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Fed shouldn’t bail out imprudent borrowers
George Will is a nationally syndicated columnist.
George Will

   Exactly a century ago, panic seized financial markets. The collateral for perhaps half the bank loans in New York was securities whose values had been inflated by speculation. Then on Saturday night, Nov. 2, 1907, a 70-yearold man gathered some fellow fi nanciers at his home at 36th and Madison in Manhattan. The next morning, a New York Times headline proclaimed:
   “BANKERS CONFER WITH MR. MORGAN
   Long Discussion in His Library
   Not Ended Until 4 O’Clock“
   Both the Times and The Washington Post (”BANKERS IN CONFERENCE: Money Stringency and Remedial Measures Discussed in Morgan’s Library“) noted that bankers shuttled between meetings at Morgan’s mansion and the Waldorf-Astoria (then at 5th Avenue and 33rd Street) in a newfangled conveyance — an automobile. Working 19 hours a day, and restricting himself on doctor’s orders to 20 cigars a day, J.P. Morgan seemed so heroic that the president of Princeton University, Woodrow Wilson, said the financier should chair a panel of intellectuals who would advise the nation on its future.
   Six years later, however, under Wilson as the nation’s president, the Federal Reserve System was created, ending the era when a few titans of fi - nance could be what central banks now are — the economy’s “lenders of last resort.” Central banks have been performing that role during today’s turmoil in the market for subprime mortgages — those granted to the least creditworthy borrowers.
   The ill wind blowing through that market has blown two goods: The public mind has been refreshed regarding the concept of moral hazard. And the electorate has been reminded of just how reliably liberal Hillary Clinton is.
   Moral hazard exists when a policy produces incentives for perverse behavior. One such existing policy is farm price supports that reduce the cost to farmers of overproduction, and even encourage it. Another is the policy of removing tens of millions of voters from the income tax rolls, thereby making government largess a free good for them.
   And this would be such a policy: the Federal Reserve lowering the cost of money whenever risky lending to a sector of the economy (e.g., housing) makes that sector desperate for lower interest rates. Many banks, hedge funds and other institutions have pocketed profits from their dealings in the subprime market. The losses are theirs, too.
   Clinton leapt to explain the subprime problem in the terms of liberalism’s master narrative — the victimization of the many by the few. In a speech favorably contrasting a “shared responsibility” society with an “on your own” society, she said, in effect, that distressed subprime borrowers are not responsible for their behavior. “Unsavory” lenders, she said, had used “unfair lending practices.” Doubtless there are as many unsavory lenders as there are unsavory politicians. So, voters and borrowers: caveat emptor.
   But this, too, is true: Every improvident loan requires an improvident borrower to seek and accept it. Furthermore, when there is no penalty for folly — such as getting a variable-rate mortgage that will be ruinous if the rate varies upward — folly proliferates. To get a mortgage is usually to commit capitalism; it is to make an investment in the hope of gain. And if lenders know that whenever they go too far and require inexpensive money the Federal Reserve will provide it with low interest rates, then going too far will not really be going too far.
   In 2008, as voters assess their wellbeing, several million households with adjustable-rate home mortgages will have their housing costs increase. Defaults, too, will increase. That will be a perverse incentive for the political class to be compassionate toward themselves in the name of compassion toward borrowers, with money to bail out borrowers. If elected politicians controlled the Federal Reserve, they would lower interest rates. Fortunately, we have insulated the Federal Reserve from democracy.
   The Federal Reserve’s proper mission is not to produce a particular rate of economic growth or unemployment, or to cure injuries — least of all, self-inflicted ones — to certain sectors of the economy. It is to preserve the currency as a store of value — to contain inflation. The fact that inflation remains a worry is testimony to the fundamental soundness of the economy, in spite of turbulence in a small slice of one sector.
   Ron Chernow, in his book “The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance” (1990), says Morgan’s 1907 rescue was the last time private bankers “loomed so much larger than regulators in a crisis. Afterward, the pendulum would swing decidedly toward government financial management.” Happily, Chairman Ben Bernanke’s Federal Reserve remains committed to minimal management, which is what government does best.  

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Banks gone bad
BY ERIK SCHNACKENBERG
For The Sunday Gazette

   If you are planning to retire or are retired, expecting to live off the proceeds of your deferred compensation plan or 401(k), take another look at the figures in your account. Watching TV news, or reading the financial section of your newspaper should have prepared you for the shocking losses of the past several weeks. If you are a small investor, like most of us, squirreling away a portion of your salary and feeling smug about co-workers who were living paycheck to paycheck, the shock may be even more profound. What happened?
ARCANE WORLD
   The financial world of stocks
   is like Oz, but full of arcane language: “leveraged buyouts,” “arbitrageurs,” “inverted yield curves,” etc. Do we ever get to use these terms in everyday conversation? I don’t. We’ve assumed that the stock market is guided by the most sophisticated numbers
   assisted by computermodels of trends and patterns. The answer according to my own primitive financial mind is a simple one — basic greed of the banking system in general.
   Banks are businesses that must show a profit to their bondholders in roughly the same manner as a Mom and Pop grocery story must show a profit to, well, Mom and Pop. Banks make enormous amounts of money (unlike the Mom and Pop store) through mortgages, interest on loans, a wide range of fees, and investing in non-banking areas. One major cause of the recent market slide has been the banking industry’s willingness to issue subprime mortgages to people with poor credit or even nonexistent credit. If the extent of banking losses intrigues you, the numbers should cause you to sit up. The United States mortgage market is about $10.4 trillion, with 13 percent as subprime and $67 billion late or in active foreclosure. You didn’t invest in banks, so why should you be concerned over the plight of bankers?
WHO’S TO BLAME
   Here it is. Bankers caused the financial problem by aggressive marketing of mortgage loans and now they want the government (read as the taxpayers) to bail them out. This is the way it will be done in New York state. A new entitlement program called “Keep the Dream” is a refinancing program for homeowners to the tune of $100 million of state and federal funds. Of course, the term “state and federal funds” is misleading because funds are derived from taxpayers in one way or another, not the government. Gov. Eliot Spitzer has explained that the $100 million in funding will help 500 to 700 families in New York state, who are in arrears due to an inability to pay their high adjustable mortgage rates. Banks offered low-initial interest rates to borrowers with poor credit, aware that the banks could raise the interest rates later. Since $100 million represents far too many numbers for me to compute in my head when that number is divided by 500 or 700, I decided that each of those families will receive a huge chunk of government largesse at taxpayer’s expense. Did I fail to mention that $650,000 will be allocated for “counseling programs” as well?
   Newspaper reports further detailed how Fannie Mae, SONYMA and other government acronyms along with other lending institutions known as “banks” will fund the program. I don’t believe a word of it. Banks are not in business for philanthropic or altruistic reasons, but for profit. In other words, they need to make a classic buck for their shareholders and do not want to own a large list of foreclosed properties that would be placed at auction.
   Large financial institutions have marketing departments that constantly seek more clients for an ever-enlarging array of bank products. From the Internet to local newspapers, unsophisticated potential home buyers were lured by the offers of easy credit, low down payments, and the initial low interest rates. Now, in the face of ever increasing foreclosures, banks nationwide are pulling back from the subprime mortgages because many homeowners are now unable to pay their obligations to the lenders. In a word, the banks were greedy and now want to be bailed out. Easy credit created the housing bubble or mania and reached an unsustainable level. The bubble has burst and has had a serious negative effect on the stock market as well — although, logically, stocks should not have been affected, but the downturn is a result of panic and uncertainty.
EVERYBODY HAPPY?
   The “Keep the Dream” program appears to have pleased everyone: Gov. Spitzer, Sen. [Hugh] Farley and a Mr. Philip Lentz, the director of communications for SONYMA. The program is an easy fix for fi - nancial institutions as well as all those homeowners facing foreclosure, or so they claim. Taxpayers must be aware by now how the government (read both political parties) “fixes” problems. I smell the smoke and can see the mirrors already, especially after Mr. Lentz was quoted saying that “most” of the money will be guaranteed by the Federal National Mortgage Association or “Fannie Mae.” If you pay attention to details, the word “most” should warrant a second look at a program with a budget of $100 million and an additional $650,000 for counseling.
   I just finished reconciling my checkbook, and I think I’m now up to date with all my usual bills. With this background in mind, I consider myself somewhat of a financial wizard, and I’m seriously considering tapping into that $650,000 counseling fund as an “advisor.” I’ve roughed out my curriculum for teaching all those persons lured by the promise of easy credit and painless homeownership. Chapter One is tentatively titled, “There is no free lunch,” Chapter Two is, “Don’t buy that boat or other adult toy just because you’ve refinanced,” and Chapter Three will be the basic, “Don’t spend beyond your means.”
   Along with the banking industry, Fannie Mae, SONYMA, New York politicians, and the gaggles of corporate attorneys, I would be willing to accept a lucrative position as a “counselor” with the clear understanding that I would be acting with a purely philanthropic goal in mind.
   If taxpayers were truly able to discover all of the hidden fees, subsidies, and bewildering obscure programs, I imagine the barricades would be in the streets tomorrow, barely holding back the mob.

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The “Keep the Dream” program appears to have pleased everyone: Gov. Spitzer, Sen. [Hugh] Farley and a Mr. Philip Lentz, the director of communications for SONYMA. The program is an easy fix for fi - nancial institutions as well as all those homeowners facing foreclosure, or so they claim. Taxpayers must be aware by now how the government (read both political parties) “fixes” problems. I smell the smoke and can see the mirrors already, especially after Mr. Lentz was quoted saying that “most” of the money will be guaranteed by the Federal National Mortgage Association or “Fannie Mae.” If you pay attention to details, the word “most” should warrant a second look at a program with a budget of $100 million and an additional $650,000 for counseling.
   I just finished reconciling my checkbook, and I think I’m now up to date with all my usual bills. With this background in mind, I consider myself somewhat of a financial wizard, and I’m seriously considering tapping into that $650,000 counseling fund as an “advisor.” I’ve roughed out my curriculum for teaching all those persons lured by the promise of easy credit and painless homeownership. Chapter One is tentatively titled, “There is no free lunch,” Chapter Two is, “Don’t buy that boat or other adult toy just because you’ve refinanced,” and Chapter Three will be the basic, “Don’t spend beyond your means.”
   Along with the banking industry, Fannie Mae, SONYMA, New York politicians, and the gaggles of corporate attorneys, I would be willing to accept a lucrative position as a “counselor” with the clear understanding that I would be acting with a purely philanthropic goal in mind.
   If taxpayers were truly able to discover all of the hidden fees, subsidies, and bewildering obscure programs, I imagine the barricades would be in the streets tomorrow, barely holding back the mob.

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Subprime lesson

While many factors contribute to the health of the housing market or the strength of the economy, it’s clear that the subprime lending splurge is coming home to roost. “Saturday Night Live,” perhaps, said it best in a 2006 skit, producing a mock commercial for a self-help book titled, “Don’t Buy Stuff You Cannot Afford.” It’s a simple premise, yet it’s one that has been ignored by overeager borrowers and, in particular, overzealous lenders.
--The Columbian, Vancouver, Wash.

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Mortgage lenders get cash infusion Federal Home Loan Bank opens spigot
BY MARCY GORDON The Associated Press

   WASHINGTON — The Federal Home Loan Bank system has increased low-cost lending to fi - nancial institutions in an effort to bolster credit stability.
   As the housing crisis worsens and the Federal Reserve has swooped into the market to ensure liquidity, the 12 regional banks are making more cash available to banks and thrifts that make mortgage loans.
   Created by Congress during the Depression, the self-funded home loan bank system has some 8,100 members around the country: banks, savings and loans, and credit unions, predominantly small community lenders. Eight of every 10 U.S. financial institution belongs to the home loan bank system, which is a big player in the $8 trillion home-mortgage market.
   Because members are government-insured deposit takers, they are subject to federal regulation and underwriting guidelines and have made far fewer of the subprime mortgages — targeted at borrowers with weak credit — that triggered panic as defaults and foreclosures in that sector surged, experts say.
   The credit problems have spread though in recent weeks to the broader mortgage market, making investors nervous about nearly all types of home loans.
   The role of the little-noticed web of 12 federal home loan banks has taken on increased significance because Washington is not in favor of allowing mortgage giants Fannie Mae and Freddie Mac to increase their debt burden until they are under tighter government supervision.
   “The powers that be would defi - nitely prefer” the Fed’s market intervention and the home loan bank system’s stepped-up advances to a raising of the mandated investment caps for Fannie and Freddie, said Armando Falcon, a former director of the Office of Federal Housing Enterprise Oversight, chief regulator for the two companies.
   FHLB members in recent weeks have increased requests for loans, known as advances, from the home loan bank system.
   The increase in the loans, backed by the mortgages held by the member institutions, has been notable at the Atlanta bank, for example, which loaned about $7 billion to members so far this month, a 6.5 percent increase from the start of August and in contrast to a 3 percent rise during the 12 months ended June 30.
   The Atlanta region members include thrift Countrywide Bank, a subsidiary of the nation’s largest mortgage lender, Countrywide Financial Corp. The parent was forced to borrow $11.5 billion last Thursday from a group of banks so it could continue making home loans, and most of the company’s home-mortgage business has been transferred to the savings and loan. The amount advanced to the thrift by the Atlanta regional bank was not disclosed.
   “We have seen an increased demand from members,” said Chris McEntee, a spokesman for the Atlanta regional bank.
   Like Fannie and Freddie, the federal home loan banks are government-chartered enterprises, benefiting from the widespread assumption on Wall Street that the federal government would bail them out in the event of a crisis.
   That implicit backing enables the home loan banks as a group — made up of 12 individual cooperatives — as well as the two publicly traded companies to borrow cheaply on global markets by issuing hundreds of billions of dollars in top-rated securities backed by mortgages.  

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Mortgage industry cuts 40,000 jobs
BY IEVA M. AUGSTUMS The Associated Press

   CHARLOTTE, N.C. — At the North Carolina offices of mortgage lender HomeBanc Corp., Archie Clark is the only employee left. But in a few days, he’ll be gone, too.
   “It’s pretty much a ghost town over there,” Clark said. “Somebody went in and took the furniture from the lobby. I don’t know who did that. I put some of the other stuff in the back and locked it up.”
   When Clark finishes helping movers from the company’s Atlanta headquarters collect computers and other property, he’ll join the more than 25,000 workers nationwide who have lost jobs in the financial services industry since the beginning of the month — with more than half coming since last Friday. With few exceptions, the cuts are the direct result of woes in the nation’s housing market.
   More layoffs are announced daily. On Wednesday, Lehman Brothers Holdings Inc. closed its “subprime” mortgage business, laying off 1,200 workers at 23 offices; Scottsdale, Ariz.-based 1st National Bank Holding Co. closed its wholesale mortgage unit and cut 541 jobs, and Accredited Home Lenders Holding Co. added 1,600 positions to the heap. The night before, banking giant HSBC said it would close a main financing offi ce and cut 600 jobs.
   Since the start of the year, more than 40,000 workers have lost their jobs at mortgage lending institutions, according to recent company layoff announcements and data complied by global outplacement fi rm Challenger, Gray & Christmas Inc. Meanwhile, construction companies have announced nearly 20,000 job cuts this year, while the National Association of Realtors expects membership rolls to decline this year for the first time in a decade.
   It’s an employment collapse that threatens to rival the massive layoffs in the airline industry that followed the Sept. 11, 2001, terrorist attacks, when some 100,000 employees lost their jobs.
   “It’s far from over,” said Bart Narter, a senior analyst with Celent, a Boston-based financial research and consulting fi rm. “The subprime lending collapse will continue to ripple through the fi - nancial sector.”
   For five years, the nation’s housing market was booming and mortgage companies grew quickly, at times offering lucrative jobs to people with little experience. But as home values declined and interest rates rose in the past year, rising delinquencies and defaults — especially in subprime mortgages targeted at borrowers with risky credit — have pounded lenders who couldn’t keep pace.
   “These kind of mortgage lenders just sprung up like mushrooms and grew like men,” said John A. Challenger, chief executive at Challenger, Gray & Christmas. “They staffed up and now you have a bust.”
   America’s largest mortgage lender, Countrywide Financial Corp., began an undisclosed number of layoffs this week. Last week, Arizona mortgage lender First Magnus Financial Corp. shut down its operations and laid off nearly 6,000 workers. On Monday, Capital One Financial Corp. said it would shutter Greenpoint Mortgage, its wholesale mortgage banking business, and lay off 1,900 employees.
   “It’s only been weeks,” Challenger said. “These companies are acting remarkably quickly, stopping on a dime.”
   Andy Roach didn’t foresee the turmoil when he joined Greenpoint in March. As late as June, the 25-year industry veteran thought the business of making “Alternative A” mortgage loans — geared for those with slightly better credit than subprime borrowers — was on a solid track. But in July, he said, spooked investors stopped buying the securities the company sold by repackaging the loans.
   A little more than a month later, Capital One announced that Roach and about 1,900 of his colleagues across the country were out of a job.

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Luxury-home
builder reports
plunge in profits
   PITTSBURGH — Toll Brothers Inc., the nation’s largest builder of luxury homes, said Wednesday its third-quarter profit plunged nearly 85 percent as the housing downturn and credit worries triggered cancellations and hefty writedowns.
   The company’s chairman and chief executive said the quarterly cancellation rate, which rose to nearly 24 percent, was greater than at any point in the 21 years the company has been traded publicly.
   Toll Brothers said earnings for the three months ended in July sank to $26.5 million, or 16 cents per share, from $174.6 million, or $1.07 per share, during the same period last year.

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Lawmakers back crackdown on ‘predatory’ mortgage lenders
The Associated Press

   NEW YORK — State and federal lawmakers are calling for a crackdown on unscrupulous mortgage firms, saying that “predatory” lending practices have fed a growing national wave of foreclosures affecting millions of people with subprime home mortgages.
   Sen. Charles Schumer, D-N.Y., issued a study showing foreclosures in New York City’s five boroughs are up by 80 percent since February, indicating, he said, that the city “is now in the full throes of the subprime foreclosure meltdown.”
   Despite that credit crisis, some mortgage companies continue advertising that entices homebuyers with misleading loan offers, Schumer told a news conference on Sunday. “Banks should not be offering these loans and sucking more New York homebuyers and homeowners into taking on more debt attached to a sky high interest rate,” Schumer told a news conference. “But judging by the way lenders are still pushing misleading, deceptive and expensive mortgages, you’d never know there is a crisis.”
   Schumer also said some lenders apparently are using accounting standards that lock borrowers into agreements without opportunity to refinance, despite a recent Securities and Exchange Commission directive against the practice. Separately, State Sen. Jeff Klein, a Democrat whose district includes parts of the Bronx and Westchester, issued a detailed survey that showed foreclosures “rising at an alarming rate.”  

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issued a detailed survey that showed foreclosures “rising at an alarming rate.”