Our Economic Mess - Who to Blame and Solutions

After all of the media attention I had to think about this economic mess we are in and decided to do some research into who were the key players and what the largest factors were. Some may not agree with my opinions which is okay.

It is impossible to blame the current state of our real estate crisis on one person, company, administration or political party. However we can look back to an administration (Clinton) that "pressured" risk based lending which inevitably opened the flood gates for irresponsible lending guidelines. The cause was noble but the execution was disastrous. Fannie Mae stockholders were excited about the idea as well as they saw an opportunity to increase their profits so they too should be held accountable. See this "The New York Times" article written September 30, 1999*

Risk Management

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As I began my career in loan origination I was astounded that lenders would offer payment option arms to people with spotty credit. I do not curse these loan programs however because people with excellent credit tend to have the discipline and resources to responsibly use these loans to their advantage. One bank (I will not mention their name) was offering payment option arms to borrowers with a credit score as low as 530 with no income or asset verification!

Our Economic Mess - Who to Blame and Solutions

I am a mortgage broker not a Wall Street Firm and even I saw the writing on the wall. How could the Wall Street Executives and Pension Fund managers turn a blind eye to these lending practices? I believe this "pressure" from the Clinton administration and stockholders of Fannie Mae gave banks the green light to package up junk and sell them as highly rated mortgage backed securities (MBSs) to unsuspecting investors. This is reflected with current losses sustained in many 401k, IRA and pension funds that invest heavily in these types of securities because they are considered "safe".

If find it hard to believe that any administration would pressure Fannie Mae and not consider oversight on the rating of these bonds. I think these policies hyper inflated the measurements of productivity and growth in our country causing a public perception that I can have anything I want no matter what the cost. I do not blame one party for this but I do blame a few powerful Washington players that shaped the past lending environment.

If credit challenged borrowers want to be able to secure financing to buy property then I believe private money would have been the key. If private investors do not want to lend to someone after reviewing their credit, income and assets then this should send a loud and clear message that these people are not in a position to borrow at this time.

So now we are faced with the same entity that helped to create this mess (our government, with special thanks to Representative Barney Frank) trying once again to make policies to shape the rules of lending. FYI, I am not a staunch proponent of the Bush administration but you should know that Barney Frank opposed a Bush administration proposal in 2003 for transferring oversight of Fannie Mae and Freddie Mac from Congress and HUD to a new agency that would be created within the Treasury Department. The proposal reflected the administration's belief that Congress "neither has the tools, nor the stature" for adequate oversight.

Frank stated, "These two entities are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

To read more of how Barney Frank contributed to this mess scroll down to read Fannie and Freddie on his bio at Wikipedia and type in his name.

Had our government kept their nose out of private banking and passed the oversight to the Federal Reserve I believe we would not be in this mess. Private firms have managed well in years past with minor supervision. When a government pressures or provides incentives to private companies to ease up on their risk mitigating policies I place more blame on government officials than I do on the private industry. In a nutshell I believe our officials encouraged and rewarded bad behavior for political gain which fed off of itself creating opportunities for big banks to make huge profits.

Solutions!

I propose:
I believe the state of our economy is 20% real and 80% perception. We all know that quick and radical changes are needed but what changes?

One idea: I propose we eliminate our complicated tax system and adopt the fair tax proposal. http://www.fairtax.org

What I find most attractive about this plan is the fact that revenue will be collected by the federal government on all monetary activities including those that they do not currently collect on like illegal activity, immigration, side work etc. For example: Drug dealers, illegal immigrant workers will make money and will eventually spend a good portion of it in the US. When they do our federal government would receive revenue. Although I do not condone illegal activity the fact remains that it does occur and those people especially should not be excluded from contributing. Currently law abiding tax payers are paying for all of the roads and other federally funded projects that these people use but do not otherwise contribute.

Knowing there are millions of illegal workers in the US one has to wonder how many billions of dollars in funds to be used for our infrastructure and federally funded programs are being squandered. This could be a chance to reduce the taxes we tax payers have to pay giving us "buying power". Some argue that the tax would be too difficult to collect. Then how in the world are individual States collecting their sales taxes? Some argue people won't buy homes without the tax deduction, I say nonsense. Let me keep all of the federal income and social security taxes I pay and I will be willing to upgrade my house!

Another idea: Currently we are providing billions to banks to allow them the funds to lend to consumers. However, many of these banks are hoarding cash and not lending. For all future TARP funds why not reimburse banks for the money that has already been lent instead of providing them money "in hopes" that they lend?

Last idea: Stop collecting federal income taxes on people and businesses for a few months. If the Federal Reserve is going to print money why not give it all to the federal government to keep it running in the absence of taxes? Dealing with the logistics of distribution and the added cost of that distribution makes it less effective. Not to mention it and would reduce the uncertainty of who gets what and how much.

Our Economic Mess - Who to Blame and Solutions

*http://query.nytimes.com/gst/fullpage.html?res=9c0de7db153ef933a0575ac0a96f958260&sec=&spon=&pagewanted=all

Nevin Williams is a branch manager for First Priority Financial in Cary North Carolina. He is licensed to originate loans in California, Oregon North Carolina and Washington. You may contact: (888) 206-5781 x 1017
nevin@nevinloans.com
http://www.nevinhomeloans.com

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