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The first time I spoke about the subject of
sub-prime mortgages and the potential for this seemingly endless fallout came
during a live television show in February of 2006. Granted, the demographic for that
medium market audience was not the same as those watching the more affluent
Bloomberg network or even the rowdy bunch who tune in to CNBC. Yet it was the very audience that
needed to hear what must have seemed at the time like a “sky is
falling” report.
As I revisited these thoughts over the next eighteen months, one
simple fact always seemed to remain constant: we, not the investor class but
the average person, continues to suffer from financial aphasia. Closely related to semantic aphasia, a
mental disorder that does not allow the individual to understand the meaning
of the words being spoken even as they understand what the words are, the
financial form of this malady leaves the listener doing one thing while
believing something wholly different.
It has been best described as a little like hearing a love song - only
without knowing why those words were used or what the singer meant by them.
Financial aphasia, by my
definition, offers a look at the mounting storm surge that the housing market
has become and the fact that, with so many people speaking about it, affected
by it, and promising to reform the system, the words have lost their
meaning. We hear them but we no
longer understand them.
Ben Bernanke, the Federal
Reserve Chairman wrote a letter recently to Senator Charles Schumer that
offered some form of agreement with the outspoken lawmaker’s fear.
“I share your concern about the potential
impact of scheduled payment resets on homeowners with variable-rate sub-prime
mortgages,” he wrote suggesting a little further along that perhaps
“developing a broader range of mortgage products” might help
those who are in the deepest trouble.
Really?
Didn’t
the problem begin with mortgage products, Mr. Bernanke? The end result of the
unceasing ingenuity and creativity of Wall Street to cater to risk seeking
investors who saw the mortgage market as the new potential rainmaker is at
the heart of this problem. More mortgage products Mr. Bernanke, are not the
solution.
Even if the
Fed has no direct impact on mortgage rates as many assume they do,
shouldn’t this traumatic event have been apparent at some point before
now on their economic radar? As
they sift through reams of data, is it possible that they suffer from
financial aphasia?
That letter
made Wall Street happy with anticipation. The possibility that Bernanke has
refocused his attention on the economy, one in which he pronounced was doing
just fine a month or so ago, sent stocks soaring - again. Despite what Wall Street wants and
even lobbies so strongly for, and at the risk of repeating myself, an
interest rate cut would not be in this economy’s best interest.
Many of the
newsworthy suggestions on how approach or even fix this problem are akin to
using a squirt gun on a forest fire.
The most
often heard solution suggests that Congress should raise the limits from the
current $417,000 for FHA insurance to $500,000, more if you live in
out-priced markets like San Francisco or New York. By doing this, the burden of a default
would eventually fall to the taxpayer. The Federal Housing Authority insures
home mortgages and by doing so, makes them more saleable to investors looking
for a safe haven for excess dollars. Upping those insurance limits for the
people who would qualify for that size loan would not have the desired effect
that Washington would hope.
The problem
with this choice piece of legislation is whom it would help: primarily, the
homebuyer who should have known better – the very people who saw the
words on the contract and failed to understand them. Financial aphasia.
President
Bush offered an extended hand as well.
Reaching out to less than one percent of the troubled homeowners with
his plan, shortly after he pronounced the economy as “doing just
fine” fell just shy of the mark.
The market greeted it with a shrug and most of those who examined his
offering saw it as disingenuous at best.
His plan to save eighty thousand homeowners by overhauling the FHA,
all while foregoing the other 1.4 million also smacks of financial aphasia.
There have
been some good suggestions. The
idea to cut the tax penalty aimed at foreclosed home owners, a move that
would help the neediest borrower seems to have fallen to the wayside yet
would be among the easiest of fixes.
Because there is little belief that this would help anyone keep the
family home, the notion lacks political incentive.
If you were
not aware of this fact, a foreclosure, while damaging to your credit report,
the same report that was probably already somewhat tarnished when the
mortgage was first obtained, does not let the borrower escape without penalty
- courtesy of the IRS. The amount of the forgiven loan, as the law is now
written, is taxed as real income at the rate of the defaulted borrower.
The beauty of
aphasia, if any can be found in the neurological disorder can be best seen on
Wall Street. They were the ones
who created the product, pushed for deregulation and opened the financial
markets to a new source of asset-secured revenue. That product allowed us, the average
American homeowner to tap the equity in our homes for cash to use to buy
products, many of which were produced on foreign soil. Those dollars were in turn, recycled
back into these mortgage-backed securities by the same entities that sold us
those much-needed wares.
Hopeful that
the Fed will begin to cut rates, Wall Street has taken a new tact. They are not, one analyst
recently suggested, concerned about the broader markets resilience even if
the Fed decides to leave the short-term overnight rate alone. They are worried they say, about Main
Street. And with good reason.
Wall Street
is worried about regulation. The
fear that, for some reason Congress will begin to take action against the
banks and financial institutions creating yet another Sarbanes-Oxley type of
fix or worse, begin force-feeding them ethics is a very scary scenario for
some of these folks.
It boils down
to this: is showing your worthiness for a mortgage, no matter how large or
small such a bad thing? No its
not. But to Wall Street, this
means less money spent as the consumer scrimps and saves for a down payment.
And then, perhaps, even buy a house they can afford.
Could proving
to the lender that you have the ability to weather personal economic storms
and still keep your house actually cripple the economy? Yes it could. The
majority of Americans are watching this “crisis” and wondering if
it will reach them. Eventually
and unfortunately it will but the readjustment may not be as painful as some
might expect. Recessionary? Probably.
Inflationary? In all likelihood. Will we survive it? Absolutely.
We just have
to remember that the words on those loan agreements have meaning and failing
to understand them can have lasting consequences well beyond our own personal
sphere of understanding. Even as
financial aphasia seems blissful, it is a dangerous mistake to consider it
inconsequential.
Paul Petillo
www.BlueCollarDollar.com
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