Predatory Legislators

With millions of homeowners now struggling to repay money they clearly never should have borrowed, our leaders have been righteously wagging fingers at predatory lenders who allegedly enticed innocent borrowers, and the country, into a financial snake pit. While the mortgage industry clearly deserves a good share of the blame, unindicted co-conspirators abound. The ringleaders are still at-large and are, in fact, busy hatching a plan to dwarf the earlier mistakes.

Contrary to the message bouncing off the marble walls of the Capitol, most borrowers in the inflating housing bubble clearly understood the terms of their loans. Most knew that they could not afford their mortgage payments once their teaser rates expired, but enthusiastically jumped into the debt pool anyway believing that guaranteed real estate appreciation, or a quick and profitable sale, would keep them afloat.

Although both lenders and borrowers were acting in their own perceived self-interest, what can we say of our economic policymakers who are expected to protect the good of all? Their actions encouraged the whole sad circus. Were it not for the excessively low interest rates provided by the Fed, the lax lending standards and moral hazards supplied by Congress courtesy of Freddie, Fannie, and the FHA, and the many real estate subsidies built into the tax code, none of these predatory loans would have been possible.

Had lenders exercised better judgment and had borrowers avoided overly burdensome debt loads, both parties would clearly be in better financial positions today. Instead, as borrowers were demanding the credit to fuel their dreams of instant real estate riches, lenders were being ordered to accommodate them.

In past generations, homebuyers were required to save for down payments and postpone their purchases until they could actually afford conventional 30-year fixed mortgages. But in recent years, as home ownership became a matter of public policy, the government accused lenders of discrimination and urged lower standards and easier terms. With government guarantees in place, the mortgage industry was happy to both expand their revenues and promote a better society.

But by denying credit, even if it requires borrowers to forgo something they clearly want, lenders not only provide a valuable service to borrowers, but to society. Given the mess in which we now find ourselves, due to the bad loans made during the real estate bubble, this lesson should have been well learned. Unfortunately it hasn’t, as the same dynamic is now playing out on a much larger scale.

Faced with a prospect of downgrading its lifestyle, the U.S. government is instead borrowing trillions of dollars to artificially inflate our deflating bubble economy. The money is being used to both expand the size of government and finance additional consumer spending. Given our financial position, this is the exact opposite of what we should be doing.

Our global creditors are now making the same mistakes made by subprime mortgage lenders. They are loaning us money that we will never be able to repay. In the process, they are enabling the largest expansion in the size of our government since the New Deal and crippling an economy already suffering from excess consumption.

Although it may sound harsh, it would be far better for all involved if our foreign friends simply cut us off. Since their loans are merely fueling the growth of our government and artificially pumping up consumer spending, their savings will not only be lost but their sacrifice will severely exacerbate our problems as well.

Just as homebuyers did earlier in this decade, the U.S. government will borrow as much money as the world is foolish enough to lend, and it will use those funds to smother the life out of our economy. At this point government is growing like a cancer, feeding mainly off the funds it borrows from abroad. In the process, it is placing a horrific debt burden on its people, committing them to either a lifetime of crippling interest payments or run-away inflation.

There is nothing inherently wrong with foreign lending. If funding were directed toward private business to enable capital investments, the loans would not only benefit lenders, but they would benefit our nation as well. The funds would fortify our industrial base and provide the necessary foundation upon which to rebuild a viable economy.

If foreigners were to cut us off, there would be some immediate pain, but tough love is exactly what we need right now. Forcing Americans to live within their means, particularly the U.S. government, will be just as beneficial to the long-term health of our economy as similar restraint would have been had it been exercised by mortgage lenders. It’s too bad so few of us seem capable of making this connection, or learning anything from the mistakes of the past – even when the ink in the history books has barely dried.

10 Responses to "Predatory Legislators"

  1. Volin   February 20, 2009 at 6:41 pm

    I do have respect for Mr. Schiff although there are number of his views that I do not see eye to eye. When Mr. Schiff asserts that the majority of the home buyers knew exactly what they were getting themselves into, he entirely conceals the fact that there were two people at the signing desk: Lenders (originators or brokers) and borrowers (home buyers). The mortgage industry has never been perceived as a kid going into a candy store, pledging that she would pay for the chocolate bar over the next 6 months as she receives her allowance. Home loans and banking system do not operate on the same spectrum; that’s why there are stringent (or at least it used to be) rules to comply to when a borrowed money exchanges hands.If a car seller offers buyers an outrageous funky loan, which it might initially appear to be too good to be true, a buyer would jump on the chance for the purchase. In addition to the enticement, the seller, assuming he is the one conducting the loan origination himself, knows very well that the buyer would not be able to pay the loan in a near future due to the fashion the contract has been devised. Therefore, it is the seller that with malice and forethought strives to merely make a deal while the buyer, even though partially to blame, sees the opportunity in obtaining a car. Yes, the buyer should have thought about the consequence but the seller, who is responsible to make the final decision base on thoroughly vetting the buyer’s credential for necessary qualification, is the one that knows for certain the loan deal would go down the sink or at least aware of indications that raise the flag on the condition of contract. Which brings us to the first paragraph where I mentioned the laws and regulations in place, in the realm of sane loan industry, should not promote such environment that would allow for realization of bad loan practices.It’s also sophomoric for one to put the blame solely on Freddie and Fannie when 85% of the sub-prime loans were originated by the “private” sector which took advantage of these two semi-government backed companies when they got tangled in the accounting problems. It is important to note that the regulatory laws dictated to Freddie and Fannie, by law, protected them from getting in these markets. At least not until it wasn’t when they got into accounting issues and overwhelmed by the Wall Street backed mortgage industry and not-so-wise deregulatory measures in which that they found themselves competing with the private sector and eventually coerced them to delve in such shady markets. Moreover, the main issue with these two companies, although holding a staggering $5 trillion of mortgages, was that they were “thinly” capitalized. Any squeeze on their operation and the companies would have been in trouble which eventually what took them down but not because they mingle with the rest of the industry by producing sub-prime loans as extensive as the rest of the private industry.I found it disingenuous when Mr. Schiff forms a pattern that the borrowers were “demanding” the creditors to go beyond their sound operation to provide them with loans and had the lenders at the gun point, “ordered to accommodate them.” It is patently false and ridiculous to assert that the lenders somehow were pressured to make bad loans knowing the borrowers were risky and would default when the good times are over. If an underage teenager “demand” a car, would the authorities and parents have to oblige to his “order” so he can go for a joy riding? Hint: NO. The policing of these markets was just too loose and encouraged many to look beyond an easy profit of 2 or 3 years in the near future while trumping the common sense.And of course, the distortion of information wouldn’t be complete without bashing CRA by pointing fingers at revisions made to the “discriminatory” laws instituted by CRA. The reform on CRA and CRA itself only promotes a strengthening measures on an anti-redlining and it does not say, in any shape or form, that the lender “must” sporadically go around and hand out loans to folks that cannot afford them. Such baseless accusation is being billowed by the loud talking heads of the right and it is disheartening to see Mr. Schiff has bought into such chicanery.

  2. Matt   February 20, 2009 at 8:52 pm

    I agree with Volin.Understand this simple fact: In an ultra-low rate environment, where prices are appreciating rapidily, and mortgaes are being securitized, ALL THAT MATTERS IS THAT THE BORROWER NOT DEFAULT IN 90 days (or 6 Months). The goal was to make a loan that did not default in that period of time, it cannot be put back to the originator.As a mortgage salesman, you only lose your a fee if a borrower defaults within 3 or 6 months. What do you do to maximize your returns? The best way to do that — to put people in houses that would not default in 90 days — was the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. By then, it was no longer your problem.Can you grasp what a monumental change this was? Instead of making sure that borrowers could pay back ALL OF THE 30 YEAR FIXED MORTGAGE, you only had to find people who could afford the teaser rate for a a few months. THIS WAS AN ENORMOUS AND UNPRECEDENTED SHIFT IN LENDING.This is the key to the housing boom and bust, and ultimately underlies the entire credit freeze. And, it would not have been possible without the Greenspan ultra-low rates, which made the teaser portion (the “2” of the 2/28) of these mortgages so attractive.Source: http://bigpicture.typepad.com/comments/2008/10/goal-increase-m.html

  3. mgentner71@yahoo.com   February 21, 2009 at 3:58 am

    Whether we like it or not, we seem to be in a time of balancing-out accounts (and closing some.) And I DO like Peter Schiff’sbasic theme here: that we will naturally prefer less lending andborrowing in the short term at least while things are beingaccounted for. It really seems obvious now that he’s writtena little here about it, and it also seems that many agree.SO I am not sure what all the grumbling from the “yeah, but..”usuals has to offer. The title hooked me in too- good one Mr.Schiff :)

  4. Guest   February 21, 2009 at 4:25 am

    The U.S. Government and FRB are not transparent and have resorted to creating bubbles that explode and have transferred production and wealth to Asia.Those in charge are saddling the U.S. with 13 trilliondollars of debt and counting. These people are morally bankrupt and are dragging down the world with them. Yes the U.S. has become a Predator of its own people.

  5. Guest   February 21, 2009 at 5:12 am

    It seems each of these posts adress some of the problems that got us here.Could we sum it up by saying that every player – lenders, borrowers, and regulators was willing to risk the future for quick gain? Can we agree that our whole society has recently been driven by short term thinking? Lenders wanted fees even as they booked questionable loans and sold them. Borrowers stretched and sometimes lied to get money so they could gamble on real estate. Regulators under intense political pressure (often bipartisan) overlooked huge fundamental credit risks and relied on untested models to predict risks. We were all complicit. Now we will all suffer. Who complained when their house went up in value so fast?

  6. Guest   February 21, 2009 at 7:06 am

    No one should forget the role of the private FRB in this mess and the collusion that caused it.The FRB knows that who controls the printing of a currency is effectively in control of that society.The FRB is a true PREDATOR.

  7. Guest   February 21, 2009 at 7:06 am

    No one should forget the role of the private FRB in this mess and the collusion that caused it.The FRB knows that who controls the printing of a currency is effectively in control of that society.The FRB is a true PREDATOR.

  8. devils advocate   February 21, 2009 at 9:17 am

    THAT’S WHATPeter Schiff – along with Jimmy Rogersw and Marc Faber and the “gold bugs” are fundamentally correct but SO WHAT…the world is running along and surviving NO MATTER WHATok, so gold went up during the Great Depression, the Weimar Republic, and now – SO WHATthe wheels will keep spinning and if the financial system comes to a screeching halt – SO WHATthe wheels will be oiled by more US paper $$$$$$$THAT’S WHAT

  9. Anonymous   February 22, 2009 at 5:09 am

    I , too put the majority of the blame on the bankers. The role of the banker is too manage risk and they abdicated that responsibility recklessly.Borrowers are guilty as well, particularly those who committed fraud by falsifying income.

  10. Anonymous   February 22, 2009 at 9:33 am

    Two words for this disaster: Al Franken