The Mortgage crisis

Ever fond of escalating every problem into a crisis, the press has declared one with regard to the rapid increase in foreclosures and home loan defaults. The president has weighed in with his remedies and the democrats are lining up their own. For the most part, however, this is a problem for speculators and those who cannot resist the lure of “free money.” More regulation may be needed, but the real crisis is in the attitude of many Americans toward financial responsibility.

For several years the Fed has created more and more cheap money by keeping the key interest rates low and infusing the system with cash whenever a financial burp happened. This was part of a strategy to make the economy appear to be healthy and robust. In fact, it is a strategy that has weakened the economy to the breaking point.
One of the key foundations of a healthy economy is a significant portion of earnings held as savings by the average person and investment in the future by business. Both have been decreasing as a portion of the gross domestic product for many years. The result is that the capital needed for investment and job creation increasingly comes from borrowing and debt, most of which is provided by foreign sources.

What we have become is a nation that is overburdened with debt – businesses are bought out and combined by virtue of heavy indebtedness; individuals are frequently over their heads in credit card debt, and in the past several years as the housing market heated up with mortgage debt they cannot repay as well.

As housing values rose, owners were sold on the idea of taking out the equity through refinancing. The lure was to pay down credit card debt, buy a fancier car, boat, big screen HDTV, etc, with the proceeds which loans carried lower interest. Of course “equity” is not real money, it is only there so long as the market stays high. When, as now, it comes down, that equity is gone and all that remains is the loan.

Many of these homeowners took on adjustable rate loans which had low interest to start but are now beginning to “reset” at significantly higher rates and therefore higher payments. Many borrowers cannot meet these new payments and are going into default. Not only does this threaten the loss of their homes, but in many states, such as California which leads the nation in defaults, this means that the unpaid balance of the loan remains a debt even after the house is foreclosed upon, unlike the original purchase loan.

In addition, in many communities most of the defaults are by “flippers” – those who bought planning to resell as market prices rose. These speculators are one of the biggest factors in raising market prices to astronomical levels.

All those who have borrowed on the “cheap” and especially those speculators who snapped up multiple properties during the boom have priced most Americans out of home ownership, and especially now that loan practices have tightened.

For anyone to consider helping people who bought on speculation or didn’t bother to consider the consequences of financing a home loan beyond their means, government should offer no assistance at all. Those of us who had the fiscal sense to avoid these risky endeavors should not be asked to bail them out. It may be a hard lesson to learn, but it must be learned.

We must change the tendency of many to look at home ownership as an investment opportunity. Home ownership has a deservedly special place in our society and rightly so. But that is based upon the fact that it is a home, not an investment. More and more some fail to see that and regard it is just another way to make money. If that is the “new reality”, then the special tax and legal treatment of home buying should be removed.

What is really needed is the kind of fiscal responsibility by individuals and business that gives a priority for savings. We must learn to defuse the power of our consumption based economy and reign in the lure of quick money. This administration has trumpeted the “investment society” as a cure-all for the economy and its many problems. In fact that philosophy is undermining our strength in ways not terrorist could ever dream of.

If the government thinks it must act, we should encourage saving, business investment and a narrowing of the wealth gap to more traditional levels. The very last thing we should do is reward financial insanity with a bailout.


  1. Carl Nemo

    Thanks for this timely article Phil Hoskins. People need to be protected by the regulators that oversee loan practices. They have a responsiblity to set up the rules for loan management and they have failed us as they have done so in many areas in recent years. They have regulatory oversight responsibilities, but instead have simply been engaged in the oversight of financial crimes being committed with their full knowledge and complicity.

    The real tragedy of this engineered housing debacle is that it’s cause can be projected directly on the Federal Reserve and the U.S. Treasury.

    When the stock market started to rollover as a function of the tech wreck Greenspan et. al. planners or lack thereof had to inflate some other area of the economy in order to prevent the impending slowdown or recession, so they foolishly lowered interest rates to 40 year lows.

    In addition to making money all “too cheap” they also created a speculative housing-based bubble of monstrous proportions. The Fed and the U.S. Treasury have the ability to set up standards for loans as well as margin requirements for the stock and commodities markets, but they did nothing because they and their money-making buddies outside these institutions were going to make a bundle off this newly created housing bubble post tech wreck.

    The stock market was grossly inflated during the upward run of the tech cycle, with it too, finally rolling over and dying like a slug in the noonday sun, wrecking many people’s 401K retirement portfolios. Worldcom, MCI, Qwest, Tyco and a host of other companies being the victims of this stock market period that had little to no traditional oversight and occurring during the Clinton era.

    The next target market for their scams was the U.S. housing market. The tech wreck was estimated at vacuuming 5 trillion bucks out of unwitting investors pockets and this housing debacle will cost around 10 trillion bucks…!

    Our statuatory allowed public debt level is now at 9.7 trillion dollars. Social Security, Medicare, Medcaid and government pensions have an estimated 55 trillion dollar shortfall too.

    Needless to say our country is in deep financial trouble. The U.S. dollar is tanking against all world currencies both major and minor and the U.S. dollar is no longer the world’s reserve currency for all practical purposes since oil producers will now only accept the Euro as payment for their oil. So the 44 percent difference in the value of the USD to the Euro slaps on a currency based premium in addition to the increased price oil.

    Ben Bernanke the Fed Chairman is referred to as “helicopter Ben” in financial circles because his simplistic view of managing an economy and currency market is via inflation. Since the Treasury has the printing presses and the Fed is the mechanism for creating “funny money”, he believes that simply running the presses 24/7/365 and dropping bales of currency via chopper around the country will solve any recessional crisis. So their latest scam is to inflate the U.S. dollar in order to pay off public debt in ever cheaper dollars while keeping interest rates artifically low. Inflation is running at about 10 percent per annum regardless of their prognostications. They no longer track M3 which is the amount of “funny-money” in circulation because it’s grown to such obscene uncontrollable proportions that any savvy investor that understands inflation would run for their lives from even investing in U.S. Treasury debt. The amount of interest paid is linked to “risk” and the interest rates paid by the U.S. Treasury are in no way linked to intelligent risk assessment relative to the possiblity of default or their insidious engineered counterfeitting of too many USD creating hyper-inflation.

    The Treasury may not have an outright default, but they can surely square up their debt with worthless “monopoly money” which is what they are up to now.

    What’s the cure, although painful…?! Taxes need to be raised dramatically and interest rates on the long bond should be sitting nominally at 8 percent or more, consequences to the economy be damned. A deep recession is good once in a while because it reigns in “excess” bigtime and re-establishes fiscal discipline. It will also discourage foreign investors floating our public debt from running for the exits. M3;ie, “funny-money” in circulation needs to be reigned-in bigtime regardless of the so-called liquidity crunch.

    Where will this bad debt scenario end up. As usual the U.S. taxpayer will get stuck with making this good because the lenders will be able to write-off a goodly portion of these bad loans as a Schedule D business expense write-off. Yes Virginia, even their bad loan practices are rewarded with a tax write-off courtesy of Uncle Sam. So I advise Americans to not engage in any “boohoo” theatrics on the part of these poor lenders, but they need to cry for themselves because in the end “we the people” get stuck with paying the freight for their quasi-criminal loan practices all due to lack of oversight from our Federal regulators that had the responsibility to do so.

    Btw this practice of writing down “charge-offs” holds true for retail credit too. The debtor may go through bankruptcy etc., and the lender may not collect their loan, but they will write off these losses against their profits lowering their taxes. If the taxes aren’t collected directly from the U.S. taxpayer via annual tax revenue income, then the shortfall will be borrowed; ie., more public debt against the U.S. citizen. They always win and we always loose…!

    The “full faith and credit” of the United States no longer has any meaning nor validity. Get ready down below is all I can say. America is in harms way with these mattoids at the helm…!

    Carl Nemo **==

  2. Dayahka

    You say that it is the responsibility of individual citizens to be responsible for their money and their financial lives. If we in fact lived in a moral universe and a responsible financial system were in existence, then this moral claim could be accepted. But in fact, we live in a time when the entire government, the regulators, the financial people, the banks, the markets, the corporation–everyone, in short–is financially irresponsible.

    Calling on individuals to be rsponsible is not going to work. This is a systemic problem requiring a systemic solution. When I see the government and the rich guys being responsible, I’ll think about it. Until then, I figure we’re all going to sink or swim together. When I see the government and the rich guys take a beating for their corruption, I’ll then reform (otherwise, forget it).