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The Path to Responsibility, Part I


Subprime lending, as a means for alternative home financing, has taken quite a hit. It started two years ago when the data started coming back on ARM loans - that they were going belly up faster than other loans. Which should have been no surprise, actually. These people came into their loan at one rate, only to have the rate move significantly higher later, and that pushed some borrowers beyond affordability. Kind of a no brainer that a decent percentage of folks would be stuck between the rock of relatively fixed income and the hard place of deflating / static home values.

I worked for a mortgage lender not long ago. My job was Strategy Consultant. My task was to think differently - to push innovation. The problem is that despite every innovative twist I could conjure and for which I might fashion a business case, just about every idea I proposed hit the brick wall of Fannie and Freddie. Becaue the lender was tied to the 800-lb gorilla's secondary market purchases, if these government entities didn't have room for the innovation proposed, any idea became, as I was told, "a product without a home."

One bit of my advice at that time was simple: "We're a one-crop farmer. If something happens to Fannie / Freddie, we're deeply hurt. We need to start developing secondary market channels outside of Fannie / Freddie." While my manager agreed with me, it ended there. Not that I was coughing up the solutions that would have solved or prevented the financial crisis from happening. That's not the point. The point is that the banks to which we trust our money and our financial security can't innovate or respond to the market without the approval of Fannie / Freddie. That's a weak position - a surprising stance for the expected firm ground of financial institutions. (And this is industry-wide, not just my former employer.)

It's a good thing that Fannie and Freddie will survive. But what I hope is that banks will reduce their risk in the market through such a heavy reliance on Fannie / Freddie. Guess what's become fashionable these days, instead of Fannie / Freddie? FHA lending. More government. Do we really think that is somehow more sound?

Banks - which are private entities - need to wean themselves off the government teat. When the government becomes the main vehicle for homeownership, it's a recipe for problems. Government is never efficient, with the exception of the military, because the military encounters competition all the time. Deadly competition. But government agencies? There is no competition to drive efficiency. Therefore, the government agencies / solutions will bloat and lack accountability and oversight, as happened with Fannie / Freddie.

I'll write more on this later, but I wanted to get these first thoughts out about this now...


Tags: mortgage
by Brett Rogers, 9/21/2008 12:41:44 PM



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