Friday, September 19, 2008
Back in the USSA
We, the U.S. of A. seem to be rapidly heading towards socialism. Our efficient, well-managed, totally ethical government in one week has taken majority ownership of the world's largest insurance conglomerate and the two largest mortgage lenders. We have added billions upon billions of potential debt, and no small measure of real current debt to our burden as taxpayers. Although I understand the reasoning behind all three moves, at a base level I abhor them. Free enterprise involves both reward and loss. It appears now that there is expected to be only reward in any investment. Risk is inherent in all speculation. In a free market (or as free as we historically have ever been) the potential reward was scaled in relationship to the degree of risk. Low return equalled low risk - think U.S. Savings Bonds or a passbook savings account. High return equalled high risk - think "junk bonds" or a venture capitalist providing start up dollars for an inventor. Mortgages have traditionally been a relatively safe haven for investment. Houses historically have risen in value over almost every decade versus the previous one. Therefore, even in default a lender could recoup a delinquent loan by repossession and selling of the property at a higher price than the loan was made for. With some careful vetting of applicants and weeding out those willing to "bite off more than they could chew", this system worked for decades, helping the American economy to become the envy of the world. Somewhere in the 60s bleeding hearts noticed that not every American had a home. The government under Johnson started requiring lenders that wished to participate in government sponsored loan programs to make loans to "marginal"(read - unqualified) applicants in lower income (read - ghetto) areas. These loans defaulted more often and when they did the properties did not/had not appreciated in value as much (if at all) as properties in more affluent areas. This caused lower returns on mortgages in general and more reserve dollars to have to be held by lenders that could have been used to make money (by lending it) for the companies versus just sitting or even worse, being spent to bail out bad loans. Ole Peanut Boy (aka Jimmy Carter) expanded the program even more. Aided by the civil rights "activists", it became mandatory for any lender to have a certain percent of their mortgage portfolio in "sub-prime" (read - bad debt, or loans that should have never been written) loans. Any mortgage writer that did not have enough "low-income" (read - unqualified) loans would be penalized by the government and chastised publically as racist by the civil rights people. The one "good" (read - scary) thing about this program was it started an unprecedented run up in the prices of homes. With prices constantly rising, this covered the inherent problem in the program of excessive defaults by providing a cushion when the houses were foreclosed on. With a ready body of new customers waiting in the wings for "sub-prime" loans, these homes could be rolled over to the next defaulter. This philosophy has continued and grown to a point that Jesse Jackson and his ilk will protest any builder or lender that does not arrange for a proper percentage of their homes to be "sold" (read - given) to people that otherwise would not be able to buy a home. As hard as it is for some to realize, some people are not fit for home ownership! The other problem in this system is the lenders themselves. With the run up in housing prices, they started seeing themselves in a no loose situation. If they could just write enough paper to enough qualified people their exposure to the marginal paper would be mitigated. This led to more and more loans being written for more and more houses. Competition began to get the "good" mortgage customers. Then came the speculators; investors that really did not want to live in the house (or in some cases - multiple houses) they were buying. They just wanted to buy them, hold them long enough for the price to rise and then sell them to the next in line. (a note here - I know the proper people would never read this blog - but to stop this all that has to be done is eliminated the mortgage interest tax deduction on any home not lived in by the tax filer at least 50% of the time. You could also "charge back" the deductions if the home was not held for at least five years or more. This would cause apoplectic gnashing of teeth from the real estate people and multiple home owners, but would have prevented a lot of what we are seeing now.) Lastly we had the "over achievers". These people wanted the latest "McMansion" without regard to the price. Getting a loan that was WAY over their ability to pay was OK as long as the value of the house was "guaranteed" to rise. Then you could refinance later with a higher base value and make it all right. People that should have qualified for a $200,000 loan were being written loans for $400,000 homes. Sometimes short-term mortgage paper was written with an adjustable rate mortgage to make the payments work, knowing the house would be sold or refinanced before the rate climbed to a reasonable level and the owner "blew up" in their ability to make it work. I have no sympathy for a person that took out a loan knowing they could not pay it unless they refinanced later with a more advantageous loan. The problem with these scenarios is analogous to water skiing. As long as the boat is going at a proper speed, a skier can ride the water. If the boat slows or the rope breaks, the skier sinks. Well even though our economy is the most prosperous in the world, sometimes the boat slows or even stops for gas. Our skiers sunk. Bottom line - people that make dumb, unwise, or risky financial decisions should pay when those decisions prove to be wrong. Lenders and politicians that allow the risky behavior should be jailed or penalized severely. Remember - THERE IS NO GOVERNMENT MONEY!! JUST YOUR TAX DOLLARS!! You bailed out the guy with the $500,000 mortgage and the management of AIG! Marx would be proud.