Rich and poor

Now with the benefit of hindsight is a good time to review just what happened in the mortgage crisis of 2008. I purchased my first home in 1959 with 4% down payment and a 28% debt to income requirement. This meant that my principal and interest payment plus property tax could not exceed 28% of my gross income. In those days as is still much of the case the cities were segregated by race. The Blacks lived mostly in one area of town and as they came in to apply for a home mortgage the banks would refuse the loan because the borrowers did not meet the required debt to income ratio and did not have enough down payment. Through the 60’s and most of the 70’s this practice continued until one enterprising group did a study and discovered that Blacks were being discriminated against when it came to home buying. This resulted in the passage of the Community Reinvestment Act of 1977 which required banks to make loans to unqualified borrows or be penalized in various ways. After years of disruption of mortgage banks by federal agencies the banks were finally allowed to lower the requirements for mortgages and this came to a head during the Clinton Administration when President Clinton told his HUD secretary Henry Cisneros to use creative financing to get more low income people into the American dream of home ownership and this opened the flood gates. This resulted in what were called NINA loans. No income and no assets! Just about any warm body would now qualify for a home loan. While these changes were occurring another practice became popular and that was the local mortgage company selling the mortgage to another company like Fanny Mae. This meant that the local bank would no longer be responsible if the home owner defaulted. This whole process by design would lead to many defaults mostly among low income borrowers who should not have received a loan in the first place. Then to compound matters many fold the major loan companies began to sell these mortgages as investments. They would put together a bundle of up to 5,000 mortgages and offer them as investments. While interest rates on bank CD’s were running 3%, home mortgage bundles were paying 6% so there was a big demand for these bundles. Rating companies jumped into the fray and rated these bundles as triple A and thus they qualified for pension fund investments. As long as the value of homes kept rising this Ponzi scheme could continue to grow but in time people realized that these mortgages were only good as long as the borrower kept up the payments. As more and more borrowers began to default the house of cards began to crumble. When all the dust settled the government had bailed out the banks and insurance companies and the poor homeowners lost their equity. As my dear mother used to say, the rich get richer and the poor get poorer.