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I’m months behind on my blog, so there’s a ton of personal rants that the public has been denied.  Not knowing where to start, I’m falling back on an old favorite - the sucky status of the mortgage industry.  Here’s a tidbit from an article in my local newspaper which explains what I experienced for myself: 

“Whacked by mounting losses from subprime, high-interest loans made to unreliable or overextended borrowers - mortgage lenders of all types are pulling back, fast and hard. Many are either going out of business or raising standards so high that only borrowers with pristine credit histories and ordinary deals need apply.”

“The lending straitjacket forces home buyers and sellers to fall in line with the stricter guidelines or get out of the market. Area real estate brokers report that deals are falling through as lenders snatch back promises made to buyers who went house-hunting with prequalification papers in hand.”

Yep.  Sure enuff.

There is a stingy spirit of over-correction going on, akin to paranoia, among lenders. It’s not just because of the very real losses, it’s also because of the perception that mortgage lenders themselves are at fault for the mess.  Frantic to appear diligent in the face of such criticism, lenders are removing the very bricks from the sidewalk in their haste to discourage customers.  Mortgage banking has regressed by 20 years in the process.  I believe it’s a devestating reaction that will compound the existing problem.  It’s especially distressing considering it’s not the lender’s fault.

It is the Federal Reserve, and it’s Chairman, that created the problem and must therefore be part of the solution.

Banks merely followed the Federal Reserve’s cues.  The Fed kept lowering the prime rate. Lending got easier because rates went down, and consumer buying power increased.  Home prices escalated madly, because the cheaper interest rates were, the more people could afford to pay for house.  As the Fed kept knocking down rates, the madness to throw around the virtually-free money and “get in” on the gold rush of real estate took on a life of it’s own.  Adjustable Rate mortgages sounded good in an environment where rates kept nosing south.  No-money down loans seemed fine when home values were soaring.

It was when the Fed started applying the brakes, too late, and too hard, that the true problem occurred.   Yes, there was mortgage fraud out there, with fake appraisals and shadow buyers, and rings of conspiracy to bilk banks out of loans that had no homes attached to them.   Then again, it was the Fed’s overzealous discounting of the prime rate that created the opportunity for fraud. 

We must remember that the Fed was desperate, after 9/11, to stimulate the economy. The stock market had tanked. The DJIA went from near 13,000 points down to about 7,000 in the course of a month.  Businesses were folding. Airlines were facing bankruptcy. Jobs were being shed by the thousands. The world, and the American way of life, had been ruthlessly shaken.  If faith was not restored in our economy, not only was recession possible, but a full-scale economic depression was likely.  One that could tank the economies of the world with it. 

More on this later.  Stay tuned for more boring economic opinion!