Government and Banks Guilty in Foreclousre Crisis

by John M. Curtis
(310) 204-8700

Copyright October 11, 2010
All Rights Reserved.                                

           When U.S. states’ attorneys general announced they would probe America’s biggest lenders in a growing foreclosure crisis, the nation’s second largest mortgage lender, Bank of America, announced it would suspend foreclosures.  Since the real estate meltdown in 2008, the nation’s biggest lenders blamed unqualified borrowers for triggering the collapse of the derivative’s market, eating up operating capital of the nation’s biggest banks.  When the Congress with support from President Bill Clinton tossed out the Glass Steagall Act in 1999, banks were given the green light to engage in wild stock market speculation.  Collateralized debt obligations or mortgage-backed securities were traded like baseball cards, placing big chunks of depositos’ capital at risk.  When the first glimpse of problems occurred in the sub-prime market, hedge and private equity funds began shorting derivatives.

            Short-selling by hedge and private equity funds, including the nation’s biggest investment banks, turned a manageable debt problem into a full-blown financial crisis, robbing banks of the cash needed to operate.  Investment banks like Goldman Sachs made billions shorting the derivatives’ market, causing the worst crash since the Great Depression.  Former Clinton Treasury Secretary Bob Rubin and former Sen. Phil Gramm (R-Texas), chief sponsor of the 1999 Gramm, Leach, Bliley Act, helped dregulate the banking industry, exposing Wall Street to another 1929-type crash.  Con artists like Bernard Madoff were small potatoes compared to the shenanigans of Goldman Sachs and the nation’s biggest banks playing the derivatives’ market.  While Goldman Sach came out smelling like a rose, major U.S. banks and insurers, like American International Group, went broke.

            Wall Street’s spin machine blamed the financial crisis on residential borrowers when, in fact, the government and banks caused the problem .  Today’s high unemployment and foreclosure crisis was entirely avoidable had Gramm, Leach Bliley not allowed banks to play the derivatives’ market.  Once banks ran out of cash and AIG—the main insurer of derivative investments—went broke, they cancelled borrowers’ home equity lines, citing new valuation.  Valuations plunged once borrowers no longer had the cash to keep making mortgage payments, eventually snowballing into a slide in real estate prices.  Banks refused to take any responsibility for causing the mortgage meltdown and financial crisis, causing the nation to shed of 7 million jobs since Dec. 2007.  Had banks not leveraged themselves with derivatives, the mortgage crisis wouldn’t have occurred.

            U.S. government and national mortgage lenders have a moral obligation to modify mortgages and lower payments for the nation’s borrowers currently upside down in real estate loans.  Real estate downturns are tolerated by most investors.  Most borrowers understand that real estate, like stocks, go through cycles.  But when the government and lending industry collude to place depositors’ money at risk and crash financial markets then it’s the government and banks that must shoulder the burden.  Allowing banks to foreclose depresses real estate markets and harms the economy by cutting the cash flow of private and publicly traded companies, harming GDP and plunging the economy into recession.  President Barack Obama must take the lead, insisting that banks no longer foreclose, providing adequate capital resources to prevent more foreclosures.

            If the government can bail out Fannie Mae and Freddie Mac for $366 billion, the two government-sponsored mortgage-buying agencies, then they can help bail out banks and borrowers currently in defaults and facing foreclosure.  While Fannie and Freddie could still cost taxpayers more cash, the government should bail out borrowers by subsidizing mandatory loan modifications.  Today’s voluntary loan modifications come with so much red tape, most borrowers don’t qualify.  Bailing out mortgage borrowers is the fast way to economic recovery.  As long as real estate prices continues to drop and not sell, the economy can’t get out the current crisis.  Giving borrowers a leg up should free up needed cash to recycle into the economy.  Mandatory loan modifications and payment reductions should be the biggest economic stimulus the country has seen in recent years.

            White House officials should get behind a foreclosure moratorium.  Government officials and lenders should take responsibility for tanking the real estate market and causing today’s stubborn recession.  There’s no better use of government funds than to help bail out homeowners, modify mortgages and provide homeowners with the cash-flow to stimulate the economy.  “I’m not sure about a national moratorium,” White House chief strategist David Axelrod told CBS News.  “Our hope is that this moves rapidly and this gets unwound quickly,” not specifying how the White House can take the lead.  White House officials must get off the fence, endorse a national mortgage bail out program forcing lenders to modify loans and admit that government policies, not homeowners, caused the financial crisis.  Stopping foreclosure should help the real estate market and stimulate the economy.

About the Author  

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.