How The Housing Crash & Recession May Have Been Avoided

Let’s start with a very basic outline of what those "bad loans" and “toxic assets” mean. Those “bad loans” that have been talked about so much are loans that were made with little or no down payment. Normally loans are made at 80% or less of the appraised value of the property. Thus the borrower would have to have at least 20% down. Those “bad loans” were made with less, usually a lot less, then the 20% down payment. In those cases those borrowers were required to pay for PMI (private mortgage insurance). That insurance was paid for by the borrower to protect the lender in case the borrower defaulted on the loan. When all the defaults and foreclosures occurred it should have been the insurers such as AIG that paid the lenders the defaulted amount over and above what the property was sold for by the bank after foreclosure and the amount owed at the time of foreclosure. Since these insurers did not have the collateral or leverage to back these mortgages they got into extremely deep financial trouble. Now in most circles when you write insurance policies that you do not have the backing for or do not retain enough reserve or reinsure enough it might be construed as fraud or financial malfeasance. Where were the insurance commissioners of each state when the insurers could not cover their policies? Toxic assets are considered toxic because the property value (in other words how much the property can sell for) is less then the amount owed on the property. And that mostly occurred because the lenders over-loaned on the property and also because property values have declined very much since the foreclosures have started. So thus the toxic assets are almost all of the properties that have been foreclosed upon over the last few years, and the vast majority of those were bad loans.

Many people have indicated that realtors are much to blame for selling homes to people who clearly could not afford them. Nothing could be further from the truth. When the housing boom was occurring most buyers came to realtors with mortgage pre-approvals already in hand. The lenders are the ones who pre-approved these potential buyers and future homeowners for loans the lenders clearly knew could be a problem to the borrowers. Realtors are required to show any and all properties to potential buyers and especially so if they can show documentation that they are pre-approved for a house priced within their pre-approved mortgage range. Realtors are not permitted to refuse to show properties to potential buyers because they themselves “think” the buyer might not be able to afford it. Clearly the largest blame for the bad loans belongs with the fast and furious lending practices of the high-flying lenders. Remember, these lenders made anywhere from 1% to 4% of the loan value as a mortgage origination fee to make the loans. Think about that. Even a 2% fee on a $250,000 home loan is a $5,000 mortgage origination fee for doing a little paperwork. Yes, and let's not forget that the lenders were also the ones who sent out the appraisers to determine the values of the properties. Perhaps the appraisers were just a bit hasty in appraising values higher then they should have been. Keep in mind that if the appraiser did not appraise a property for a value high enough to cover the amount offered by the potential buyer the lending institution would not be able to make the loan and therefore they would lose out on their mortgage origination fees. So how many appraisers were willing to risk their jobs to say the property wasn't worth what was being offered by the potential buyer?

Okay so how could this real mess have been avoided…the foreclosures, the housing crash, the property value crash, the recession, the jobless rate climb, etc. Since the property value crash, the recession, the joblessness, the housing crash, and most of the other financial woes are said to have been caused by the foreclosures, avoiding that would have been the key. Giving bailout money to the lending institutions and insurers that caused the problem is like rewarding a bank robber for the cleverness of robbing the bank. I maintain that when the foreclosures started rising rapidly, and the timing of that was well known throughout the industry and in government circles, the government should have stepped in and made grants to individual borrowers in the amount of the payment arrearages to get the loans up to date. That grant money would not have to be repaid until the borrower sold or moved out of the house. This grant would work much like the first time home buyer grant works. This method would have eliminated the foreclosures, kept more people in the homes, cost the government and ultimately taxpayers much less then the bailout and subsequent unemployment have, would have retained property tax income for the counties, kept property values from plummeting, kept homes from being abondoned and run down, and most importantly would have not caused the economies of the world to crash…which has caused bankruptcies and joblessness.

One more point about those bad loans. Those borrowers paid for that mortgage insurance. They then lost their homes. And now as taxpayers they are being asked to pay for the bailout to the insurers that took their money and the lenders that sold them down the river. That seems almost too insane to be real…and it is. Does that seem fair? I don't think so. And why when a borrower was behind (let’s say for arguments sake) $3,000 wouldn’t the lender accept $2,800 as a beginning with the borrower making up the remaining arrears with the next payment. Well they wouldn't. They required all back payments at once or nothing at all. That’s right. It is almost as if they wanted houses to go into foreclosure.

I hope I am wrong about this prediction but I don't believe the foreclosures are done. In another 6 months or so a second round will hit. These will be the homes of the people that have been unemployed for the last 6 months or more. This is when the foreclosures really hit middle America. These won't be foreclosures on bad loans. These will be foreclosures on people who have lost their jobs because of bad loans in the past by greedy lenders. These will be foreclosures on good honest working Americans who can no longer pay their mortgages and possibly their other bills as well. These foreclosures will cause even more unemployment, poverty, and financial problems.

The government grant seems like a simple solution doesn’t it? Well it is. What were our incredibly brilliant leaders thinking as this tragedy unfolded? It cannot be that the U.S. government thought granting money to individuals was too complicated. It certainly would have been far easier to manage and track a few hundred million dollars or a few billion dollars in grants to individuals then trying to keep track of the hundreds of billions they have poured into the financial institutions and insurers so far. Well all that having been said, maybe, just maybe, this idea has time to work before the next round of foreclosures occur.

Musings on Corporate Structures

Since my last post I have had the good fortune to have discussed my thoughts regarding corporate structures with others. In those discussions I have been quizzed and questioned about so many things within the corporate world that I so easily and readily took for granted as understood by the general public. Thankfully I was reminded that as I proceed down this path of writing my thesis regarding a new socially just business model that I need to keep it simple and to the point so that everyone reading it can understand the concepts and strategies and why they may be needed and why they are better than what is out there currently.

Some very good questions were raised regarding corporate debt and is it really needed. Another was stockholders and why they may not really be good for a company since these "owners" do not actively participate in the company. Why companies no longer value their employees and human resource departments don't truly treat people very well or with much humaness. In fact, the people should be assets not just mere resources. Why some companies, even very large ones, seem to have the respect and admiration of their employees and the employer for the employees. How do they do it? Can that be replicated everywhere? Is that respect only the domain of privately held companies? Can the bad service obtained from many customer service groups be resolved? And the list goes on.

Suffice it to say all the points raised and pondered will be great food for thought, and will be addressed in the thesis. Thanks for the new challenges and your extremely valuable input.

Social Justice In Corporations

Since the 1950's corporations have spread their tentacles across our great nation of once independent businesspersons. Corporate giants have gobbled up or plowed under untold numbers of small businesses in the name of growth, progress, and capitalism. Is this really what the world needs or is it just greed on the part of the big businesses and stockholders? And let's not forget that anyone who owns stock of one type or another is part of that group also. If one's 401K is invested in large corporations then that person is part of it. Not only that, if the stock is in a company that participates in off-shore importing or or off-shore jobs, that stockholder is a part of that also.

We need a return to corporate stewardship that values America, its people, its culture, and its ability to grow and enrich itself. I envision a corporate structure that is based in social justice values and holds certain rules regarding size, ownership, and the corporate culture toward its employees, its customers, and the community. In my vision once a company reaches a certain size it must split and distribute the two parts to its owners who are its employees. Yes, that's right the employees are the owners. Why not? Every company is built off the backs of its employees and what better way for a company to enrich and make loyalty flourish and grow.

For the most part when social justice issues are looked at the major items that come to mind are homelessness, food, clothing and jobs. I would maintain that the corporate culture and greed are the biggest problem in perpetuating many these issues. The lack of housing, food, and clothing are the symptoms not the problem, at least not in and of themselves. Throw in the issues surrounding crime, prisons, and disenfranchisement and the social justice problems grow astronomically.

Those are the basic ideas to be addressed in a thesis I am currently working on that I am confident can and will produce a template and model for a new style business model. A model that defines its business culture as proud and bold and positions itself as "good corporate citizentry" and is an asset to every owner, every employee, and every customer it services. And as I progress I can attach new concepts and strategies to other social justice issues as well.

In future blogs I will share much of the research I have discovered regarding social justice. Much research has been done within the confines of the United Nations, microbanks, and charitable organizations throughout the world. It's time to bring this information and knowledge to the fore and act upon it.