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The Mortgage Crisis

The Problem:

The current mortgage default crisis was precipitated by the deceptions of those who issued the loans.  They issued loans which they knew would fail.  The issuers escaped liability as they packaged those loans into financial instruments which they sold to other institutions and ultimately their investors.  The loan issuers have made things worse by tricking the borrowers into adjustable rate mortgages when, in many cases, they thought they were getting fixed rates.  The adjustable rates made the financial instruments appear more lucrative to the buying institutions.  In actuality, the primary effect of these adjustable rates was to ensure loan failure.

Unfortunately, we are experiencing only the first round of the mortgage crisis.  In this round, loans which should not have been issued in the first place are failing.  In the next round, loans will fail because of the changing circumstances of the borrowers.  As the wages of workers are decreased (halved in the case of Delphi workers) to meet competition with starvation wages in Mexico and China, many more people will be forced to default.

With all of these defaults, there are many empty houses and house values are rapidly declining.    The investors recognize that these mortgage financial instruments are a bad investment and aren't buying them.  Now, the original lenders are only issuing very sound loans.  For the borrower, the option of selling, rather than defaulting, is rare.

The Solution:

  1. Most of the answer must come from the financial industry.  Laws may be necessary to give the solutions they implement some legal standing and to prevent future abuses.
  2. The investors will not be well served by foreclosing on millions of homes which they cannot sell.  Each loan on a house which cannot be sold will represent a total loss.  The financial institutions involved must lower interest rates and even the loan amount to keep as many of the loans as possible from defaulting.
  3. The loan issuers did not observe due diligence in issuing the bad loans and misrepresented the safety of those loans to the investors.  The loan buying institution should seek damages from the loan issuers. 

Future Policy:

  1. Standard loan agreements should be written by the industry and reviewed by citizen advocacy groups to assure fairness.  Those published agreements should be used for all mortgage loans.  Only the loan amount, period, and interest rate should be added.  The loaner must certify that the agreement is a specific approved agreement and that if it in any way differs from the standard agreement, the standard agreement rules.
  2. The loan issuing institution should retain at least a substantial portion of the liability for loan defaults.

Philosophy:

We have become a nation, not of doers, but of paper shufflers and manipulators.  We are being brought down by the "grab the percentage off the top and run" crowd.  That is not just in this crisis but in our industry as a whole where no profit is enough and no sacrifice by the worker is too large.  The gap between the rich and the poor is expanding.  We are rapidly becoming a third world country of failed infrastructure, poor health care, and inferior education.  In the past, industry leaders like Henry Ford cared what effect their actions had on the nation and its people.  Even the people who are being victimized honor the three piece suit and the Lamborghini over overalls and work ethic.  I take solace in imagining these thieves trying to get through the Pearly Gate by writing a check.  But, let's try to solve some of these problems here on earth.  Let's start with a change of attitude and soul.   Read what my father wrote in the late 1950s.