Sunday, October 09, 2011

Don't blame the poor, poor bankers!

Every so often, I see or hear someone make a comment like this:

You know, the government required that banks make loans to poor people, and that's what lead to the real estate meltdown.

Usually when I hear that, I can instantly guess the person is either a libertarian or terribly uneducated.

The government yes, did require banks offer more loans to lower income houses - but the potential home owners had to fall under the FHA guidelines, which meant that:

* They had to have proof of income (tax returns, pay stubs, etc).
* They had to buy home owners insurance.
* The loan itself had to have mortgage insurance - the idea here is that if the borrower couldn't pay back, then the bank got at least most if not all of their money back.

Pre-2008 or so, FHA loans had about a 5% failure rate - so the risk/reward for banks was pretty even, and the mandatory purchase of insurance meant that they were still making money overall.

However, the real estate meltdown was caused by subprime mortgages. Mortgages that were paid for by creating a second mortgage to make the down payment on the first. Mortgages with variable rates that would suddenly jump. No income proof required mortgages. No insurance required loans.
In other words, not the style of FHA loans that the government requested the banks make to a small number of low income people.
Basically, saying "Well, the government is to blame not the poor poor banks" is nonsense. If the banks had stuck with the FHA style requirement loans that were asked for on a small group of lower class people, nothing would have happened. If those 5% had failed, they would have been insured.

But the banks went insane. They were making toxic, quick turn around, get those homes into mortgages and then sell them up into CDOs to sell on the market fast fast fast ignore the risk someone else will pick up the tab! Now it went from a failure rate (with insurance to protect on it) of 5% under FHA guidelines, to a failure rate of 13, sometimes up to 25% - with no insurance to pick it up. And once those groups started to fall, the ripple effect took out everything else along the way. After all, the banks weren't going to worry about the cost of the subprimes - they were selling them off onto wall street. Wall street didn't bother to check the validity of their CDO investments - that was up to the individuals. The individuals trusted the rating agencies that had been paid to give good ratings. Everyone else was going to pick up the tab for their bad investments.

And that someone turned out to be the American taxpayers when the financial systems made loans that were not required by the government, were not properly vetted, were not properly insured, and now we know also contained fraud (such as how much people were actually making) or without proper title backing.

Blaming the government in this case is like your doctor telling you to take a couple of aspirin, and then you blame him when you turn into a crack addict selling your body to HIV infected gang rapists. It's not accurate as to the scale, as to the process, or as to the unwarranted thoughtless greed that caused the meltdown.

1 comment:

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