During the real estate boom, subprime lenders preyed on consumers who often had no proof of income, no down payment, risky adjustable rates - nothing that would lead a responsible bank to feel that this was a good investment. Setting the foreclosure risk aside, it was worth it for lenders to rake in outrageous interest rates before selling their bad paper. Senator Tom Coburn has told the Washington Post that the Administration should not subsidize borrowers' "stupid behavior, but predatory lenders' behavior is just that.
Back in the boom, house flipping wasn't the biggest trend - loan flipping was. And the loans kept on flipping until they broke the bank. The same bank that did not foresee the housing market burst, the dot com burst or the Great Depression. While titans of industry were jumping off office ledges in the '20s, displaced homeowners made it though the loss however they could. They still do, and now the industry term for negative equity is homeowners under water.
Treasury Secretary Henry Paulson said in a speech this week that congress should leave it to the Bush administration to find ways to help borrowers with underwater mortgages, those with less equity than the home itself is worth.
Connecting the dots, the lack of a comprehensive 8/29 plan for homes under water for months due to massive federal levee failure - a $30 million private bank bailout - and the billions needed for homeowners metaphorically under water, it's clear where the working man will land. They were disenfranchised long before they became bearers of bad paper. Bush's endorsement of Paulson with a heckofajob for putting in extra hours all weekend before the Bear Sterns bailout is not a good indicator.
The Post article goes on to quote Senator Coburn who hopes that:
"the administration is not into subsidizing stupid behavior. It's one thing to help people who made a rational decision, who were spammed or defrauded. But it's another thing to reward people who thought they were getting something for nothing, and knew what they were getting into."
The senator blames the subprime mortgage crisis on everyone but lenders. He includes spam as a culprit, like an ad to enlarge your penis can lead to bad debt.
But eight million homes with negative equity is not just a run of bad luck. Subprime lenders issued loans skirting the edge of lending law, despite the fact that there are checks and balances: the Truth in Lending Act and Homeowner Mortgage Disclosure Act to start with. With these laws in place, will those responsible for the SMC (I'm going to go out on a limb and give the subprime mortgage crisis an acronym since we'll be talking about it for years) have a free pass like Halliburton did when it landed the no-bid New Orleans contract post-Katrina and packed the city with undocumented migrant labor rather than hiring locals so they could come home?
Representative Barney Frank's congressional brainchild would let the FHA insure $300 billion. Subprime lenders take a loss and debtors get a break. But the likelihood of the mortgage industry giving American homeowners a break reminds me of Albert Brooks' character asking a Vegas tycoon to return his wife's lost nest egg for good gambling publicity. It didn't work in Lost in America.
Meanwhile the administration is on a tightrope between playing Daddy Warbucks for Bear Sterns, and the risk of a homeowner bailout alienating fiscal conservative voters who have turned a blind eye to billions spent so far for the Iraq invasion. Senator John McCain is bundled tightly into that trick bag. His campaign co-chair, Senator Phil Gramm, spearheaded looser finance regulations in the Gramm Leach Bliley Act which, according to Barack Obama, has helped lead to the SMC.
And Newsday reports that Maggie Williams, Senator Hillary Clinton's campaign manager, served on the board of the subprime Delta Financial Corporation until it went bankrupt.
Compared to two campaigns run by finance industry powers that be, homeowners facing foreclosure may be less daunted by Obama's pissed off pastor. Whatever the case, with voters increasingly looking to hold onto their homes, whoever has the best plan for the SMC can step to the front of the race.