Braunholtz: Mortgage situation a modern tragedy
Vail, CO Colorado
The plight of poorer (sub prime) homeowners at risk of losing their homes in the sub prime mortgage mess is a modern tragedy. Greed seems to be a weakness in all of us these days.
Now that the whole banking/credit industries house of cards threatens to collapse, there’s lots of talk about helping these homeowners. While I want to believe the banks and this administration have suddenly awakend to the plight of the poor, I cynically can’t believe it. The stimulus package and interest rates cuts – they’ve been squawking for these non-stop – look to help out Wall St. and their investors more than Main St, USA.
That just seems to be the way things go. Whenever capitalism mixes with an ideology that doesn’t believe in oversight, then greed and the fear of being left behind combine to create some giant Ponzi scheme, which all the CEOs leap onto like a herd of lemmings.
These schemes reap huge profits for a well-connected few before collapsing. Often they’re big enough that we end up bailing out the banking industry to prevent a recession.
This gets tiresome. Either we trust in our bureaucracy and government agencies to regulate, rein in and reform industries excesses, or we should allow the boom-and-bust cycle to occur. If we keep bailing out “essential” industries whenever they mismanage themselves to the point of bankruptcy, they’ll never learn. Jobs, bonuses and careers should be lost. With teenagers, it’s called “tough love,” I think.
Sure, it’d be inconvenient for industries to disappear and major recessions to occur, but then we’d learn to save for a rainy day and scrutinize what we agree to a little more. Personally I prefer the bureaucracy option; it’s much easier to live with. To trust energy companies, financial institutions or any impersonal for profit business “to do the right thing” for society as a whole is naïve.
Our bureaucracy makes it possible to trust each other and in the American dream of working hard, fair and bettering yourself. There are rules that prevent some one smarter, smoother and better connected from walking off with your home after a land deal or pension after a buyout. I’m guessing many countries dream of a non-corrupt bureaucracy like ours. A land with out trust looks sort of like Nigeria, which isn’t conducive to a good quality of life.
In the sub-prime collapse no less than five federal agencies followed our President’s philosophy of letting businesses police themselves and did nothing to protect the poor, ignorant and weak, who the original lenders preyed on. In fact, in 2002 several states wanted to enact legislation that would’ve held the secondary investors in the sub-prime mortgage market accountable to how the loans they purchased were sold ” i.e., don’t buy loans from companies that practice predatory lending. This would’ve put a damper on the whole market, probably saving many people from taking out loans they couldn’t afford. It also may have prevented the credit crisis that’s pulling us into a recession. What happened? National banks complained to the treasury and they overrode the states.
Yes, the people who signed on to loans they couldn’t afford have no one to blame but themselves. However, the lenders targeted unsophisticated and weaker members of society in an appalling display of unethical behavior.
A few highlights of their practices: Friendly brokers attracted clients with promises of big cash and lower-than-current payments, they then steered them to the most expensive and risky loans earning themselves a “yield spread premium” bonus for doing this. Hide the details of the loan in 20 pages of legal gibberish so the client wouldn’t understand the realities of an adjustable rate mortgage (payments increase a lot after two years), escrow payments for tax and insurance not included so loan appears cheaper than it is, prepayment penalty so client can’t get out to a better loan when they find out they’ve been had.
Fees on a subprime mortgage typically came in at over 5 percent compared to a normal loans fee of 1 percent. That is a huge difference.
The claims of offering a service and the dream of home ownership don’t mesh with these practices, and the targeting of refinancing loans to inner-city neighborhoods with a high percentage of home ownership. Many of these neighborhoods are now destroyed.
If as a society we sit back and give the strong, smart and powerful the freedom to abuse the weak, then we all deserve the hardships of a recession. Sadly, the poor suffer more in a recession than most.
Perhaps we need to get away from accepting that a part of our economy (the richest in the world) is the creation of a whole set of “sub-prime” people whose struggles we can ignore.
Alan Braunholtz of Vail writes a column for the Daily. Send comments or questions to firstname.lastname@example.org.
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