The Mortgage Crisis and Obama's connection

I cringe when I hear some of the news media talk about the mortgage meltdown. In the media's ignorance, the blame has been put on a variety of U.S. Presidents: Ronald Reagan, Bill Clinton, George Bush, and now, Presidential candidate, John McCain. Of course, Senator Obama is relishing in the meltdown while he blames Senator McCain and the "good old boys." He hasn't been in Congress long enough to be tied to this mess.

Let's inject some truth into what is happening with this mortgage crisis. Early in my career in banking, I took mortgage applications. At the time, the government restricted the rate of interest on mortgages through the usury law. Only fixed rates were offered and the going rate for conventional mortgages was 8.5% and slightly less for FHA and VA mortgages. The minimum amount of downpayment you needed was 20% for a conventional mortgage and around 3% for an FHA and VA mortgages. Your income could be no more than 28% of the Principal, Interest and Taxes for a conventional loan. That means if your mortgage was going to be $1,000, you had to make $3,571 a month, or $42,857 a year. FHA and VA mortgages were slightly more complex in their calculations and flexibility, but essentially they were similar.

Mortgages were not easy. The underwriter received written verification of the borrower's income and savings. You had to have money to buy a home. You had to have a job and to be in that job for at least two years. You could be declined if you had bad credit. And if you had one late on a credit card or loan, you had to provide a legitimate reason why you were late.

The banks complained, however, that they could not make enough money on mortgages due to the fixed rates. After all, they were paying 5.5% on savings accounts. And, they didn't want to hold mortgages on their books forever. So, the Fed got rid of the 8.5% ursury law and allowed banks to offer variable interest rates and mortgages with less of a downpayment through Private Mortgage Insurance companies. Fannie Mae and Freddie Mac would buy these mortgages from the banks. The banks packaged the loans, sold them and made a small profit on the sale.

At that time, citizens groups, then the government, started to pressure banks to free up more mortgage money for poor neighborhoods. They said banks were intentionally "redlining", or not investing in certain areas. In other words, they were discriminating against minorities and the poor.

Congress and activist groups continued to encourage the banks to lend more freely. The Community Reinvestment Act was born in 1977. As time went on, lending practices became more liberal. If people couldn't qualify for a loan due to income, the percentage of allowable income was increased. If they didn't have any money for a downpayment, then they could have zero downpayment loans. Some mortgages didn't need any income verification. They took your word for it. Bad credit? You could still get a mortgage, just at a higher rate.

The mortgage companies, of course, were in the market of selling mortgages. They had no incentive to properly qualify people. The broker's primary goal was to get the commission and fee from selling the loan and get out.

Everyone jumped on the bandwagon, of course. Easy money brings on the sharks. It was a feeding frenzy. People who really didn't have the qualifications to purchase a home because they didn't have the proper income or money were invited to the party. Speculators began to buy properties, fix them up, and turn them around. Some speculators didn't even fix up properties. They just held the property for a little while and sold it when the housing prices would jump.

Like all bubbles, it burst. It was the "perfect storm." People who had bought homes at the height of the frenzy walked away from the home because it was worth less than the mortgage. People who had stupidly taken a mortgage at a "teaser" rate, had the rate change and couldn't pay the mortgage. Speculators had no incentive to hold the house because no one was buying and walked away. There was no reason to fight for the home - they had no money invested in it.

Banks and investment houses who bought up these mortgages, of course, began to see them default. Fannie and Freddie, who were in major trouble anyway, went belly up. Why should the CEO's care? They had made their millions. They had sucked the companies dry.

Congress, who encouraged this fiasco in the first place, now has bailed out Fannie and Freddie and will continue to prop up this market.

The secret, however, is how big the mortgage crisis is. It has toppled Fannie, Freddie, Lehman, AIG, possibly Washington Mutual and Morgan Stanley. Who is next? I don't get it.

So, who is really responsible for this mess? Who can we put the blame on? In 1995, the Clinton Administration's revision of the Community Reinvestment Act (CRA) substantially increased the number and amount of loans to low-and moderate-income borrowers for home loans. The revisions allowed the securitization of Community Reinvestment Act (CRA) loans containing subprime mortgages. Bear Stearns started the first public securitization of CRA loans in 1997.

In 2003, the Bush Administration recommended moving the government's supervision of Freddie and Fannie to a new agency within the Department of the Treasury. This failed to happen as the Democrats opposed it. Rep. Barney Frank (D-MA) claimed that Fannie and Freddie were "not facing any kind of financial crisis, that people were exaggerating the problems, and the more pressure there is on these companies, the less we will see in terms of affordable housing." Representative Mel Watt (D-NC) added "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing."

Sen. Obama has not escaped his connection from Fannie and Freddie (F & F), however. The top three U.S. senators getting political bucks from F & F were Democrats. Sen. Dodd was first with $165,400 and Sen. Obama was second with $126,349. http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html

I suppose we should not be surprised. The Dems have been "in bed" with F & F for some time. Clinton's House Budget Director Branklin Raines ran Fannie and collected $50 million. Jamie Gorelick, Clinton's Justice Department official, worked for Fannie and made $26 million. Jim Johnson, on Obama's VP search committiee, made millions in his Fannie CEO job.

To make matters worse, the CEO's of F & F were cooking the books. They inflated earnings in order to make everything seem just peachy keen.

But, the Republicans are not entirely unscathed by the F & F debacle, either. Since 1989, according to opensecrets.org, F & F contributed a whopping $4.8 million to our politicans - both Democrats and Republicans. Over nineteen years, Sen. McCain received $21,550 from F & F, not good, but quite a bit less than Obama as a first term Senator.

How stupid for Sen. Obama to try to push the stench of the Democrat's connection to F & F onto the Republicans, particularly Sen. McCain. The American public will find out the truth.

In only his first term as Senator, he's already waist deep in you-know-what with the F & F fiasco. I have serious doubts about a man who has almost no track record in federal government, yet has demonstrated a complete lack of common sense and moral judgment by being in bed with one of the most incredible spectacles of greed, deception and corruption of our time.