Trapped, Tricked, Packaged

Ah, Mark Krikorian, you lovable godawful braindead goober! What caused the financial meltdown? Political Correctness.

I have no way of judging whether the Wall Street bailout is a necessary evil or an impending disaster. But we're in this mess, ultimately, because our political elites thought it was good social policy to encourage banks to give mortgages to uncreditworthy people, resulting in what Sailer months ago called the "Diversity Recession" (if this doesn't work, make that the Diversity Depression). In other words, if poor people in general, or blacks or Hispanics in particular, were less likely to be approved for a mortgage, the only possible reason was racism or classism or whatever. Thus "creditworthiness" was an illegitimate, dead-white-male concept, like middleclassness.

It was also a fear of being unfairly called racist that made investment banks buy up all those bad loans and try to transmute them into investment gold by inventing ingenious new forms of financial alchemy. And what else but a terror of not seeming "PC" could possibly explain "the creation of a parallel depository banking system (a.k.a. the money market mutual fund industry) without any sort of insurance fund (either public or private) and only cursory regulation"? The obvious motivation there was to avoid looking "biased" against minorities.

Who, in the final analysis, is more responsible for the current crisis -- Wall Street or Oprah Winfrey? The answer, my friends, could not be more clear.

Wall Street loved African-Americans not wisely, but too well. I only hope impoverished minority groups will have the simple decency to do the right thing and apologize to all the corporate tycoons they have so cruelly betrayed. For shame!

(Sometimes you have to hand it to Greater Wingnuttia -- there really is nothing they won't say.)

Comments

[Jemand von Niemand]

So -- the collapse of a financial system dominated in an overwhelming majority by older, paunchy white males... is due to Harriet Tubman, Frederick Douglass; W.E.B. DuBois; The 369th U.S. Infantry Regiment (1917-1919); the 92nd and 93rd U.S. Infantry divisions (1942-1945); Dr. Martin Luther King, Jr.; Dick Gregory, Bill Cosby; Miles Davis; Aretha Franklin; Richard Pryor; "Shaft"; Richie Havens; Sanford and Son; The Jeffersons; BET; Oprah; Senator Barack Obama, and The Williams sisters.

Right.

[Jay_B]

I'll try and remember this the next time I read the article: "GOP tries to reach out for black support" and they just don't understand why blacks hate Republicans.

[Tom Hilton]

Krikorian really helps his credibility by citing a professional racist like Steven Sailer.

[actor212]

What Kricketbrain seems to want to ignore is that policy was instituted THIRTY FUCKING YEARS AGO and banks made money hand over fist on it up until 2006!

[pseudonymous in nc]

Shorter Krikorian: I'll pull that ladder for $120k/year of Scaife wingnut welfare.

[Mark S.]

What actor212 said. This is racist scapegoating on par with the Nazis (fuck Godwin's Law).

[DrDick]

KKKracKKKorian also conveniently ignores the fact that minority borrowers were significantly less likely to default on their loans. Also not mentioned is the fact that 60% of the subprime loans (the majority of defaults) were issued to borrowers who qualified for conventional loans on far better terms. Wall Street greed and predatory lending by overwhelmingly white, professional class men.

[Bitter Scribe]

I used to think that all the payday loan places you see in black and Hispanic neighborhoods---you know, those legal loan sharks who charge 300% interest---were there because they were exploiting people who had few if any other options. But now I know those big mean scary libruls were behind it all.

[NonyNony]

Once again I have to point out - do these guys REALLY think that Wall Street gave out $700 billion dollars plus worth of sub-prime loans to poor minority borrowers?

Really? Are their readers so stupid that they can't make that goddamn connection for themselves?

[Me]

Really? Are their readers so stupid that they can't make that goddamn connection for themselves?

Yes.

[James]

The wingnuts have no idea what they are talking about. The mortgage meltdown did not arise as a result of the 1977 CRA act that ended redlining. It came about because of lending industry deregulation, led by Republicans with a lot of Democratic help. Before 1995, profitable and performing loans were the same. Deregulation of the industry led to fragmentation of the industry which then incentivized all of the people in the mortgage origination-to-sale chain to create profitable as opposed to performing loans. In 1995 the Republicans in control of Congress changed the RESPA anti-kickback rules as they applied to mortgage brokers and allowed lenders to pay brokers what is called a yield spread premium or a par plus payment. In a nutshell, this is a payment made by the lender to the broker if the broker originates a loan that is a higher than par rate. For example if a broker has an "A" rated borrower based on his loan application, and now his FICA/Fair Isaac score, that qualifies for the lender's 6% loan, the lender will pay the broker a premium if the broker can lock and close that "A" borrower into an 8% loan. That 8% loan has more value to the lender because an "A" borrower, who is less likely to default, is paying an interest rate that a "B" borrower would pay - who is more at risk of default. I and several other consumer lawyers around the country argued that this payment was a kickback for the referral of business made illegal under RESPA because the broker does no more work to close the loan at 6% than he does at 8%. The broker is being paid by the lender for the higher than par rate loan. The mortgage industry got Congress to eliminate this anti-kickback rule so that we had to prove the overall compensation was unreasonable - an impossible task because most states allowed lenders to charge up to 10% of the loan amount for his commission. Countrywide saw this as a means to eliminate offices, and the overhead and management issues of having a Countrywide office in every city. Countrywide created a nationwide network of brokers who they would pay yield spread payments for originating loans. Before 1999, Countrywide would get short term money to fund the loans, which had to be "qualifying loans" then turn around and sell them to fannie mae or freddie mac. The broker would qualify the borrower by giving him an adjustable loan with a 1 year discounted teaser rate and qualify the borrower at the lower monthly payment. So, for a simplified example, an "A" borrower goes to a mortgage broker and says "I need a $100,000.00 loan". Since he is an "A" borrower he qualifies for 6%, but the broker would search for the lender who would pay him the highest yield spread, usually Countrywide and tell the borrower all he can get is a 8% loan. At closing Countrywide would draw $100,000.00 on its short term line of credit, and fund the loan paying the broker the yield spread. Countrywide would sell these qualifying loans in the secondary market. It has nothging whatsoever to do with race or ethnicity.

Allowing interstate banking, then Gramm-Leach-Bliley bill that eliminated the wall between investment banks, deposit banks, and insurance companies, with a boost from the parity statute created a non-qualifying pool of money to lend and so allowed Countrywide to take this pool of loans, all mixed in of "A" "B" "C" and "D" grade borrowers and go to someone like Merrill Lynch and say "I have 1,000 loans average $100,000.00 each with an average 10% yield over 30 years with a present value of $125,000.00. I will sell you the loans for $115,000.00." Countrywide would then pay back its credit line and just made $15,000.00 per loan less its yield spread less its costs of money for 1,000 loans, or lets say $10,000.00 per loan which is $10 million. Meanwhile Countrywide kept the servicing rights for these loans which also generated another income stream for Countrywide. Merrill Lynch who before deregulation was prohibited from entering the mortgage business but now was an unregulated lender has an income stream from Countrywide as the servicing agent, then sells the pool of loans to Bank of America (who after buying Countrywide and Merrill Lynch has a vertical monopoly in the mortgage business from Countrywide’s network of brokers, to BOA’s ability to short term fund the broker’s loans, to Countrywide’s mortgage servicing business to Merrill Lynch who would securitize the pool, to BOA who acts as Trustee for the securitized loans), as a non-regulated security ie they in essence sold shares of stock in the pool of mortgages. The rating of these pools of loans was essentially privatized, which meant that a company like Moody's was given the rating task - a job that they never had before. Moody's had no idea how to rate a pool of loans which had a mix of "A" (usually 10%) and "B"-"D" loans, all with greater degrees of risk of default because these borrowers were now paying slightly higher interest rates than they would be expected to pay. What happened in essence was that Moody’s saw that 10% of the pool of loans were "A" borrowers and so rated the entire pool as AAA which was its highest degree of safety. So the pool of in essence junk loans was sold as AAA rated securities to entities like Bank of America, as Trustee for "ABC" asset backed securities. As you can see no one had an incentive to make sure the loans were performing loans. The Broker and Countrywide as originator, and Merrill Lynch and Bank of American only had an incentive to close profitable loans - loans they could sell. They could care less if the loans were performing loans. Everything was "sellable" as long as the pool was sold before too many of the loans started to default. There were no underwriting rules because these "lender's" were unregulated so you started to see non-income qualifying loans i.e. stated income. Many people gave the correct income info to the broker, who then submitted an application to the lender with false income information. These loans were justified because of the values of the properties. The brokers would get friendly appraisers to give a high-ball appraisal then submit the loan package. The appraiser would either give the higher appraisal or he would lose that broker's business. This was the first wave of foreclosures that are going through the courts. These sub-prime loans defaulted because they were based on false income and false appraisals, 1 year discounted teaser rates, and all the borrowers were paying higher interest than they should have paid.

The next wave we will see is when deregulation compounded the problem by allowing the 4 option mortgage. This mortgage allows a borrower to elect to pay on 1 of 4 options each month: 1) ½ of the interest that was due on the loan with the remaining ½ put on the back end of the loan. At the end of a fixed period, usually 3 or 5 years the borrower would have to amortize the full mortgage principal plus back end interest at whatever the rate was; 2) interest only; 3) amortize over 30 years; 4) amortize over 15 years. The Countrywide broker now could qualify a borrower if his income allowed him to pay ½ of the interest. This opened up a whole new category of borrower who could not otherwise qualify for a 30 year amortized loan. The broker would sell this 4 option mortgage to the consumer by telling him "just come back in 3 years or 5 years when the loan adjusts and we will refinance you because the house will go up in value" The broker used the same appraiser to over-appraise the value. Here is an example of how that loan works. A $100,000 10% mortgage would require $10,000 per year interest or about $850.00 per month. The broker would qualify the borrower at $425.00 per month which is ½ of the interest. After 3 years, the $100,000 principal is now $115,300.00 and costs about $1,000.00 per month to fully amortize over 30 years. The borrower's payment more than doubles. These are the loans that we are starting to see come through the foreclosure division in my county now and we will see this wave for a few years.

You have to remember, too, these are amateur borrowers who have maybe 1 or 2 mortgages in their lifetime, relying on professional lenders who are closing 1 or 2 mortgages a week. The borrower usually relies on the lending professional to give good advice because the borrower thinks the broker is working for the borrower when he is not. The Broker is working to maximize his yield spread payment. The incentive for the broker is to close as many loans as he can to maximize his profit. He has no stake in making sure the loan performs as long as he gets paid. If he worked for a bank that kept the loan and he closed too many loans that defaulted he would be fired. Countrywide had an incentive to pay brokers large yield spread premiums and turn around and sell the loans as fast as possible. They did not care if the loan performed, so they closed an eye to the bad underwriting that went on an in fact encouraged its employees to qualify everyone - who cares at Countrywide as long as the loan is sold before it defaults. Merrill Lynch does not care if the loan performs as long as the pool is AAA rated and can be sold. This is why we are where we are. The problem has a simple cure. Regulate the mortgage brokers prohibit yield spread payments, un-fragmentize the industry and enforce proper underwriting guidelines with oversight that has a bite.

[The Oracle]

Think of Government Regulations (as passed by our representatives at whatever level of our democratic form of government) as a Red Light at an intersection.

Traffic lights have Green, Yellow and Red colors. Green for GO, moving traffic flow along, maybe even synchronized to make traffic flow even more smoothly through multiple intersections. Yellow for CAUTION. Red for STOP.

Getting rid of all Red Lights (Regulations), thus leaving only Green Lights at intersections would lead to a whole lot of wrecks...or in the case of the de-regulated Wall Street, a blazing financial wreck and meltdown.

If you've noticed, crooks fleeing from cops in high-speed car chases don't observe Red Lights at intersections. Wrecks and deaths often ensue.

So criminal-minded Reaganite Republians, like former Sen. Phil Gramm of Enron infamy and John McCain, have been pushing for almost thirty years for removing all the Red Lights from financial markets, energy trading centers and even our federal agencies.

Why?

So the corrupt conservative Republicans could give the "Green Light" to all their crony corporatist pals, letting them rob our country for as much as they could rip-off without silly "Red Lights" or government regulations impeding their rush to obscene riches...at the expense, the wreckage of everyone else.

And the Yellow "CAUTION" Light?

Treasury Secretary Paulson, formerly of Goldman Sachs, no doubt saw the Wall Street intersection's traffic light flashing Yellow faster and faster, but blew off the warning signs. (Just like the Bush administration blew off all the pre-9/11 warnings of an imminent right-wing domestic terrorist attack).

Finally, all Green Lights (supposed free-market capitalism) is just as dangerous, therefore, as are all Red Lights, which one sees in one totalitarian dictatorship after another (especially Red Commie dictatorships). A blinking Yellow Light cautions against going to both extremes...which history has shown only leads to disaster and wrecked lives.

Let's do a dissection of the current Wall Street crisis.

George W. Bush declares himself to be the "ownership society" president. He, therefore, pushes for more U.S. citizens, whether financially qualified or not, to own, own, own. Buy a house. Buy something else on credit to put in the house, driving up one's credit card total.

To accomplish this "ownership society" scheme, the Republicans (and Bush) needed to relax the "rules," to turn off as many of the regulatory Red Lights as possible...which they have done over the past eight years to such great success...and devastation.

But what's the real reason behind this "ownership society" scheme?

Well, "owners" tend to be more conservative, especially the owners (and families) of "property" like a home...which must have given some Republican strategist (Karl Rove?) the idea that pumping up the number of "owners" would lead to more people voting Republican.

Besides the normal graft and greed of the Republicans, I believe this "political" calculation was also one of the major reasons for Bush's "ownership society" gambit.

Now all the anti-regulatory mangy Republican chickens have come home to roost...crapping all over the hen house.

[Jemand von Niemand]

Word.