No Bottom Yet for the Housing Market
Why is that? Why it's those pesky old subprime loans that are coming due. Congress is looking at how to deal with the cratering mortgage market because much of the debt is going bad and a good piece of it is going to hit the 401 (k)s of millions of Americans. McClatchy has an excellent description of how our retirement savings ended up with this bad debt and the underlying economic policies (and lack of regulation) that led to this mess. Almost 38% of the loans originated since 2001 were backed by subprime loans. Today some 15% of those loans are deliquent and by early next year almost 25% of the loans could be deliquent as another 2 million adjustable rate loans are scheduled to reset to higher rates this year.
Congress is trying to come up with a way to deal with the meltdown which they see as being driven by predatory lending practices.
Lawmakers believe that a large number of these delinquent loans involve predatory or unsound lending. Now the Democrat-run Congress is studying whether to hold sellers of mortgage-backed securities liable for enabling unsound or predatory lending.
These Democrats believe that the packaging of mortgages masks - or at least provides an incentive to - predatory or unsound lending by allowing the consequences to get kicked far enough up the investment chain so that bad lenders escape unpunished.
"Yes, it provides a lot more money, but it also meant that if you made the loan and you sold the loan, you weren't so much on the hook. And if you bought the loan, you were never on the hook," said Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, which will draft legislation this year to address problems in the subprime mortgage market. "That's why ... there needs to be some responsibility all the way through the (investment) chain."
Fed Chairman Bernake agrees that Rep. Frank is correct in his analysis of what led to such a diffuse system where it's hard to identify the culprits, but doesn't want to go so far as advocating any new regulations.
But as this piece shows, regulators knew that a day of reckoning would come and no one stepped up to stop it because too many people had too much incentive to keep the con-game going.
The federal government arguably failed most of all. It shirked its responsibility to regulate this critical area of home finance - much as it had during the savings-and-loan crisis of the 1980s. At least nine federal agencies oversee some portion of the mortgage market, and over the past three years nearly all of them issued warnings about risky loan terms.
By the time this is over, many, many people will be hurt because the free market cult believes that regulation punishes the good guys.
Yet in some ways this mess is not surprising. After all, it's another piece of Bush Jr's makeup where he is bound and determined to out-do Dad in his presidency. He's achieved this by screwing up his Iraq war and his handling of Katrina, and now he's overseeing an even bigger financial debacle than Bush I's savings and loan crisis. Heckavajob, Shrub.