In a forum I participate in, someone posted this link, a cartoon strip which attempts to break down the mortgage crisis in terms the typical reader can understand.
I previously linked to a YouTube video of a couple of Englishmen, who were explaining how the whole financial mess can be attributed to the actions of a sleazy mortgage broker offering a subprime mortgage to an uneducated black man in a string vest who was living in a rented shack in Mississippi. The man had not even requested the mortgage to buy the property. He was approached by the salesman as he sat on his porch.
The video followed the steps that followed the loan, as it was converted into an “asset” and repackaged and sold repeatedly, each step acquiring a higher rating as it lost information that would have revealed the actual chance that the money would be paid off by the borrower.
Alas, the video is no more. But to respond, I made the following post:
There are more actors in the story than the comic strip implies, and I see the homebuyer as being seriously mischaracterized.
There are two types of homebuyers that play a role in this crisis: the crass investor, and the dumb homeowner. The crass investor took out dozens of subprime mortgages on properties because he realized he could game the system and make a ton of money on the next sale before the rate rose, thanks to escalating real estate prices. He probably did it with a shell corporation. The dumb homeowner is in fact a typical person who buys a home.
Mortgages are complicated financial documents, and a person who is not experienced in law and finance cannot be expected to fully understand them. That’s why lenders have a legal responsibility to the public to explain them honestly and lend responsibly.
The two have been synthesized into the supposedly typical “crass homeowner”, who deliberately set out to buy a home he knew he could not afford by taking out a mortgage that he planned to walk away from.
Describing homeowners this way makes it easy to claim that there’s equal blame for everybody—My God, those hedge fund operators are victims, too! Those borrowers should never have taken out morgages they didn’t understand!—when in fact it was irresponsible mortgage salesmen and mortgage officers at banks that often lied to people and told them they were getting a mortgage they would be able to afford, while they were often writing subprime mortgages for people who would have qualified for fixed rate mortgages, mortgages that paid lower commissions.
The fact that subprime mortgages even exist is due to failings of government regulation. It goes without saying that Congress was lobbied extensively to pass legislation that would make this all possible. The fact that they were bundled and resold without regard to their value, again, this could not have happened without legislation that permitted it to happen.
The government is spending untold billions of taxpayer dollars to assume the losses of the guys on top. That’s money going directly from people living on the street to the ultra wealthy who sucked the money out of the system while it was good and sent it abroad, or faked paper losses.
A little peek into how morgages used to happen should provide some needed contrast.
Now let’s look at who’s been minding the henhouse for the past generation in Congress: John McCain, who was personally responsible for the Savings and Loan Crisis. But some people never learn.