Who's Fault is this Financial Mess? Everybody's! -- Part 1

A Moron's Guide to the U.S. Financial Crisis

The current financial mess on Wall Street is everyone's fault:

• the people who took out loans they can't afford
• the banks who tool advantage of the deregulated environment
• the politicians who forced banks to make loans to people who should not have qualified
• the voters who kept putting these political nit-wits back in office

The cause of the problem is quite simple, if you stand far enough away.

The Root Cause

In the 1990's and 2000's especially, there was a move from Washington D.C. to increase home ownership in lower-income and minority neighborhoods.

A good instinct on the surface. Many studies -- and common sense -- have shown that home owners take better care of their residences than renters, and home-owners are more concerned about their neighborhood and city. Stability is good for any community.

However, to meet this lofty goal, the federal government forced banks and mortgage companies (Sec 807.a.1) to grant mortgages that the lenders would normally have denied. The feds required lenders to give money to people who could not afford the mortgage, and to ignore an applicant's lack of credit history or worthiness.

One piece of evidence is this 1992 set of guidelines from the Federal Reserve Bank in Boston. The Boston Fed "encouraged" lenders to ignore the typical standards applied when reviewing mortgage applications, and in fact should give "special consideration" to lower income applicants:

Lenders should:

• Ignore higher debt obligations, because "lower-income households are accustomed to allocating a larger percentage of their incomde to rent (p. 13)." And stated that the secondary market (read: Freddie Mac and Fannie Mae) is willing to allow borrowers to commit more than 36% of their income to mortgage.
• Allow charitable gift and government grants to cover down payments (p 14). Standard practice disallows the use of gifts as down payment.
  
• Disregard lack of credit history (p 14). A borrower's complete lack of credit history "should not been seen as a negative factor," because of cultural differences. Some cultures discourage borrowing, preferring to "pay-as-you-go." If a person pays their $200 phone bill, he should have no problem paying the $2,000 mortgage.
• View credit counseling as equal to credit history (p 15). Participation in credit counseling means a borrower has the "ability to manage their debts." Taking a class on paying debts is the same a actually paying them.
• Evalutate properties based on their "potential" value, not current market appeal (p 15). A bad house in a bad neighborhood should be judged the same as a nice house in a nice neighborhood, as long as someone thinks the bad neighborhood could get better.
• Ignore an applicant's unstable work history (p 14/15). Just because someone hasn't stayed in a job very long does not mean that he can't keep a job.
• Accept temporary sources of income (p 15). For lower-income applicants, temporary income should be accepted, such as "overtime," "welfare payments," and "unemployment benefits." Someone who is receiving 30-weeks of unemployment should be given a 30-year mortgage.
• Don't take No as an answer. When it comes to appraisals and primary mortgage insurance, the lender should find another source, particularly appraisers or insurers "experienced...in minority and lower-income neighborhoods. (p. 22)" Why stop at 2, just keep looking until you find an appraiser that will give you the answer you want: Yes!
  

Among the initiaves, this one from the Clinton administration, would have allowed people to take money from their 401K account without penalty to make a down payment.

So, if I am reading this right, the Federal Reserve Bank of Boston wanted lenders to grant mortgages to people with no credit history, no job history, too much debt, and cannot make any down-payment on their own so he can buy a house that has no market appeal and is in a neighborhood that might be improved in the future. For the borrower, his first foray into the world of credit is a 30-year mortgage that he, by definition, does not need to be able to afford.

Gee. I wonder why this didn't work?