September 19, 2008

What in the world is going on here?

You've seen the headlines, and you heard of the failures and buyouts.
Lehman Brothers, Bear Stearns, Merrill Lynch, AIG; all big names and all
in big trouble. Then those mysterious quasi-government agencies with names
like Freddie and Fannie become wards of the state and you learn that you
and your fellow taxpayers are potentially on the hook for tens of billions
of dollars. At the end of the week Washington Mutual is looking for a
buyer, and you start to wonder about the security of your own bank and
your own savings account. Let's change that ad copy to WaMu -- boo hoo.

Somewhere in the back of your mind you understand that this is all tied
somehow to bad mortgages. If you start reading a bit further to enhance
your understanding you run into terms like Mortgage Backed Securities
(MBS) and credit-default swaps, whatever in the world those are. Read
further and you find out that a combination of falling home prices and
mortgage defaults have put many investment banks and other financial
institutions in deep puddin'. All this reading, all this watching the
talking heads on TV, and you still don't really know what in the world is
going on here.

Fear not. I'm here to help. I know ... I'm just another talk show host;
but the fact is that when the stage was being set for the problems we're
seeing today I was making most of my money as a real estate lawyer ..
closing loans for some of the very institutions that are the tank today.
This rather unique combination - closing lawyer and radio talk show host -
gave me a front row seat to the politicization of mortgage loans that led
us to today's headlines.

OK .. so we all know that a lot of really bad real estate loans were made.
The political class would sure love for us to believe that the blame here
rests squarely on "greedy" (try to define that word) mortgage brokers and
lenders. The truth is that most of the blame rests on political meddling
in the credit decisions of these mortgage lenders.

Twenty years ago the buzz-word in the media was "redlining." Newspapers
across the country were filled with hard-hitting investigative reports
about evil and racist mortgage lenders refusing to make real estate loans
to various minorities and to applicants who lived in lower-income
neighborhoods. There I was closing these loans in the afternoons, and in
the mornings offering a counter-argument on the radio to these absurd
"redlining" claims. Frankly, the claims that evil mortgage lenders were
systematically denying loans to blacks and other minorities were a lot
sexier on the radio than my claims that when credit histories, job
stability, loan-to-value ratios and income levels were considered there
was no evident racial discrimination.

Political correctness won the day. Washington made it clear to banks and
other lending institutions that if they did not do something .. and fast
... to bring more minorities and low-income Americans into the world of
home ownership there would be a heavy price to pay. Congress set up
processes (Research the Community Redevelopment Act) whereby community
activist groups and organizers could effectively stop a bank's efforts to
grow if that bank didn't make loans to unqualified borrowers. Enter, stage
left, the "subprime" mortgage. These lenders knew that a very high
percentage of these loans would turn to garbage - but it was a price that
had to be paid if the bank was to expand and grow. We should note that
among the community groups browbeating banks into making these bad loans
was an outfit called ACORN. There is one certain presidential candidate
that did a lot of community organizing for ACORN. I won't mention his name
so as to avoid politicizing this column.

These garbage loans to unqualified borrowers were then bundled up and
sold. The expectation was that the loans would be eventually paid off when
rising home values led some borrowers to access their equity through
re-financing and others to sell and move on up the ladder. Oops.

Right now this crisis is being sold to the American public by the left as
evidence the failure of the free market and capitalism. Not so. What we're
seeing is the inevitable result of political interference in free market
economics. Acme bank didn't want to loan money to Joe Homebuyer because
Joe had a spotty job history, owed too much money on his credit cards, and
wasn't all that good at making payments on time. The politicians told Acme
Bank to figure out a way to make that loan, because, after all, Joe is a
bona-fide minority-American, or forget about opening that new branch
office on the Southside. The loan was made under politicial pressure; the
loan, with millions like it, failed - and now we are left to enjoy today's
headlines.

So ... why aren't you reading the whole story in the mainstream media?
Come on, are you kidding me? Do you really expect the media to blame this
mess on deadbeat borrowers and political interference in the free market
when it is so easy to put the blame on greedy lenders and evil
capitalists? Remember ... there's an election going on. One candidate is
decidedly anti-capitalist. Do the math.

The Rest of the Meltdown Story is by Neal Boortz

Neal Boortz is a nationally syndicated talk show host and co-author of The
FairTax Book.