The housing crisis and mortgage mess may be moving off the front pages, but I still have some big questions.
Many of those questions revolve around how so many smart people -- not the homebuyers, but Wall Streeters -- could have been so dumb. Or how they could've been so blinded by greed to the eventual results of what they were doing. I wonder how they can complain now that they're losing money.
Here are just a few questions I'd love to get answered:
Why Is Alan Greenspan Surprised?
Alan Greenspan has been publicly lamenting the fact that he's being blamed for the mortgage mess. That's the same Greenspan that flooded the credit markets with liquidity and pushed rates down -- the same
chairman who acted as cheerleader for the refinancing boom that fueled both the economy and his legacy of "growth."
In a February 23, 2004, speech to the credit industry, Greenspan actually endorsed adjustable-rate mortgages, noting that while "American homeowners clearly like the certainty of fixed mortgage payments ... American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."
In the same speech he pointed out: "The ability of lending institutions to manage the risks associated with mortgages that have high loan-to-value ratios seems to have improved markedly over the past decade."
No wonder he's surprised!
Where Are the Mortgage Brokers?
If we can't pin the blame on Alan, or the bankers, or the bank regulators, or the investment bankers, or the rating agencies, why can't we go back to the start and find the individual mortgage brokers who initially made the worthless loans?
That's not an idle question. The financial institutions seem quite able to find the initial borrowers when it comes time to collect or foreclose. Surely the banks or servicers have the documentation from the initial loan, noting the name and address of the mortgage broker who hustled around small-town America talking families into these great adjustable-rate deals, collecting $1,000 per deal.
Surely, someone has considered tracking them down on their yachts -- and charging them as individuals with fraud.
(To allay the onslaught of complaints from the mortgage industry about this suggestion, let me make it clear that I'm referring only to those jerks who made loans to people who clearly had no income to make the monthly payments once the initial, low rates wore off. Could we get their bosses -- now departing with big severance checks -- indicted as co-conspirators?)
Where Was the PMI?
Another big question: What happened to PMI -- private mortgage insurance? Lenders used to require this dreaded extra payment, typically one-half of one percent of the amount of the loan, to be paid by borrowers who had less than 20% equity.
This insurance was there to protect the lender from default, not to protect the borrower from loss. It was required for loans sold to
( FNM) and
The Web site of the Federal Reserve Bank of San Francisco still posts as an explanation for PMI -- and, interestingly, an endorsement of low down payments:
"PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3% to 5% down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment."
Since PMI was designed to protect the lenders, surely those insurance policies should mitigate the banks' losses on the loans that went bad. Except that most of those loans didn't have PMI.
In their eagerness to make and securitize loans, the banks devised ways of splitting a large mortgage into separate, smaller "piggyback" loans and packaging them as securities instead of selling them to the housing agencies. Cleverly, these tactics avoided the PMI as a requirement.
And now, those same banks are complaining about losses?
Where Was Congress?
Congress must have been aware of the PMI requirement, because it just voted to make PMI premiums deductible for 2007 through 2010.
That move is designed to help the mortgage industry convince new buyers to pay for insurance to protect their lenders -- albeit a bit late in the game. But the folks up on Capitol Hill haven't investigated the lenders for bypassing PMI in the past with their too-clever subprime loans.
Speaking of Congress, in 1998 it passed the Homeowner's Protection Act, which required that borrowers be notified and allowed to stop paying for PMI when they reached 20% equity.
It was a great name for a bill.
What a shame it didn't actually protect borrowers from unscrupulous brokers and lenders, who were just gearing up for the greatest consumer ripoff in our history.
One Last Question
Property-tax assessors, this one's for you.
You were quick to raise property taxes when home prices were soaring. Will you be equally quick to cut those property taxes in the midst of the huge price drops we've seen?
And that's The Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.