The ‘House of Cards’

I’m sitting in my family room on Thursday evening, watching a two-hour documentary narrated by David Faber of CNBC, looking into the causal factors of the real estate debacle.

It’s anything but a pretty picture: the best analogy that I can think of is that of the relationship between a john and his prostitute. Each knows or should know that what they are doing is not going to work out in the long run. But the financial rewards are just too good: They serve as a deadening sedative.

That may sound crude and it is. But it was just such a perverse relationship between home buyers, mortgage originators, and the securities industry which led to the current financial mess.
One of the tricks turned was the practice of not verifying borrowers’ income. Mortgage originators simply took a person’s word about his/her income. You could lie. Nobody cared. One technique used is called “stated income.” Just tell the loan originator what your income is: If you made $50,000 per year, you could declare your income to be four times that amount. Nobody checked.

It didn’t matter to the person who wrote the loan, because, as one person being interviewed on TV said, “I never made a mortgage that Wall Street wouldn’t buy.” The Street didn’t care either, because these below-500 FICO score mortgages were simply repackaged and sold as very complex collateralized debt obligations to pension funds, hedge funds, and other large investors who didn’t understand what they were buying.

There were also governmental institutions involved in this financial flesh industry – The Federal Reserve Bank, The Senate Finance Committee, and The House Financial Services Committee. Starting in the early 2000’s, the Chairman of the Fed lowered and kept interest rates down too long and did not discourage what he termed “alternative forms” of lending.

Meanwhile, legislators on Capitol Hill encouraged Fannie Mae and Freddie Mac* to lower loan requirements and to push out more of these fractured mortgages. As David Farber said tonight, “Nobody wanted to stop the party.”

Earlier this week, elected officials of the two Congressional committees could be seen on TV, as they raked bankers over the coals for their salaries, bonuses and incentives. It reminded me of a john abusing the source of his income.

Got to go now. I want to concentrate on the balance of the documentary. Thanks for checking in. Take care of yourself. If you are a responsible citizen, you deserve better than you are getting.


*Clarification: (2-13-09, 9:00 p.m.) Fannie and Freddie did not issue loans directly to consumers. Instead, they purchased bundles of mortgages directly from banks, thereby providing more cash to those banks so they could write even more mortgages. That in itself is not necessarily a problem. Serious ethical issues arose when it was reported that executives from Fannie and Freddie put pressure on bank executives to write large numbers of questionable loans, in essence telling the banks, “Don’t worry about those mortgages; just keep writing them, and we will keep purchasing them back from you!”