How things have changed

John Cole has a blog post up about this article by Thomas Franks that puts the blame for the current crisis right where it belongs--the mortgage industry that wrote loans it should have guessed were going to go bad. He quoted a different section than I'm going to, but the whole thing is worth reading.

I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn't originate any of the bad loans -- that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.

Most of the mistakes for which we are paying now, Mr. Black told me, were actually made "by four entities that under conservative economic theory should have exercised effective market discipline -- the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities." Instead of "disciplining" the markets, these private actors "served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble." It is they, Mr. Black says, who "turned a crisis into a catastrophe."
I've never sold houses, but for a mercifully brief period of my life in the early 90s, I tried selling cars for a living. I wasn't very good at it--I left the business not long after a woman put a second mortgage on her house from a finance company to get the down payment for her new van. I felt ill afterward.

But I think the story I'm about to tell is still illustrative of how the world of financial instruments has changed over that span of time. Do a google search now for "buying a house after bankruptcy" and you get page after page of hits talking about how easy it is to do. Some of them say you'll need a 20% down payment--others are even more hopeful than that. Even if that's not the case today, it was certainly the case two to three months ago.

But one of those days I was on the lot--this would have been 1995 or so--and a couple came in, looking for a middle-of-the-road car, nothing fancy. We looked around a bit, and finally the husband tells me "look, I don't want to take up a lot of your time if I can't make a deal here. I tried starting my own business five years ago, it went under, and I filed bankruptcy. I've paid every bill I have early ever since then." I took him to our finance guy, and ten minutes later, they came out, headed for the door, and never looked back. The finance guy came to me and said "I couldn't write those people if they had half the purchase price as a down payment." The bankruptcy did that to them, he said. That alone.

So it seems to me that there was a time when financial institutions were willing to take a share of responsibility in the credit process, when they were willing to tell people "no thanks--you're not worth the risk." Mortgage companies during the boom were obviously not willing to hold up their end of the bargain.

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