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December 2008
Index of all
past
Affiliate Corner columns
Decisions of the past have led us to this teetering economic climate
By Tom Gross
Crestline Mortgage
The following is adapted from a speech delivered Oct. 2 to my Toastmaster’s Club. Please note that although I am frustrated by our culture’s apparent inability to hold people in positions of authority and power remotely accountable, mortgages are still available and many current buyers are some of the best examples of the American Dream. That dream, I repeat, is still available.
Unlike the fable of the Boy Who Cried Wolf, our country hasn’t had cries of wolf when there was no wolf – we’ve simply had too few people crying wolf when there were wolves at the helms of financial ships.
Unless you just dropped down from a spaceship, you’re aware that Wachovia and Washington Mutual (WAMU) were purchased just prior to going belly up. AIG, Bear Stearns, Fannie Mae and Freddy Mac have been taken over by the federal government.
We didn’t just get here
Some might say that what we’re experiencing just happened. In my life, I’ve never experienced a period when almost every evening we’re greeted by a different politician saying that if Congress doesn’t bail out the financial markets, the world as we know it will end. I submit for your consideration a concept that I was taught many, many years ago at the U.S. Navy’s Officer Candidate School: If a ship has a collision at sea, no matter who’s at fault, there was a point prior to the collision that it could have been avoided. We didn’t just get where we are – decisions were made by people with authority and power that led us to this day.
In order to present my thoughts in an apolitical manner I will not name names, but I do have the names of the guilty if you want to talk with me later.
Limits faced opposition
Over 15 years ago, in 1992, the first push was made to put some limits on Fannie and Freddie, but the current House Financial Services Committee chairman opposed the efforts. In 1999, Fannie’s chairman and chief executive officer announced the easing of credit requirements on loans previously defined as sub-prime. The New York Times briefly acknowledged an American Enterprise Institute representative who said he felt Fannie was another thrift industry growing up around us. A new president called for increased restraints on Fannie in 2001, but was stopped due to opposition by the minority party.
In 2004, the chairman of the House Government Sponsored Enterprises Subcommittee predicted the collapse of Fannie, but nothing was done due to opposition of the then-minority party.
One of the subcommittee members of the minority party even called the investigation that found illegal activity at Fannie a lynching.
The dysfunctional nature of this litany of missteps can possibly be a focus on results more than means – a focus on increased homeownership rather than ability to make mortgage payments even when times become tough – the use of adjustable rate mortgages with no intent of ever paying the increased payment – the assumption that because of appreciation, no matter what the payment, the buyer will be able to sell the property with a $20-, $30-, $40- or even $50,000 profit just 6 – 12 months later. During the dot-com boom of the 1990s, this was called the Greater Fool Theory – no matter what I pay, a greater fool will come along who will pay more.
Beyond our imagination
I don’t have an immediate answer for our current situation. I do know that most if not all mortgage bankers depend on lines of credit to fund their loans. If lines of credit were to dry up, our economic culture would change into something we probably can’t imagine.
Again, I don’t have an immediate answer, but I do know that while advocates of increased scrutiny of Fannie failed, powerful advocates of the status quo within Congress received contributions from Fannie. Why should a government-sponsored entity be allowed to make political contributions? Maybe, just maybe, if government-sponsored entities weren’t able to make political contributions to their favorite congressman, congresswoman or senator, fewer wolves would be given the helms of financial ships.
When the shepherd called for help because there actually was a wolf prowling around the flock, no one came. He was comforted by an old man who assured him that the villagers would help him find the sheep. He also told the boy that “nobody believes a liar…even when he is telling the truth!” Not all of our leaders are liars, but there was a time when our current financial emergency could have been avoided. The advocates for increased restraints should have been more forceful. The advocates of results rather than control should be given full credit for their misguided, foolish obstreperousness.
Postscript, Nov. 14: Congress chose not to have a formal investigation of Fannie or Freddie buy-outs until after the November election. Fannie announced a $29 billion quarterly loss less than one week after the election. Every advocate of the practices that led to Fannie and Freddie’s demise was either elected to a higher office or re-elected.
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