The Crimson Blog

Views and Social Commentary about News of the Day, Society, and Technology

The Crimson Blog header image 2

The Subprime Mortgage Mess and the Folly of Bailouts

April 14th, 2008 by Rick

I will be one of the first to admit that the subprime mortgage meltdown in the U.S. is harrowing and completely devastating for whole swaths of the U.S. economy.  Foreclosures are occurring left and right, and the areas hardest hit are seeing entire sections of neighborhoods now sitting empty, due to foreclosures.  The societal impacts are heavy as well – entire families being displaced, businesses being shuttered if they have any relation or proximity to the housing or mortgage banking markets.

That being said, what appalls me even more are the calls for a Federal “bailout”, by Congress and even the Presidential Candidates.

Bailout?  Why?

Whose fault is it that millions of these homeowners entered VOLUNTARILY into highly risky “boutique” interest-only mortgages?

Whose fault is it that people who had no business buying homes were buying homes, due to inadequate income, or insufficient up-front liquidity (a down payment)?

Whose fault is it that the people buying homes didn’t read the fine print, and only became outraged when their “teaser rates” began expiring and started reflecting the real world?

Do the banks and unethical mortgage loan brokers share some of the blame?  Absolutely.

But at least equal amounts of blame (if not more) are shared by the homeowners themselves.

If you signed a loan for what is for most people their single largest purchase in their lifetime, without reading the fine print, shame on you.

If you bought a home and couldn’t really afford the payments when your mortage started, shame on you.

It’s not the Federal Government’s role to bail you out for embarking on what is largely a foolish financial venture. Note: It’s foolish if you can’t really afford it.

And its not fair to the millions of people who responsibly purchased their homes with conventional mortages and sufficient incomes, and sufficient financial liquidity and reserves.  These are the people who are being unfairly burdened and whose taxes will go toward any kind of bailout program, that is sure to be in the hundreds of billions of dollars if enacted.

Tags:   · 3 Comments

Leave a Comment

3 responses so far ↓

  • As much as this mess is every Americans fault, it’s not the bankers, brokers, CEO’s, businessmen or anyone of that natures fault, because they were only doing what the Clinton administration told them to do.

    Bush HAS NOT changed any major housing regulations while President. President CLINTON and his administration is the one to blame. Before you boo me, I was the first to admit I was a Clinton fan, but anyone who knows politics knows that a presidents foot print in history isn’t determined until well after he leaves office, simply cause his policies have not had ample time to affect the majority of us. Guess what? Clinton just left his mark. He took the Community Redevelopment Act (a well intended Carter era law that encouraged minority homeownership) and put it on STEROIDS. Through tough new regulations such as dictating where mortgage lenders could lend or who they had to lend to, Clinton and his lobbyists created the market for high-risk sub-prime loans that are now affecting the mortgage backed securities that are messing up the balance sheets of all financial institutions causing many of them to go bankrupt or to be sold off for well under what their value should be. This forced these companies to discard sound business practices that had been established for years and years. If they did not they would face stiff government penalties. It was the Clinton administration that mismanaged the quasi-governmental agencies(Fannie Mae, Freddie Mac, etc) that over the past 10 or 15 years have come to control most of America’s real estate market. People such as Frank Delano Raines a good friend of Clinton and a lobbyist who took control of Fannie Mae in ’99 and pushed for sub-prime loans to help him meet his goals so he could earn his big bonus whom ran off with over $100 million in compensation. An aide of Janet Reno named Jamie Gorelick was compensated $75 million to help lobby and create this mess. Are either of them going to use that money to fix all of our issues? NOPE. By the way Raines was accused of shady accounting practices and in the end Fannie Mae had to pay a record $400 million fine to the SEC for his violations. Regardless of that small issue Clinton’s administration caused, the damage that we see today had already been done, the sub-prime loans were flying off the shelves in secondary markets setting every financial institution up for failure and blame in the years to come which are now here. But for the “government that can do no WRONG” or the “Bush sucks” crowd you just do not get it. You won’t acknowledge the law of unintended consequences from well meaning, if misguided acts. But for now all of you must know especially with election time right around the corner that Obama and the Democrats on the Hill think that even more regulation and involvement will help clean up the mess that THEIR policies created. And if you think Clinton’s economic policies were great now that you have the facts, Obama’s is Clintons policy on steroids, just wait another 15 or so years to see what kind of mess we are in then. While government does need to have a role in helping low income people purchase homes, the Clinton administration went too far trying to fake it until they made it and they went to dictate a territory that they were not the experts in. There were sound business practices at one time that prevented this from happening. Not created by politicians, but by the experts, bankers, businessmen who know how to seperate emotion from money. Because people who are emotional over money had the power to dictate laws and regulations we are now in a mess of caca. Market failure? Hardly, this is government failure. If this was my business and I made a mistake I would have to pay for my mistakes, but this isn’t. Now we all have to pay for the mistakes (approximately $2300 for each of us) of a few who had a social experiment to run that ended up turning into the worst economic disaster in history. People have to realize it’s not the CEO’s fault that make millions for doing what the Clinton admin told them they had to do. It’s ignorant people who meddled in areas that they are not experts in that created this mess. And for your personal information, this does not mean that I’m for McCain, I’m not, I’m undecided. It’s simply taking this mess back to it’s origin and making sure blame gets placed on the right people because if we blame the wrong people, we are going to learn the wrong lesson.

  • I do agree with you about individuals getting into loans that they had no business getting into, but do you think that this alone has brought this house of cards to such a swift decline.?

    There has been a lot of finger pointing at the Banking Industry because of the subprime loans, but I believe it goes much deeper than that. When the securitization of mortgages was implemented, it opened a bag of worms that is eating away at our very souls. Mortgaged-back securities was the worst idea to every hit Wall Street, Main Street, etc… This can all be summed up in one word, “GREED”.

  • It seems like everyday now that we learn about a government sponsored bailout of another major corporation. Many smaller businesses, as well as individual people, are left asking where is their bailout from the unscrupulous lending practices of the banks and credit card companies.