Mortgage Crisis: A Simple Analysis

September 12, 2001 - Recall, if you will, a country, no a world, panicked, not only about terrorism, but about money. We all knew 9-11 would cost a lot. Markets were down, assets destroyed, confidence plummeted. The US government, through the Fed responded by slashing interest rates. Now, I don't pretend to understand global economics well. I only got a "C" in economics because of some crazy bell curve not even my professor seemed to understand. I should have flunked (it was the only class in which I actually slept during a test).
This I do know, however, when interest rates drop, investing goes up. When money is cheaper to borrow, people borrow more.

These low rates coupled with an absurd lack of standards in the lending industry led to the housing boom we saw for several years. We have purchased and re-financed homes several times. Each time, it was clear to us how things really work. Your mortgage broker hires an appraiser, tells the appraiser how much the house needs to be worth, and voila, the appraisal matches that amount. It has been my experience that banks in the past have been far more willing to offer credit than they should have. I know how much of a payment we can afford, yet each time I've met with a loan officer; it is me trying to talk him or her down rather than the other way around.

Why? The banks were making money. Even if a small percentage of folks defaulted, they still made money. But greedy lender failed to see the writing on the wall. This system couldn't go on forever for several reasons. First, people were overextending themselves with home financing they couldn't afford, often using interest only or ARM mortgages. Second, interest rates couldn't stay artificially low forever. Third, the rapid inflation in the housing market was not sustainable. Home prices rose faster than incomes and the bubble had to burst.

OK, all of this is easy to understand. But here's what I find interesting. In the 2004 presidential election, when President Bush had precious little to crow about, someone on his team noticed the housing boom. I recall hearing how under his presidency, home ownership had increased significantly. Suddenly, he was responsible for families, even low income families, realizing part of the American Dream.

Fast forward to 2007. The bottom has now fallen out of the housing market for the above reasons. Now Bush is the first to call on banks and home owners to be personally responsible for their choices. I agree. The lenders were deplorable in their practices and consumers closed their eyes and minds as they signed their lives away for a 3 bedroom rambler with a backyard. But, what complicity does the government or Bush administration have in the current crises?

Are we to believe that no one in the administration knew why home ownership was on the rise? Did these people, some of the smartest in the country, not understand why suddenly even low income families with terrible credit were qualifying for home loans? Nah, I don't buy that.

My bet, were I a betting woman, is more like this. After 9/11, the financial leaders were panicked. Grasping at straws to keep the economy from collapsing, they closed a blind eye to the negligence and fraud of the mortgage industry. They ignored the inevitable outcome for consumers. As the markets swelled, they basked in the temporary glow and touted their "success" to the voters. Then as the unavoidable downturn began, I think they crossed their fingers hoping that the economy had become stable enough in the six years since 9/11 that it could absorb this hit. I think there was also a bit of wishful thinking that maybe, things wouldn't get too awfully bad until 2009, January to be specific. When the problem wouldn't be theirs anymore.

Maybe that's the new American Way. Make a big mess then make sure you leave it for the next guy to clean up.