Here is a prediction for all my readers: The Subprime Mortgage problem will occur again in 15 - 20 years (maybe sooner but my bet is a bit later). So, why do I say this?
First, we need some time to forget. Just like there was an asset bubble in real estate in the Northeast and Southwest during the '80s and it took us until 2000 to forget it, so this will be forgotten. You would have though people would have applied the internet bubble lessons to real estate but apparently the bubble has to be in the same asset class for people to really apply the lesson. New people will be graduating from fancy business schools talking about "The New Economy" and "New Math" just like in 2000.
Second, it is the cycle of federal regulation. Here is the circle: ---->1)The Fed tightens credit.... 2) The Government "cracks down" on "predatory" lending ..... 3) Result is: Less people can buy homes and usually the underprivileged and minorities suffer greatly as the banks ensure there is no way they will run afoul of the law.........4) Soon, an uproar will start about how the banks are "too tight" with their money and someone will correlate this to race profiling and "red-circling"........ 5) Hearings will be held and "Blue ribbon" commissions will meet to discuss the racist policies of the banks....... 6) The Fed and The Government will "encourage" banks to open up their lending practices and will encourage risk taking so that no one is "left out" of the great American Dream.......7) Banks will open up, crazy loans will start, an asset bubble will be created and POOF.. within 5 years of that it will explode again.
And there you have it. The circle of the mortgage mess will renew! All of this because we did not learn our lesson in the '80s and we are not learning our lesson now. The problem is moral hazard plain and simple.
As is discussed in this article called "Our Subprime Fed" (BTW, written in August of 2007), everyone knew at least one year ago that this was a mess in the making. The Fed, the Government, the underwriters etc. all knew that crazy loans were being made. The article states"
"The crisis was foreseen — for more than a year before the bust,
bankers, analysts, and even regulators knew they had a mess in the
making. And once the mess became clear, it wasn't hard to see what was
wrong. Lending practices in the subprime market were "shoddy and
absurd," said John Makin of the American Enterprise Institute in March
of this year. Lewis Ranieri, former chairman of Salomon Brothers,
echoed those comments in this newspaper when he observed: "We're not
really sure what the guy's income is and . . . we're not sure what the
house is worth. So you can understand why some of us become a little
nervous." Mr. Ranieri helped pioneer the bundling of mortgages into
marketable securities ("securitization"), so he should know!"
I love the line, "We're not
really sure what the guy's income is and . . . we're not sure what the
house is worth. So you can understand why some of us become a little
nervous." as this was common practice. During this time I bought two homes. In both cases the bank told me, "We do not need to see proof of income" huh? Did anyone suspect that when that was going on that there may be some financial instability?
The article goes on to say:
"Today, monetary policy is fostering moral hazard. Monetary policy can
generate moral hazard if it is conducted so as to bail investors out of
risky and otherwise ill-advised financial commitments. If investors
come to expect that the policy will persist, then they will
deliberately take on additional risk without demanding commensurately
higher returns. In effect, they will lend at the risk-free interest
rate on risky projects, or at least at a lower rate than would
otherwise be the case. Too much risky lending and investment will take
place, and capital will be misallocated."
The only way to stop this cycle is to ensure investors (yes, that is you the home owner) NEVER feel like the Government is going to bail them out. We have an opportunity here to let some banks fail and let homeowners be foreclosed on. Sounds cruel? Yes, but it is even more cruel to foster this behavior which is exactly what the new policies are doing. In fact, these policies are not only fostering the behavior, they are GUARANTEEING we will be right back here again at another date.
Yes, Bernake, the Congress and the White House have accomplished one main thing: They have assured another housing bubble 15 - 20 years from now.