MAYRA'S COMMENTARY ON THE FINANCIAL CRISIS
I hear people every day debating what caused the worst recession we’ve seen since The Great Depression. The conversations usually include comments about the Wall Street fat cats and their bonuses. While I absolutely agree that Wall Street greed is responsible, my anger has more recently shifted toward our government.
First, the American public is manipulated into purchasing homes. It’s the American dream after all, isn’t it? If you own a home, you get to deduct the mortgage interest and real estate taxes that you pay hopefully decreasing your total tax bill at the end of the year...and who doesn’t want to do that? So, work, work, work and save, save, save so that you too can one day own a home.
Then, in order to ensure that banks will lend, the government created Fannie Mae and Freddie Mac. Fannie Mae was created in 1938 during the Great Depression and Freddie Mac came along in 1970 after Fannie Mae was taken public in 1968 to prevent Fannie Mae from monopolizing the market. Now America’s two largest mortgage companies, Fannie and Freddie together hold or guarantee some $5 trillion in debt. Both companies are what we call Government Sponsored Enterprises. In short, there is an implicit guarantee that the US government will not let these companies fail. The purpose of both entities is to purchase home loans from lending institutions, pool them and sell them as securities to investors on the open market. This increases the supply of money institutions have available for additional mortgage lending so you and I can get a loan when we decide to purchase that home. Fannie and Freddie made home ownership a real possibility for almost anyone and at the same time forever shifted the fundamental practice of ‘making a loan.’ Lending institutions no longer had to hold the loans on their balance sheet, which meant they were not scrutinizing the borrowers as they previously had. Remember that childhood game of hot potato? As lending criteria loosened and more convoluted loan products were created that consumers didn’t understand, a vicious cycle began. Throw investors into the secondary market that have no knowledge of real estate or the CMBS market and you have sure disaster.
Encourage the public to purchase a home…fine. Encourage and create an environment whereby lending institutions will lend…awesome. Wall Street AND our government worked in tandem to create a market where everyone makes money on us, the borrowers, several times over, and neither one is looking out for our best interest. Wall Street…fine. But, our government was elected to represent us.
The bonds that were created from our home loans were supposed to be appropriately rated by rating agencies like Moody’s, Fitch and S & P. What ultimately brought down the whole market was that these agencies were not doing their job and assessing risk. It comes down to the basic premise that the company seeking an objective 3rd party opinion, whether it be for financial results (Arthur Andersen and Enron – ring a bell?) or for securities, should not compensate the company that is providing the opinion – it creates a conflict of interest. A bank pools several loans together knowing full well that the securities they are backing should not be rated AAA and asks Moody’s to rate the issuance. Moody’s knows that if they don’t provide the AAA rating requested, the bank will simply go to another agency. I am left frustrated. All of our Congressmen are aware of this and have done nothing. We are going on three years since the collapse of the market and nothing has been done to avert this from happening again.