The first time I spoke about the subject of sub-prime mortgages and the potential for this seemingly endless fallout came during a live television show in February of 2006. Granted, the demographic for that medium market audience was not the same as those watching the more affluent Bloomberg network or even the rowdy bunch who tune in to CNBC. Yet it was the very audience that needed to hear what must have seemed at the time like a “sky is falling” report.
As I revisited these thoughts over the next eighteen months, one simple fact always seemed to remain constant: we, not the investor class but the average person, continues to suffer from financial aphasia. Closely related to semantic aphasia, a mental disorder that does not allow the individual to understand the meaning of the words being spoken even as they understand what the words are, the financial form of this malady leaves the listener doing one thing while believing something wholly different. It has been best described as a little like hearing a love song - only without knowing why those words were used or what the singer meant by them.
Financial aphasia, by my definition, offers a look at the mounting storm surge that the housing market has become and the fact that, with so many people speaking about it, affected by it, and promising to reform the system, the words have lost their meaning. We hear them but we no longer understand them.
Ben Bernanke, the Federal Reserve Chairman wrote a letter recently to Senator Charles Schumer that offered some form of agreement with the outspoken lawmaker’s fear. “I share your concern about the potential impact of scheduled payment resets on homeowners with variable-rate sub-prime mortgages,” he wrote suggesting a little further along that perhaps “developing a broader range of mortgage products” might help those who are in the deepest trouble. Really?
Didn’t the problem begin with mortgage products, Mr. Bernanke? The end result of the unceasing ingenuity and creativity of Wall Street to cater to risk seeking investors who saw the mortgage market as the new potential rainmaker is at the heart of this problem. More mortgage products Mr. Bernanke, are not the solution.
Even if the Fed has no direct impact on mortgage rates as many assume they do, shouldn’t this traumatic event have been apparent at some point before now on their economic radar? As they sift through reams of data, is it possible that they suffer from financial aphasia?
That letter made Wall Street happy with anticipation. The possibility that Bernanke has refocused his attention on the economy, one in which he pronounced was doing just fine a month or so ago, sent stocks soaring - again. Despite what Wall Street wants and even lobbies so strongly for, and at the risk of repeating myself, an interest rate cut would not be in this economy’s best interest.
Many of the newsworthy suggestions on how approach or even fix this problem are akin to using a squirt gun on a forest fire.
The most often heard solution suggests that Congress should raise the limits from the current $417,000 for FHA insurance to $500,000, more if you live in out-priced markets like San Francisco or New York. By doing this, the burden of a default would eventually fall to the taxpayer. The Federal Housing Authority insures home mortgages and by doing so, makes them more saleable to investors looking for a safe haven for excess dollars. Upping those insurance limits for the people who would qualify for that size loan would not have the desired effect that Washington would hope.
The problem with this choice piece of legislation is whom it would help: primarily, the homebuyer who should have known better – the very people who saw the words on the contract and failed to understand them. Financial aphasia.
President Bush offered an extended hand as well. Reaching out to less than one percent of the troubled homeowners with his plan, shortly after he pronounced the economy as “doing just fine” fell just shy of the mark. The market greeted it with a shrug and most of those who examined his offering saw it as disingenuous at best. His plan to save eighty thousand homeowners by overhauling the FHA, all while foregoing the other 1.4 million also smacks of financial aphasia.
There have been some good suggestions. The idea to cut the tax penalty aimed at foreclosed home owners, a move that would help the neediest borrower seems to have fallen to the wayside yet would be among the easiest of fixes. Because there is little belief that this would help anyone keep the family home, the notion lacks political incentive.
If you were not aware of this fact, a foreclosure, while damaging to your credit report, the same report that was probably already somewhat tarnished when the mortgage was first obtained, does not let the borrower escape without penalty - courtesy of the IRS. The amount of the forgiven loan, as the law is now written, is taxed as real income at the rate of the defaulted borrower.
The beauty of aphasia, if any can be found in the neurological disorder can be best seen on Wall Street. They were the ones who created the product, pushed for deregulation and opened the financial markets to a new source of asset-secured revenue. That product allowed us, the average American homeowner to tap the equity in our homes for cash to use to buy products, many of which were produced on foreign soil. Those dollars were in turn, recycled back into these mortgage-backed securities by the same entities that sold us those much-needed wares.
Hopeful that the Fed will begin to cut rates, Wall Street has taken a new tact. They are not, one analyst recently suggested, concerned about the broader markets resilience even if the Fed decides to leave the short-term overnight rate alone. They are worried they say, about Main Street. And with good reason.
Wall Street is worried about regulation. The fear that, for some reason Congress will begin to take action against the banks and financial institutions creating yet another Sarbanes-Oxley type of fix or worse, begin force-feeding them ethics is a very scary scenario for some of these folks.
It boils down to this: is showing your worthiness for a mortgage, no matter how large or small such a bad thing? No its not. But to Wall Street, this means less money spent as the consumer scrimps and saves for a down payment. And then, perhaps, even buy a house they can afford.
Could proving to the lender that you have the ability to weather personal economic storms and still keep your house actually cripple the economy? Yes it could. The majority of Americans are watching this “crisis” and wondering if it will reach them. Eventually and unfortunately it will but the readjustment may not be as painful as some might expect. Recessionary? Probably. Inflationary? In all likelihood. Will we survive it? Absolutely.
We just have to remember that the words on those loan agreements have meaning and failing to understand them can have lasting consequences well beyond our own personal sphere of understanding. Even as financial aphasia seems blissful, it is a dangerous mistake to consider it inconsequential.