February 13, 2008
What got us here?
Sources: (CNBC) House of Cards written and produced by James Jacoby
Shortly after 9-11, then Federal Reserve Board Chairman, Alan Greenspan lowered interest rates to promote American spending. Americans could purchase a home with zero down on a 30-year loan, as long as they had good income. The government encouraged Americans to get out and spend and go on with life as usual after 9-11. Freddie Mac and Fannie Mae set the standards for the home mortgage industry. The requirements at that time made Americans accountable for repayment of home loans. (You had to have good credit, copies of Federal tax returns and proof of income.)
Mid 2002, government and mortgage companies pushed opportunities for Americans to buy homes. Alan Greenspan called for greater mortgage alternatives for more Americans to buy homes. The ARM (adjustable rate mortgage) was born. The ARM loan allowed borrowers to pay a low payment the first 2 years of the loan; the interest not paid was just added to the balance of the loan. In 2 years the payment was set to go up on the loan, but the balance was going up also. (Many of these homes are sitting abandoned now.) Foreclosures are mounting daily.
Money was plentiful during this time in the U.S. and in China. The markets were soaring. A lot of borrowers were making what were called "liar loans".
About this time, Freddie Mac and Fannie Mae got into trouble and were put in the penalty box. (I don't think we were informed of this at the time.) So, other entrepreneurs got the idea that they could make money doing the same service. Orange County California gave rise to several mortgage companies that offered what they now call "sub prime mortgage loans". YOUR CREDIT SCORE COULD BE UNDER 500, YOU COULD USE 'STATED INCOME' WITH NO PROOF OF INCOME AND NO TAX RETURN COPIES. These mortgage companies took your word on your stated income. (Mr. Jacoby shows one immigrant in California making $900. per week that stated on his mortgage loan application he was making $3600. per week and he got a loan on a $540,000. home.)
Suddenly there was a trillion dollar market for "sub prime loans", with no body keeping score and no regulators watching. The loan closing agents were not required to be licensed agents. The lending companies were pulling as many mortgages together as fast as they could, making their closing fees, bundling these loans together and selling them.
On a different front, Wall Street were buying as many of these loans as they could get their hands on and reselling them in packages. These loans were packaged up and sold to the world. (60% were sold to China and to Asia.) There was 600 million dollars profit made in 5 months on these packaged loans. Five million dollars per month of these packaged loans were secured through CITI, Country Wide, and Wells Fargo. "If you had a track record and volume with these mortgages, Wall Street would buy the loans." Banks were buying up, repackaging and selling bad loans.
In 2004, Americans got 900 billion dollars from refinancing their homes. Some of the borrowers paid off credit cards and then recharged them again. Thus refinancing their homes two and three times. The rapidly increasing housing values allowed equity to increase in their homes at an alarming rate. So the equity was always there when they needed to refinance. This flowed more and more money into the retail markets, and the DOW soared.
Someone on Wall Street got the idea of rating these loan packages. This made them more official and more attractive to buyers. The ratings were fudged. A triple A could have easily been a triple B with the scale they were using for the future of the housing market being set so broad. The riskier BBB loan package looked as good as the AAA. They had lowered the requirements for the ratings. The very banks that made the bad loans in the first place paid the rating agencies. The risks for the buyer were hidden.
They named these packaged loans "collateralized debt securities". Bear Sterns packaged these as a "structured product". Another term they used was "residential mortgage backed securities". They pieced these together creating what they dubbed CDO's. This was something to sell that was concocted on Wall Street. Demand increased for these CDO's. Credit restrictions loosened up more because more mortgages were needed to make more profit. This was a 300 billion dollar a year business. U. S. banks were buying mortgages at the rate of 4 billion dollars per month.
Money was flowing even more freely into the economy. People were spending more than ever. In April 2005, 800,000 jobs were in the housing industry. Twenty percent of all new mortgages being made were "sub prime" or bad mortgages.
If you talk to the Security and Exchange Commission, they say they thought the banks were policing themselves. The bank regulators never even tipped off the SEC. This was a trillion dollar business, unregulated, that directly touched every consumer. Some say that with the housing values rising from one and a half to six and a half percent per year…it had to fall. The banks involved did not worry about "risks" management.
In February 2006, things began to come unglued. Some neighborhoods in California begin to look like ghost towns. Banks began closing down. The "sub primes" were coming back to haunt them. Rising delinquencies on home loans were tainting the market. This escalated rapidly. Forty thousand home mortgage jobs closed out. The borrowers were unable to refinance their way out of mortgages they could not afford. Mortgage credit dried up and with no new buyers in the market home prices began to fall. The ARM loans came due.
AAA related investments (all of these bundled up mortgage packages) were junk. The U. S. had sold an assortment of products and they all crashed. Bear Sterns had been structuring products that were blamed and the company collapsed. In January 2006, Alan Greenspan retired and with in one year the age of Euphoria came to an end.
"These were not poor decisions on the part of these people, these were the worst decisions our financial people have ever made. Block by block and bank by bank it all collapsed. "
Banks have lost over a trillion dollars. Banks have turned to the taxpayers to foot the bill.
*The above information was taken from CNBC James Jacoby article House of Cards.
My thoughts: I wish this had been told us in 2006. I wish that in 2008 when it all came out that they government would have said…people we need your help…each of you can send $2.00 to help America if you chose to. I bet we could have solved this by now.
More later on the pending banking bail out package and government STIMULUS BILL.
Lynda Startzman
RAZORBACK FINANCIAL AND INCOME TAX SERVICES, INC.
