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    Default In the Name of Love

    In the Name of Love

    by James Scurlock

    James Scurlock is author of the book Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders and the movie maxedoutdvd movie about the consumer credit bubble and what's in store for the US economy as it ends.

    We interviewed James earlier this year.

    It has long been obvious that the modern financial industry floats high above us normal folk, untethered from the laws of classical economic theory or basic mathematics. How else to explain that as defaults, foreclosures and bankruptcies skyrocketed over the past decade, so have banking profits. The faster their customers go broke, the more money the banks and credit card companies rake in.

    Which is what made the past couple of weeks so promising. Wall Street's sudden refusal to buy "garbage" mortgages originated by Countrywide and the nation's other home lenders signaled a return to common sense–a bold declaration that if the Fed wasn't going to remove the punch bowl than the Wall Street bankers would. But no sooner had Wall Street stopped serving than Ben Bernanke declared happy hour at the Fed and encouraged the banks to drink up as much cheap, easy credit as they needed–an act of recklessness not seen since Alan Greenspan encouraged Americans to take out adjustable-rate mortgages when he should have been pushing fixed rate mortgages at their lower rate three years ago. Meanwhile, Countrywide, the company that proved itself so effective at maxing out its customers, maxed out its own credit lines and then borrowed $2 billion more from the Bank of America–at 7.25 percent, more than half a percentage higher than the rate it can charge its customers on a 30-year fixed mortgage.

    It gets weirder. Hillary Clinton, who two years ago abandoned middle-class Americans in order to stand by her man in the hospital during the lending industry-sponsored bankruptcy reform vote, is now talking loudly–and piously–about rescuing homeowners, thus joining an unlikely chorus that includes virtually all of the Democratic presidential contenders, as well as self-professed stock manipulator Jim Cramer and billionaire bond guru Bill Gross of PIMCO.

    Gross wants a bail-out of his funds. Cramer wants a bail-out of his billionaire hedge fund buddies (and maybe himself). Hillary, of course, wants the presidency. Cramer is easily the smarmiest of the bunch but still the most honest of the three, because he understands that any bail-out is a gift to Wall Street, not to those Americans who have been swindled into taking on mortgages that Kirsten Keefe, founding director of Americans For Fairness in Lending, correctly points out were "designed to fail."

    Hillary's idea for a $1 billion "mega-fund" to help people renegotiate their mortgages and get financial "counseling" reveals her misunderstanding of both the size of the home mortgage market ($8 trillion) and why lenders have been so willing to lend in the first place. More defaults plus more foreclosures plus more bankruptcies equal more profits–and even more so if there is a bail-out.

    Yes, it's counterintuitive. Clearly, it's not sustainable. Obviously, the solution to the mortgage mess (and the coming credit card mess) must be to realign the financial industry's interests with those of its customers, not just allow the customers to get screwed a little less.

    Several years ago, when the attorneys general of several states investigated Ameriquest, the nation's largest subprime mortgage lender, they discovered that Ameriquest's ideal loan officer was a male used car dealer in his mid-20s, in other words someone willing and able to sell a piece of junk that would ultimately blow up in the customer's face. Read through Countrywide's training material and you'll find an interesting phrase they call "the oasis of rapport," a euphemism for ingratiating yourself with a customer so that you can sell them anything. A vice president for Mastercard cites something called "a taste for credit" to explain why customers who have recently been through bankruptcy are such profitable customers. In other words, the modern credit business is not about selling the American Dream, it's about selling very profitable time bombs, and then another even more profitable one after the last one blew up on the borrower, leaving him or her with worse credit and therefore needing to pay even higher rates of interest. What is needed it not longer fuses but a wholesale dismantling of the bombs.

    This, of course, is more easily said than done, not only because the products themselves have become so convoluted that Harvard Law professors and M.I.T. math geniuses can't make sense of them, but because these mortgages have long been pooled together in huge funds that make the "bad apples" indistinguishable from the good ones–an extraordinarily profitable scheme that one consumer advocate aptly calls "mortgage laundering." What spooked Wall Street two weeks ago is that consumers are realizing they were sold lemons and they have stopped paying for them–not out of anger but out of pragmatism. If you have a family, you need a roof over your head that's not in danger of being detonated by an investor halfway around the world.

    Bill Gross, the bond guru, correctly observed that we haven't witnessed home deflation of the sort we're headed into since The Great Depression. Inexplicably, he blames George W. Bush for not doing something about it, as though the White House or the Federal Reserve can suddenly make the past three decades of irresponsible lending disappear. The Japanese, who are just now climbing out of their own real-estate bubble collapse hole two decades later, understand that no policy change can mitigate the hangover of easy credit excess. That excess has to be worked off and that takes time. If Hillary Clinton wants to help cash-strapped Americans, she should unwind the draconian bankruptcy reform bill that she, as First Lady, encouraged her husband to veto in 2000 and then, as New York Senator, allowed to pass four years later without a word.

    The bad news is that millions of Americans will abandon their homes over the next several years and that these unfortunate folks will become poster children for billionaire hedge fund managers demanding bail-outs and politicians making a pious display of their empathy–politicians who have milked rising home "ownership" rates as proof of the American Dream's vitality. The good news is that the financial industry's dysfunctional relationship with its customers–what economists like to call a "market failure" when it's not making everyone rich–may finally run its course, if only the Federal Reserve and the politicians will allow it to happen.



    Last edited by FRED; 09-03-07 at 09:01 PM.
    Ed.

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