From the book FROM THE PEA PATCH

The Current Mess

Is Wall Street to blame?

Having been in the real estate business for the early part of my life and having designed lots of tax shelter deals when that was in vogue, I dealt some with Wall Street which raised the money for same.  More than once I wandered the concrete canyons of New York City in my cowboy boots and dealt with the boys in the three piece suits, yellow power ties, and Italian loafers.  I’ve also, as a historian by avocation, studied the history of money, credit, and the real estate market in this wonderful free enterprise system of ours at some depth.  I am not an economist, but have been a real estate broker, appraiser, contractor, and mortgage broker.

I can tell you that the raising of capital and trading of stocks, bonds, and commodities is as pure an enterprise as there is in a free enterprise system.  Note, I didn’t say honest, aboveboard, and ethical, and there’s a great difference.  Like most industries and specialties in this country, they self regulate, and like most, they do a damn poor job of it, and therein is the reason for government, a supposedly neutral party, to oversee and regulate..from the outside.

Wall Street, a label for the financial industry in the United States, is a voracious animal.  It’s not concerned with much else other than profit…and to your surprise, I’m telling you that’s not a bad thing. It’s in fact, one of the critical elements that have made this the great go-to country she is.  Capital, generated on Wall Street, is thrown at new opportunities, and credit worthy opportunity, with a zeal.  And a few of those new opportunities become viable businesses that create jobs, generate profits, and yes pay taxes so someone in government can make the full circle and regulate how capital is raised.

What happened in the great real estate, mortgage, debacle of the last few years?  Is Wall Street the culprit?  No, no more than a firearm is to blame for a crime in which it was used.  Wall Street was the vehicle which took blocks of those mortgages to the marketplace, raising more and more money so more and more homes could be financed.  And government wanted them to do exactly that.

So what happened?  Credit, and credit worthiness for mortgage lending (or any lending) is, or should be, overseen by those taking the risk, i.e. the banks, mortgage companies, and various other lenders.  Government, who controls much of the rules and regulations of those institutions, sets the guidelines for lending…when in fact those taking the risk should determine who qualifies for a loan.

When government  interferes with that process, when they decide that they know better than those taking the risk, then things become artificial.  In the case of mortgage lending, the credit worthiness of borrowers became a falsehood motivated and created by government.  When they allowed the old tried and true process of verification by those taking the risk to become only the truthfulness of the borrower, then the process fell in a  pile of rubble.  Prior to changes, instituted by Clinton, a lender would, as standard operating procedure, obtain a verification of deposit (how much money does the borrower have) from the borrowers bank, a verification of employment and income (who does he/she work for and how much does he/she make) from the borrowers employer, and a credit report (what is the borrowers credit history).  And, of course, an appraisal on the property which acts as collateral for the loan from an independent appraiser.

But government, wanting the economy to roll on, and home sales being a large part of that process, decided to change the process.  And I wish I could believe that wanting the economy to improve was governments only motivation.  Buying votes was, in my opinion, the primary motivation to destroying an industry and almost a country.  Some, in congress, decided everyman was entitled to three bedrooms and two baths, no matter their credit worthiness or income.  Verifications became a mortgage broker or banker merely asking the borrower, “how much do you make?” without an verification coming from the employer, making prevarication by the borrower a simple part of the process…otherwise, with verifications, it did a borrower no good to lie, as he wasn’t asked the question.  Now, it was simple. The new loans were known as stated income in the industry, and as liar’s loans to those of us who had common sense and a small understanding of human nature.  Now, the process, oft times went something like this, and you must remember the mortgage broker was making thousands of dollars off the average loan:

Mortgage Broker:  “Okay, Mr. Borrower, how much do you make at the Jone’s Meat Market?”

Borrower:  “I make thirty five thousand a year.”

Mortgage Broker:  “Uh…you have to make sixty thousand to get this loan.”

Borrower:  “Oh, let me see, I told my wife and in-laws we were buying this house.  I forgot my bonuses.  I get another twenty five thousand a year in bonuses.”

Mortgage Broker: “Great.  You know this house will go up in value, so you’ll be okay.  Sign here.”

And everybody lived happily ever after, until the great collapse, and Mr. and Mrs. Borrower and the kids, having lost their three bedrooms and two baths are now living with the in laws and Mr. Mortgage Broker, having lost his five bedrooms and three baths is selling shoes, a job which he’s under qualified to perform.

Now, let’s see, will people lie to get what they want?  Duh.

So lots of homes were sold, lots of folks who couldn’t afford the payments occupied lots of houses across the country, and, as lots of enthusiastic real estate sales people had guaranteed, prices rose.  These same real estate people are back to selling shoes, if they can now find even that job.  Of course prices rose, as homes couldn’t be built as fast as borrowers could lie about their income, and as government could dictate to lenders, “you must loan to all those wonderful borrowers who will vote for us.” And as Wall Street, as they always have, raised the capital by selling blocks of those loans to investors.  And those blocks were looked upon by investors as being prime investments…after all, they were first mortgages on peoples homes, and people protect their homes almost before all else, and the government of the most powerful country in the world set and dictated the standards by which those loans were made.  Prices rose, because of demand (economics 1A), but demand was artificial because credit was easy, and it was all based on a lie and the greed, not of Wall Street (Wall Street has always been greedy and that’s their place in the workings of the economy of the U.S.), but of government.

The economy was destroyed by Harry Reid and Barney Frank and their ilk and their greed in wanting to “buy” votes.  And let’s see, whom can we blame it on…of course, Wall Street, those greedy folks who we depended upon to continue to sell the artificial loans we dictated that lenders must make.

And now, the hell of it is, those of us who did not lie about our credit, who looked at the artificial real estate market and said, “I think I’ll set this one out,” are now being taxed to keep people (liars in many instances), in those homes they couldn’t afford in the first instance.

And more of the hell of it is, when somebody is around to bail you out, time and time again, do you learn the error of your ways?  Of course you don’t.

By the way, one of my first jobs was selling shoes, so no disparagement intended.

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