We have now passed through the point of no return in the housing market. Yes, we have had housing “bubbles” before, but were they ever under the
same circumstances as the one that has busted now?
How we got here:
Well, for starters there was a bill passed in 1933 called the Glass-Steagall Act. In a nutshell to protect from what caused some of the problems of
the “Great Depression” from ever happening again.
An act passed by Congress in 1933 that prohibited commercial banks from collaborating with full-service brokerage firms or participating in
investment banking activities.
The Glass-Steagall Act was enacted during the Great Depression. It protected bank depositors from the additional risks associated with security
transactions. The act was dismantled in 1999.
Fast forward to 1999, when this Act, for all intents and purposes is repealed, after decades of lobbying by Banks, successfully completed by what many
refer to as “Mr. Weill goes to Washington” – that would be Sandy Weill, formerly of CitiGroup, which by the way would never have become
CitiGroup without it .
Following the merger announcement on April 6, 1998, Weill immediately plunges into a public-relations and lobbying campaign for the repeal of
Glass-Steagall and passage of new financial services legislation (what becomes the Financial Services Modernization Act of 1999). One week before the
Citibank-Travelers deal was announced, Congress had shelved its latest effort to repeal Glass-Steagall. Weill cranks up a new effort to revive
Weill and Reed have to act quickly for both business and political reasons. Fears that the necessary regulatory changes would not happen in time had
caused the share prices of both companies to fall. The House Republican leadership indicates that it wants to enact the measure in the current session
of Congress. While the Clinton administration generally supported Glass-Steagall "modernization," but there are concerns that mid-term elections in
the fall could bring in Democrats less sympathetic to changing the laws.
This is just a snippet of the history of the Glass-Steagall Act, for a quick complete history, check the link.
So, a lot of consumer protection flew out the window when Glass-Steagall got repealed, oh but the Banks were sitting pretty. What happened next
appears to be an almost complete and utter breakdown of all regulatory agencies, mortgage products that never should have been created or used, and a
rash of downright fraudulent mortgages allowed.
What of the Regulation? Well, Bernake can’t even seem to keep his head on straight about that to this day.
Bernanke Urges Flexibility in Mortgage Regulation
You really have to read between the lines on this one. The headlines say one thing, but the article almost implies another.
Two months later.
Bernanke to Propose Stricter Mortgage Regulation
Now, let’s consider some of what happened, from my point of view at least. It’s no secret at this point that people were being handed out
sub-prime mortgages they really couldn’t afford.
Wall Street firms are stumbling and markets around the globe are nervous. Economists worry the mortgage bust may lead to a recession.
NOW connects the dots to see the extent to which recklessness, corruption and greed created this subprime mess that now threatens to undermine our
entire economy. David Brancaccio talks to Rep. Keith Ellison, who grew up in North Minneapolis and who has pushed legislation to address the crisis.
He also talks to Ameriquest whistleblower Mark Bomchill, who explains the competitive "boiler room" culture that encouraged brokers to aggressively
push mortgage products they knew clients would be unable to repay.
In addition, there were a rash of fraudulent loans originated that were almost too obvious to miss.
Nancy Olland's application for a mortgage said that she made $6,900 a month. She needed that much income to qualify for her loan. Her pay
stub shows that Olland, 48, a mental health therapist from Cleveland Heights, Ohio, makes $3,286.
She said she had not been asked to document her income. She signed the application without reviewing it and discovered the discrepancy months later.
"I don't know where the information came from," Olland said. "I didn't give it to my mortgage broker. Was it literally fabricated out of thin
New Century Financial, a leading U.S. subprime lender last year, was Olland's lender. Laura Oberhelman, a spokeswoman at New Century, which is based
in Irvine, California, said that the company only approved loan applications "that evidence a borrower's ability to repay the loan." To stem fraud,
she said, New Century uses electronic and manual systems "designed to detect red flags like inflated appraisal values, unusual multiple borrower
activity or rapid loan turnover."
New Century filed for bankruptcy on April 2.
Now we can’t even be clear who misstated the income when you read that one. Was it the borrower (plenty of times it was), or were lenders/brokers
doing some of it too?
Now, let’s discuss what if none of the above ever happened. There would have been a lot less qualified buyers in the market and there is no way the
current housing bubble could have gotten as big as it is, the prices would not have inflated the way they did without this glut of buyers. This alone
would have prevented a lot of the foreclosures we are now seeing, and a lot of innocent people who legitimately bought into the market now being
screwed by a market which has left them upside down on their home purchases (owing more than they are worth).
To make this all worse, banks are in trouble now because of all these worthless loans on their books (which by the way the true impact of is not
apparent till a foreclosure actually occurs, and there are a lot of delinquent loans where no action has been taken yet). There is not a single big
bank (or even little investor for that matter) that is not feeling the impact now (but that is an even a larger story that needs to be addressed
This article was written in 2005, and guess what, if you look for them, you will currently find stories of people who have been living for free (not
paying their mortgages for a year or two now) in million dollar homes.
All of which means the housing boom is being fueled by the willingness of lenders to let borrowers get behind—and stay behind—on their
payments. Homeowners go deeper and deeper in debt and become less and less home "owners," but they get to keep the roof over their heads. It used to
be that only gigantic banks and corporations like Citigroup and Chrysler were regarded as too big to fail. Today, the humble homeowner enjoys that
status as well.
Not like we don’t all know homes ARE being foreclosed around us, but just how are they picking and choosing who to foreclose on and who not to?
This is a tangled web of deceit - permitted, overlooked and ignored when every bank, lender, legislator and regulator knew what was going on and what
the repercussions would be. (You shouldn’t need all the links to that, because if they didn’t know they had to be idiots, it was perfectly
So here we sit with a mess of unfathomable magnitude and step two coming down the pike (bailouts for some, utter and complete devastation for others).
There is nothing in this entire scenario that couldn’t have been prevented.
WHY WASN’T IT?