Regulation, Not Deregulation Caused the Current Mortgage Crisis
By Mary Mostert
September 29, 2008
Barack Obama, in his effort to blame his opponent for the current financial problem on Wall Street, said "There's only one candidate who called himself, and I quote, 'fundamentally a deregulator,' when it was reckless deregulation and lack of oversight that's a big part of the problem on Wall Street right now."
Only, it was not the problem of de-regulation that caused the crisis. The current melt-down that involves unsound mortgage lending was very directly caused by exactly the same thing that caused the melt-down of the Savings and Loan Industry that followed President Jimmy Carter's four years in office in the late 1970s. The cause was Congress itself. Congress, by law, required Savings and Loans to give mortgages to risky borrowers. The demand for those laws often actually came from community organizers such as Barack Obama insisting that lending standards be lowered and that government, not individuals, solve the problems.
Today it is actually Chicago, where Obama worked as a community organizer, that leads the nation in home foreclosures due to sub prime loans to unqualified minority borrowers. More than fifty percent of those now losing their homes in the Chicago area are blacks or Hispanics. Dedrick Muhammad, a senior organizer and researcher at the Institute for Policy Studies, wrote a report in January 2008 in which he claimed that "We estimate the total loss of wealth for people of color (blacks and Hispanics) to be between $164 billion and $213 billion for sub prime loans taken during the past eight years."
Congress passed legislation that actually required the Savings and Loan industry give mortgages to people they felt were too risky. This was done in the name of Civil Rights and it began back in the 1960s when it was common for lenders to "redline" areas of a city where they believed housing values were threatened or populated by people who did not have the financial resources or employment record to become homeowners.
During the 1960s I ran into that problem myself as I purchased and renovated boarded up houses in the inner city of Rochester, New York. I bought the houses with personal loans because the banks were not interested in loaning on often abandoned properties in the decaying inner city.
There also was a law that required a ceiling on the amount of interest Savings and Loan companies could charge depositors. Late in the administration of President Jimmy Carter, Congress raised the insured deposits in Savings and Loans from 70% to 100% of a person's deposit and raised the insured amount from $40,000 to $100,000.
These laws required Savings and Loan companies to lend to people they felt were risky and on properties they thought would not maintain their values. That led to speculation and to the number of US federally insured savings and loans in the United States declining from 3,234 to 1,645 in the 1980s. The market share of S&Ls for single family mortgage loans went from 53% in 1975 to 30 % in 1990 and it cost the federal government about $160 billion when our country's Gross National Product was about one-third of its current value of $1.3 trillion.
In the 1970s Savings and Loan crisis companies experienced a significant outflow from low-interest rate deposits, as interest rates rose to as high as 21% and as depositors moved their money out of the low Savings and Loan rates controlled by Congress to the new high-interest money-market funds. The S&L'S had most of their money tied up in long-term mortgage loans at fixed interest rates, and with market rates rising, these were worth far less than face value.
The current financial crisis is actually quite similar to the Savings and Loan crisis. Apparently Congress failed to learn anything from the Savings and Loan meltdown of the 1980s. In recent years, in the guise of helping blacks and other minorities achieve the American Dream of homeownership, again banks, Fannie Mae and Freddie Mac ignored the need for financial responsibility and financial discipline in their customers. Sub-prime mortgages required little or no proof of income; others needed little or no down payment. Homebuyers could take out a simultaneous second, or piggyback, mortgage at the time of purchase, make interest-only payments for up to 15 years, skip payments by reducing equity or, in some cases, obtain a mortgage that exceeded the home's value.
How could people possibly lose money by obtaining such mortgages when the borrower didn't have any money involved in the purchase in the first place? What is actually happening, of course, in many such situations is that the value of the house has dropped below the amount of the mortgage. When that happens, many people stop paying their mortgages. So far, loss of jobs has not been a major factor and it is generally unemployment that causes real recessions.
When individuals, or businesses, ignore basic financial responsibility, they usually do end up in financial difficulty. As in the Savings and Loan Crisis, again the federal government has stepped in to stop the failure of the nation's financial institutions. Since it has been the action of the government in passing regulations that has not only permitted, but encouraged, lending money to people who have little or no proof of income, no down payment and who often purchase homes they cannot possibly afford, government action is needed to keep the entire financial structure from collapsing, as it did in the early 1930s.
On the other hand, some people used money borrowed on equity loans on their homes to start their own businesses. This factor, often overlooked, has improved the nation's economy and created many jobs. There are those who are comparing the current collapse of the mortgage market to the collapse of the nation's finances in the Great Depression that lasted for 25 years from 1929 to 1954. The stock market did not regain its high of September 1929 for 25 years, until, in 1954, Dwight D. Eisenhower, a Republican, was president. The president from 1933 to 1945 was Franklin Delano Roosevelt. He believed, as does Barack Obama, that the solution to the nation's financial problems was tight government control and putting an end to free enterprise and "greedy capitalists."
In fact, although Obama's blueprint for change condemns "lobbyists" and he claims he has "done more than any other candidate in this race to take on lobbyists - and won," he was actually a lobbyist himself when he worked as a "community organizer." His job as a community organizer involved teaching black people how to lobby their local government officials for such things as asbestos removal, school reform and for a job clinic.
Note that Obama the community organizer did not organize people to create their own job clinic, remove the asbestos from their own dwelling units or become actively involved in helping to improve the schools their children attended. He only taught them to lobby a government entity to do it for them.
We survived the Savings and Loan crisis and I believe we can survive and continue to prosper in spite of the current lending crisis with the right kind of leadership. A lot of the money generated by the housing bubble did go into the formation of new businesses run by new capitalists with new products that are fueling a new kind of boom in technology, health and nutrition. On the other hand, if people become as frightened as they did during the election campaign of 1932, when the Democrats ran a campaign that targeted President Hoover as the cause of the worldwide depression, won the election and addressed the financial problem with rampant socialism, we could be in for a very difficult time ahead.