Connect the Economic Dots Part I

There is a connection between our current economic meltdown, oil prices and a lack of financial regulation.  In some ways it is a perfect storm of groups not quite colluding, but using happenstance as a way to grab a lot money.  Connect the Economic Dots will wind up being a series of postings, as the problem is deep, multi-faceted and needs some esplainin’, to quote Desi Arnaz.

The commonly accepted wisdom is Wall Street is in trouble is because a large number of mortgage-backed securities turned out to be utter garbage.  This is true, to a point, but does require some investigation. 

Roll back the calendar about three, perhaps four years.  A box of rocks and a side of bacon could get at $250,000 mortgage with no money down, no job and no need to come up with even the basic fees, as the mortgage lender would fold all that into the mortgage loan.  Even nicer, the loan was at less than the prime lending rate, so as a customer of the mortgage sharks, you felt like you were getting a hell of a deal. 

Think back to the Ditech.com banker commercials; "Lost another loan to Ditech…"  Countrywide was in there too, with sweetness and light, hustling easy applications, same-day acceptance, no money down and so on.  Banks, seeing the mortgage lenders making a ton of money, decided to get in on the act too.  After all, real estate prices don’t really go down much over time and there is always the re-finance market to milk.  Which the banks and lenders did:  "Use your equity to get the home you deserve." was a common copy hook. 

You could re-fi an unbuilt house as the price on the mortgage was less than what the market was willing to pay.  Pocket an instant $100,000 just by refinancing the house you don’t live in because it hasn’t been built yet?  Holy Shite!  Money is falling from the sky for doing nothing except watching TV and eating corn chips.  

There was a housing boom as people who could barely afford food were suddenly on the fast track to home ownership:  Not modest little starter homes either.  Home builders were slapping up McMansions and town homes the size of a small Central African country. The builders were complaining they couldn’t get enough skilled trades people to work in the industry as demand was so great.

Builders probably assumed that their unskilled, undocumented and unknown workforce would be buying what they were building.  It looked plausible too, as there was always a mortgage lender who would cut a deal if you could fog a mirror.  The balloon payment in two or three years?  Fuggedaboudit.  Real Estate always goes up, right?  You could re-fi your $250,000 mortgage, as your house would be worth $450,000 in two years time and pocket a cool $200,000 just for owning a home.  At least that’s what the lenders said, as they worked the market with the builders.        

Meanwhile, the auto industry was doing the same thing with cash-back incentives to move their products.  Remember the GM Red Tag Sale, or Ford’s Employee Pricing? "You pay what we pay!"  It was always interesting to see that a big pickup truck has close to $10,000 profit in it, as that was the size of some of the incentives and cash backs.  Chrysler isn’t going to sell it for less than it costs, ever, so they pare back the per-unit profit and call that an incentive.  Fully optioned Ford Explorers for $250 a month?  Yep.  No problem, come on down.

To feed the housing boom, companies like Aaron’s and Rent-A-Centre were hyping their no-money-down, we don’t check your credit specials, letting new homeowners rent-to-own most of the furniture in their new house.  Of course you need new furniture for your new home.  Besides in two years you’ll have so much equity you can pay all this off and get a bigger flat-screen TV.

It was boom time and everyone was there to help people of modest or even no means move into a mammoth house, with new furniture, a big screen TV and a brand new SUV in the driveway.  If that sounds like the American Dream, then you would be right, with the one critical exception:  No hard work involved.  They waived that provision of the American Dream.