Janet Albrechtsen who writes a weekly column for "The Australian" had this to say in today's WSJ. "Dream of home ownership is a fraud. Politicians who pimped this dream created an unsustainable mortgage industry whose collapse is only surprising because it didn't happen earlier. America's mortgage industry will not recover, nor deserve to recover, unless it is prepared to challenge this politically unpalatable reality.
Why not recover? Our rules are way too relaxed. In Australia, when people borrow money to buy a house, they know that if they default and the mortgaged property doesn't cover the debt, they will be responsible for the shortfall. And the lender will chase them.
In America, where populist post-Depression laws in many states have mandated loans that be non-recourse, the opposite is true. Americans can take out a mortgage more or less as a one-way debt. If you can't afford the repayments and can't refinance, you just send the keys back to the lender. Borrowers wipe their hands of liability. Naturally, an American in financial strife will pay off debts that carry PERSONAL liability - such as credit cards - before they pay off their mortgage".
Prepayment penalties are either prohibited or severely restricted by the government in the U.S. Borrowers and lenders simply make a bet that the borrower can repay without penalty anytime say on a 30 year fixed loan. Statistics averages show this is a good bet. However these are AVERAGES and don't reflect actual experience and are mis-leading when real outcomes are at the extreme. If interest rates fall, the buyer refinances at a lower rate, sometimes elsewhere. If rates go up the buyer stands pat. Borrowers terminate just when the loans they made are becoming profitable for the original lender and unprofitable for the banks. Another lender now has the loan before the original lender could make a profit A game of winners and losers with the biggest loser the one who holds the worthless paper last. Who would want to be an American lender?
Evidently, many were forced by government to make these loans, and many gamed the system, some won, but a hundred million people lost, many of them basically innocent like the Lehmann Brothers employees and the "lack of transparency" stockholders.
"America has a long and undistinguished history of populist politicians stacking the cards against the lenders and in favor of risky home ownership. Proving that good intentions are no guarantee of good policy", Ms. Albrechtsen continues.
Populist Democrat Jimmy Carter pushed the Community Reinvestment Act, which required banks to make loans to low income people and from then on through Clinton and populist Democrat leaders in Congress, economically reckless laws caused entirely predictable problems for lenders and now it looks like innocent prudent taxpayers are going to have to bail them out.
Australians - and others, too, place a high value on home ownership. But they are aghast at the dumb things America has tolerated in pursuit of all at risk homeowners to own homes they not only couldn't afford, they couldn't afford to to meet their credit card and other ordinary bills of owning a home.
Even more dumber is a Democrat Congress and a socialist and populist Democrat presidential candidate between a rock and hard spot in knowing what to do WITHOUT LOSING VOTES.
Get that, how to posture while "talking" about how to change the rules without losing the populist vote.
Wall Street, like most all people today, took advantage of a Congress who felt that to be be "compassionate" they forced lenders to make loans they knew that lenders were running a gamble they would be repaid. Borrowers, speculators, the government and the lenders gambled that home values would keep rising.
Almost everybody is now paying the cost of political blunders, ridiculous executive compensations, greedy speculators and manipulators, gullible voters and a "compassionate" driven populist equality.
Not to mention, posturing for reelection.
This mess started under Democrat leadership. Democrats have now been in power for 21months an it appears more likely that the whole country will go populist Democrat in November.
To have to depend on our government to get out out of this mess they basically created is a "gamble" this great country had better win.
Almost all the solid entities will survive and help lead us "out of the wilderness". That is, unless the government injects the bailout money to the not so solid entities.
Refer my blog of 9/17, "Home Ownership Push Rethought".