Wednesday, April 2, 2008

Sub-prime loan failure explanation for the average person

My cousin was a local bank president before he passed two years ago, and he told me at that time that banks were going to feel the brunt of this long before it actually happened. He was infuriated that everything he learned in college, and from his banking experience was about to be defeated by a President Carter era law. The Community Reinvestment Act of 1977 that claimed to prevent “redlining” (denying mortgages to black borrowers), by pressuring banks to make loans in poor to moderate income neighborhoods. Every time my cousin had to endure government audits and defend his position on the granting of what he considered to be “bad loans” his mood was somber to say the least. As he told me, “I was hired to make good decisions and make money for my investors, and yet the government is making the decisions on a certain number of loans, in trade for a silly rating system instituted by the government. During the Clinton era this act was made even more stringent through his “Welfare Reform Act”. Loyola College economist Thomas DiLorenzo said that, to insure that banks got a high government rating, they had to issue increasingly riskier loans to people who wouldn’t normally have even qualified for a mortgage. This combined with an over-inflated housing market (land and property), has now attributed to the tumbling of the house of cards of “sub-prime” loans. The rules are ridiculous by anyone with a shred of common sense…..lax underwriting standards, no down payment, no verification of income, interest only payment plans, and weak or non existent credit history. The housing bubble has now burst, mortgage lenders are going bankrupt, and thousands of sub-prime borrowers are loosing their homes. Senators Obama and Clinton demand now that the government bail out the borrowers. Although not blaming the Bush administration directly, the insinuation is there. This is normally the answer from the democrats, “let’s throw money at it, and it will go away”. Neither of the democrats has suggested repealing this act to fix the problem. Clinton doesn’t because her husband was part of the problem; Obama doesn’t because he believes not only in the Act but also in “affirmative action”. The problems of our country will never be fixed unless bad laws are repealed. But they should remember when they point a finger at someone that four more are pointing back at them.


Anonymous said...

Well said Al, as usual. If you run for President, I'll vote for you.

Anonymous said...

This is the best explaination I've seen yet on this subject, I always thought it had to do with some special interest rate, but never did I think it had to do with this!Why should our tax money be spent to "fix" this problem?