CAAR Blog

I was traveling in Richmond yesterday and heard a lively debate on WRVA 1140 (equivalent to our WINA) on the President’s plan to help deal with the so called “mortgage crisis.�  The DJ (I think they called him “Doc�) had the audience pretty mad about the government bailing out owners who had gotten in trouble with adjustable rate mortgages.  He compared it to going to Vegas and losing money and expecting the government to come bail you out.

When you compare mortgages and gambling I doubt even the most “progressive� political thinkers would think it was a good idea to rescue these potential defaulters.  But, unfortunately, the situation is way more complicated than Doc made it sound.  I think we can compare this situation to the dotcom and Savings and Loan crisis of the last 20 years.  As with those crisis, the current situation was caused by what Greenspan correctly called “irrational exuberance.�  Also, similar to those crisis is the root of all evil – the love of easy money.

In the S&L crisis it was financial institutions lending money to projects that had no chance of being successful.  Same thing happened in the dotcom situation and once again in the current crisis.  While it is easy to blame the individual who gambled on the hot real estate market, I think more blame should be placed on the irrational exuberance in the mortgage investing markets.  This situation proves the saying, “you can’t protect the foolish from the greedy.� 

The bail out plans from the President and every other politician are not designed to bail out individuals; rather, they are intended to bail out these financial institutions that made bad loans and the investors who blindly backed these loans without considering the chance of success.  We bailed out the S&L industry, so I guess the financial markets are expecting the same thing this time.  That’s who we should be mad at instead of the few fools who agreed to these sucker loans.

The situation is even more complicated than I make it, but in an effort to keep this post short, just trust me when I say that the real crisis we are in is that of investor confidence and NOT a mortgage default problem.  Notice the run up in the stock market when the President announced his plan.  Don’t blame your local mortgage lender.  That would be like blaming the addict on the street for the global heroine trade.  Most mortgage companies are doing wonderful work to help people buy a home.  The default rate is only 6%, which hardly seems like a real crisis.