Friday, October 3, 2008

Who Did What and How Do We Fix It?


How Did We Get Here?

Boy, I have had a lot of calls lately about what is going on in this country. So, here is an assessment of what actually happened that is not in “legalese” or “mumbo-jumbo” that a normal person could understand without some kind of translator.

Before we talk about what happened, we need to talk about what banks and lenders really care about when making a decision. This will provide a foundation and bring this issue to a point of sensibility.

A bank or lender cares about three basic things:

The borrower’s ability to re-pay. (income)
The borrower’s willingness to repay. (Credit)
Adequate collateral to secure the note. (Appraised value)

That is about it in a nutshell. If you get these in line with underwriting guidelines, you can make the loan.

Now enter The Community Re-Investment Act law that was passed by Congress to make home ownership accessible to lower income families. Although the idea of bringing the American Dream of home ownership to everyone sounds great, the strategy was fatally flawed because rather than bring the dream to lower income families, we needed to bring them to the American Dream.

So, rather than create an environment for people to improve their economic situation by lowering taxes, creating jobs, and building families, Congress chose to take the easy route, once again, to lower standards for those families and people who don’t make much money.
The American way is to become someone great, the American way is to make your life what you want it to be. It is called the American “way” because it is the WAY, as in path, to achieve the American Dream.

So, back to Congress, the Democrat party which needs people to be “victims” in order to flourish, makes it easier via regulation, rather than do the heavy lifting. Taking the easy road is not being progressive, taking the easy road is simply setting people up for future failures.
Writing laws that enable people to improve their lot in life is hard work because it might mean you could be perceived as un-caring and insensitive. I am not saying that minorities are like children, but my 7 year old thinks I am insensitive and un-caring when I require her to do what is right and what is best for her. No matter what she thinks, I owe it to her to do what is best for her, even if it means I am unpopular. I do it because I truly care about her future. I care about her future more than mine.
We, as a country, need to require people to stand tall and actually expect our citizens, all of them, to do what it takes to become more affluent by their own efforts. The Democrat party, by their own laziness, and the endorsement thereof, is systematically destroying minorities and the African American community.

Their action with the CRA was the fulcrum of leveraging the housing market to a point of collapse.

The Community Re-Investment Act was well intentioned to make credit and loans available to geographic areas under served by banks and lenders. In an effort to prevent “red-lining” of areas that a bank might choose not to lend in. This law required banks to have a percentage of their loans made within urban areas which are historically populated by lower income people. But, it was not based on common sense. Legislatively forcing banks to offer home loans to people who really could not be reasonably expected to repay was a mistake.

So, in order to comply with federal law, banks ultimately relaxed their guidelines and Fannie Mae and Freddie Mac designed loan products to fit the borrower. Since you cannot verify what you do not have as far as income goes, stated income loans were made more available, and ”no doc” loans which did not require any proof of income were also created.

Since lower income families are unable to save much money, 100% financing programs were designed that increased loan risk further. The rates had to be held low in order for this scheme to work.

Lastly, since there was a correlation of poor credit with lower income credit requirements were significantly relaxed.

The recipe is almost complete. The law of supply and demand being what it is began to see home prices climb at an unprecedented rate since there is now a tidal wave of new home buyers. Many more buyers than sellers drove home prices higher, and people thought it would remain that way.

We compromised the integrity of the lending business on all three critical components and banks had to go along or face severe penalties and fines. FannieMae and FreddieMac guaranteed these loans and then sold them to investment banks who had YOUR money. Over time these guarantees became worthless once the level of foreclosures began to hit. This was not a wave, it was a Tsunami. It was compounded by the federal government requiring changes to revolving credit accounts (credit card) effectively doubling the minimum payments which is a story in itself.

We also found out that the CEOs of Fannie and Freddie lied about their earnings and solvency, and cooked the books to get paid colossal bonuses. Cronyism and shoddy accounting was the order of the day. These people need to go to jail for a long time, although there is no call for investigations, which should tell you who is really responsible…

Now you know what happened.
Once again, by playing around in the market, lowering standards, and taking the easy way to help minorities and cities, our government has nearly destroyed an entire industry and economy. And might still yet.

But no one is actually taking any responsibility. The Speaker of the House of Representatives recently stated that the Democrats are not responsible. It is easy to point a finger at the chief executive. He is charged with executing and enforcing the laws of the land. George Bush did not cause this problem. Congress caused this problem. There was a historic effort to prevent any regulation and oversight of Fannie and Freddie by the Democrats, yet it is the Democrats screaming and yelling that the Republicans and the Bush Administration did not "regulate" these Government Sponsored Enterprises.
The obvious irony being that it was a regulation that started this whole damn mess.

The lowest common denominator here is the idea that minorities and lower-income families are incapable of achievement. If cities are struggling and banks don’t want to lend there, it is because of the conditions created by local, state and federal government.

Stop electing the people over and over who are not improving things. The only way to inject accountability in to the process is to stop supporting the people who tell you that you cannot achieve, and that you are not part of the dream. We don’t need them to achieve. Lowering the standards is never the solution. The American spirit and liberty is what we need to achieve great things. Liberty means less government.

Now, we must raise the standard for our elected officials, and demand they put the interests of American ahead of their own political agenda. There is not one instance I know of where throwing government money at a social problem fixed it. Not education, not health care, not welfare.

There is only one “way” to get to the American Dream, and that is the American way of personal responsibility and accountability. Drive and dogged determination to accomplish what you think you cannot. While Democrats and Republicans alike have ownership of this problem, the problem is here. We need to go get those that are responsible and hold them to account, but we must work on the solution. The solution has been and always will be “We the People”.