Out of the Credit Mess in 1-2-3: Blame, Blame, Blame

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Includes: BAC, CFC
by: Andrew Horowitz

This week an interesting article from the Wall Street Journal appeared that is just one in a broad series looking to once again cast blame for the economic mess we are now experiencing. The author cites sources that explain how the mortgage brokers (among others) are the new villains in the ongoing credit market chaos. Unfortunately, that is only partly true. It seems that the brokers/scapegoats have been tagged as the ones that are originating mortgages with a high level of default. While that may have occurred, please forgive me, but who ultimately sets the approval standards for those loans?

The blame game continues and until someone stops the madness and bellies up with a plan that makes sense, we are going to continue down a path that leads to financial ruin. It is the same-ole’ political battle that now has Bank of America playing the knight in dull, but shining amour. They stepped in with a helping hand in August and now they are left with the responsibility of cleaning up the rest of the mess.

On this week’s Meet The Press, Senator Clinton proposed a plan to freeze mortgage increases for Clinton and Russertthe next five years. In the interview with Tim Russert, she said, “…I want to freeze interest rates for five years, and I want to have a $30 billion package that will go in and try to stabilize the housing market and stabilize communities that are going to be affected by that.” To that, Mr Russert asked, “But, Senator, many people opted for those cheaper mortgages. They could’ve had a fixed mortgage at a higher rate, but they opted for a cheaper one. Should they not bear some responsibility?” Then with a gentle motion and a touch of pixie dust, Senator Clinton solved the entire problem with this exceptional plan; “…I think all of us should. But I’d say three things about that. The bankers, the mortgage lenders, the brokers, all bear a lot of the responsibility, because many of the practices that were followed were just downright predatory and fraudulent. There is no doubt about that. I started talking about this last March. A lot of people got into subprime loans who frankly could’ve been in a conventional fixed-rate loan. They were basically told that this was a better opportunity for them. Should they take responsibility? Yes, but look at what will happen if we continue this cascade of foreclosures. Housing values are down. They’re down 6 percent. That’s over $1.3 trillion in housing values in the last year. So everybody bears some responsibility. I went to Wall Street last month to tell Wall Street they had to be part of the solution because they sure had been part of the problem.”

It seems that the politicians and the lack of any meaningful oversight had nothing to do with it. It is unbelievable how much breath is expended with meaningless chatter. Now, more than ever, the politicians are grabbing on to the misfortune of the U.S. economy in an effort to win over the chads this coming November.

As far as the brokers are concerned, they will have to take their fair share of the blame for sure, though the truth is that the banks are not innocent. What ever happened to the belief that big banking was the financial stewards for America. For decades they were considered the trusted sources for all things related to money and finance. Perhaps we should look back at their recent history and reconsider a few of those ideals:
1) 1970’s - Deregulation creates new environment for industry. Now known as the decade with the largest bank failures in history.
2) 1980’s - Savings and Loan Crisis - Caused by the improper lending practices by banks for real estate related investments.
3) 1990’s - Banks enter brokerage business and lobby broker scandal within major banks shows to be ripping-off clients.
4) 2000’s - Subprime Fiasco (I just can’t use the phrase “Subprime Mess” again.)

Perhaps, instead of looking to bring more consolidation to this industry as is going to occur with the Bank of Countrywide merger, we should look at instituting some type of massive regulation for this industry. While the last thing that is often deemed beneficial is any degree of governmental association with business, it is apparent that this sector is in sore need of a babysitter. Time and time again we have watched as situations are needed to be cleaned up - only to find something else that these trusted stewards foul up.

Is it possible that we have instilled to much confidence in the system? Maybe we have been too quick to bail them out. The chart below illustrates just how problematic the most recent financial disaster is and brings up a few new concerns. With a majority of the past loans originated from BOA and CFC, there will be the potential for a credit paralysis if the new BOA lending team decides to tighten the screws for borrowers. Since it is clear that they have a habit of blaming everyone else for their sins, they will continue to play the game know as : BLEED THE PUBLIC. They have been shown that it is only play money anyway. In the end, they are well aware that bailouts are abound. Don’t fool yourself into thinking that they will they care about the end user who is contractually bound to a mortgage contract.

Just recently, I had the opportunity to speak with a friend, who in his hayday, had a company with dozens of loan officers who were all riding high on the refinance and real estate boom. In a nutshell, he explained how the irresponsibility of buyers and investors was the main reason for the current predicament of the real estate market. I asked him whether or not he felt that the lenders were at all responsible for their part. He explained that they were simply filling a need.

His blatant disregard for the obvious is appalling. Needless to say that now those that filled the need in the past are themselves looking for someone to fill their need for gainful employment. This is because my friend’s company recently went from 40 employees down to 5. Don’t feel bad though. It is certain that as soon as those horrible borrowers have repented, they will once again be looking for credit and he will hire most of the loan officers back.

“Blame and Yee shall be innocent”… Anonymous Death Row Inmate

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Disclosure: Horowitz & Company clients hold positions in CFC and BAC