Sunday, January 6, 2019

Wall Street Snuffed Out President Clinton's Goal of Homeownership for the Poor

It is one thing for the head of a government (or a government’s executive arm) to set a praiseworthy goal that is in the public interest, and quite another thing to rely on the financial sector to implement it. Finance has its own means tied to its own goals, with plenty of greed in the mix. Governmental officials may tend to minimize the potential damage from ego-laden greed to the goals of public policy. Such policy ideally strives for the good of the whole, whereas the goals of a private sector of a part. This could account, at least in part, for the financial crisis of 2008 and the continuing bear market in housing in much of the U.S.
According to The Wall Street Journal, housing prices had fallen for 57 consecutive months by May 2011.[1] Even though the recession had officially ended in June 2009, the real estate market still had yet to hit bottom.[2] Since the housing peak in 2006, home values nationally were down 29.5 percent, according to Zillow.com. Compared to the same time in 2010, prices were down 8.2 percent in the U.S. markets. In that year, house price depreciation had slowed or stabilized because of tax credits of up to $8000 that expired during that summer. Accordingly, negative equity became even more prevalent in the first quarter of 2011, when 28.4 percent of all single-family homes with mortgages were "underwater."[3] Monthly declines for February and March were "really staggering," according to Stan Humphries, Zillow's chef economist. He claimed that the declines reflected "the true underlying demand," which was "being completely overwhelmed by supply."[4] Fannie and Freddie sold more than 94,000 foreclosed houses in the quarter; this represents 23% more than in the previous quarter.[5] The increase in supply from the foreclosures was at relatively low prices, hence the impact on the market was particularly depressing.
A declining housing price translates into lost wealth for the homeowner. When home values decline, the values of mortgages often do not go down as well. Homeowners lose some of their equity, or the stake they have in their home. When equity becomes negative—that is to say, when the value of a mortgage exceeds the value of the property—homeowners become especially vulnerable to default and foreclosure. “Falling home prices can create a vicious cycle. When a property falls into foreclosure, it tends to depress the values of properties around it, making those homes more likely to experience a similar fate. [In 2010], nearly 2.9 million homes received a foreclosure filing, and more than 2.8 million homes got one in 2009.” based on the data provider RealtyTrac.[6] More foreclosures further reduced the value of residential mortgage-based securities, which in turn reduced the asset-values and returns of companies and individuals investing in the CDOs (collateralized debt obligations) worldwide. This investment asset essentially has mortgage-borrowers pay the holders of the respective CDOs, whose value is thus based on the value of the underlying mortgages.
Problematically, the holders of the CDOs, not the originator of the mortgage, assumed the risk that the mortgage borrowers might stop their mortgage payments. The mortgage servicers had sold their mortgages to an investment bank such as Lehman Brothers, which in turn would pass the then-securitized mortgage-based bonds on to investors such as Deutsche Bank and the two major banks of Iceland. Neither companies such as New Century (or Countrywide) nor investment banks like Lehman would face any risk unless they happened to be holding a significant number of the risky mortgages (or real estate) when the merry-go-round finally stopped in 2008.
Countrywide was bought up by Bank of America (by Ken Lewis, CEO at the time) and Lehman Brothers went bankrupt. Both Lewis and Dick Fuld (of Lehman) could be said to be empire-builders—meaning expansion at virtually any expense and even as an end itself. Pure ego plus greed. New Century and Lehman both assumed that they would never get caught with their pants down holding toxic mortgages. They were both wrong—oh so wrong. To be so wrong and yet blame the consumers is, at the very least, bad form.
Unfortunately, the housing market was “plagued by scandal” in the first quarter of 2011.[7] Homeowners and investors filed “numerous lawsuits alleging that big banks misplaced or even faked crucial mortgage documents.” After it was “revealed that companies that processed foreclosures signed thousands of documents daily without even reading them, potentially violating the law, some of the biggest banks temporarily halted their foreclosure proceedings” in the fall of 2010.[8] I suspect, however, that the failure of the underwriters (and compliance folks) is a red herring; most of the sub-prime residential mortgages required no documents proving income or even a job, and many of those mortgage applications contained lies known or even encouraged by the brokers. Not unexpectedly, the brokers and borrowers have differed on whether the latter should be expected to have resisted the, “It’s ok, really. Trust me,” from the “professionals.” In any case, the (in many cases) first-time homeowners were used, and the greed of the mortgage producers was ultimately behind it.
The claim, for example, made by some mortgage brokers and Wall Street securitization arrangers that the borrowers should have somehow known better than to sign low- or no-document subprime mortgages with steep ARM resets of up to double-digit interest rates is more than just disingenuous; the brokers had assured the potential homeowners that the inevitable increase in home equity appreciation from the rising housing market would give them the 20 percent equity stake that was necessary at the time to refinance into a fixed mortgages at a decent, constant interest rate. The brokers did not care whether the borrowers enabling the double commissions could make the higher ARM (adjustable rate mortgage) payments in case they might kick in. One might even say that the system was rigged by the mortgage-producing companies such as Countrywide at the expense of first-time mortgage-borrowers. Preying on the newbies, in other words, could characterize the system’s basis. Of course, such preying is unethical, for it puts others in harm’s way unless the prey should have known better, which I dispute. In short, it was not a fair fight when the harm came as even AAA-rated subprime (i.e., risky) mortgage-based CDOs ruptured in the financial crisis of 2008. 
In conclusion, although Clinton’s goal of putting poor people in their own homes had been laudable, constructing ARM mortgages with resets that low income people could not afford and relying on a rising market to obviate them was a recipe for years of a bear housing market. In other words, the system that the financial world established blocked Clinton’s goal from being sustainable, and thus achieved. Of course, Wall Street was not in the game to do Clinton’s bidding; finance had its own goals, which went on through two terms of George W. Bush in the White House. In retrospect, Clinton should have used government regulation to establish a viable system in sync with the goal rather than allow his henchmen—most notable Alan Greenspan at the Federal Reserve, Robert Rubin, Secretary of the Treasury, and Larry Summers also of the Treasury, to push Congress to keep the CDOs unregulated. In other words, Clinton, in trying to position himself in the political middle, followed Carter in adopting a deregulatory position even as it ultimately rendered his laudable goal unattainable and even reckless.



1. Nick Timiraaos and Dawn Wotapka, "Home Market Takes a Tumble," The Wall Street Journal, May 9, 2011, pp. A1-A2.

2. William Alden, “Home Prices Fall Again in Biggest Drop since 2008,” The Huffington Post, May 9, 2011.


3. Ibid.


4. Nick Timiraaos and Dawn Wotapka, "Home Market Takes a Tumble," The Wall Street Journal, May 9, 2011, pp. A1-A2.


5. Ibid.


6. William Alden, “Home Prices Fall Again in Biggest Drop since 2008,” The Huffington Post, May 9, 2011.


7. Ibid.


8.Ibid.