn’t allow many ‘qualified’ borrowers to qualify anymore?  Heh.

Now that were in the midst of an economic ‘crisis’ and the welfare line is growing with entire industries changing their cries from ‘Stay out!’ to ‘Bailout!’.

The solution resides in letting our economic woes naturally diffuse toward equilibrium instead of throwing good money after bad and catalyzing a cataclysm.  There is no quick and fast solution and knee jerk reactions end up kicking someone in the crotch.  Let our collective minds work through problems instead of trying for the quick fix. There are no magic bullets.  We’re transitioning from fast and loose to slower and tighter, from historic economic highs into a historic economic correction.

We need sound thoughtful guidance from progressive, ethical and transparent leaders from government, public and private sectors to steer us out of this current state of uber-volatility.  80% of the people in this country cannot handle marginal volatility much less the category 5 economic hurricane that’s come ashore.

Here’s hoping the government and private sectors don’t create more temporary paper-remedies that have had disastrous effects like the toxic MBS free money giveaway party of 2002-2007.  Not capitulating to the bloated auto industry’s request for a hand-out without a thoughtful, practical plan in place…possibly even forcing them into a Chapter 11 reorganization…is a positive sign-IMO

These are going to be relatively painful times compared to recent history but we will pull through it.  America remains the most innovative country in the world, second to no one, we can think and work our way through these challenging times…we just can’t continue to get high on our own ether or we will pass out.