The Lesson Of Greed

While reading about the impending crunch that is going to hit us as a result (in large part) of the subprime mortgage fiasco, I reviewed a newsletter from John Maudlin back in August, The Panic of 2007. In it, John explains how there is plenty of blame to go around, and several parties to share it. One thing he says is this:

But then in 2004 loan practices began to change and had got completely out of hand by 2006. In 2005-6, about 80% of subprime mortgages were adjustable-rate mortgages, or ARMs, also called "exploding ARMs." These loans are so-named because they carry low teaser rates that often reset dramatically higher, increasing the borrower's monthly mortgage payments by 25% or more.

Interesting. Subprime mortgages are given to people who are more likely to have difficulty making the payments. So what do the mortgage brokers do? They push these people toward the loans with low "teaser" interest rates. That way, the broker gets the closing (and the commission) and is out of the picture by the time the rate jumps and the borrower defaults and the bank forecloses.

Another item that caught my eye:

The loan application and review process for 'no-doc' loans was so lax that such loans are referred to as 'liar loans.' In a recent report by Mortgage Asset Research Institute, of the 100 loans surveyed for which borrowers merely stated their incomes on loan documents, IRS documents obtained indicated that 60% (!) of these borrowers overstated their incomes by more than half.

I had no idea that there is such a thing as a "no-doc" loan, or the "stated income" loan. Apparently, these loans allow people to get a mortgage without actually having to verify their income. They simply tell the bank how much they make. I'm sure that these loans were created for a legitimate purpose. The flaw, though, is the part of human nature that causes these to be referred to as "liar loans."

The bottom line is that deregulation and lack of oversight do not work. I understand that it has been a conservative wet-dream since at least the Reagan era to rid the country of all government interference in business, but time and time again, we see that businesses can't be trusted to regulate themselves. The concept of deregulation may look good on paper, but conservatives never seem to account for the one factor that always screws things up: greed.

The subprime catastrophe is the perfect example of the downward spiral of greed. Greenspan held interest rates at unreasonably low levels due to Bush's greed (It masked the failing economy so Bush could be "re"-elected.) Home buyers and speculators started buying more house than they should have, especially once home prices started climbing faster and faster. Banks eased the process of getting a loan because there was a lot of money to be made.

Eventually, of course, the sputtering economy caught up with the housing market and now we're seeing the beginning of the destruction that a lack of regulation and oversight brought to the mortgage industry.