The country's largest mortgage company Countrywide Financial is finding itself fighting for survival amidst the deepening financial crisis. They tapped an $11.5 billion line of credit in order to stay afloat while other firms have gone bankrupt. Interestingly the panic caused by lenders of sub prime (higher credit risk customers) mortgages has spread to mainstream institutions like Countrywide. Lack of confidence in the markets is now affecting everyone.
Once upon a time when you needed a mortgage you went to your local savings and loan. You applied with someone you probably knew from church or your civic group or someone your children played sports with. They issued the loan based on savings account deposits in their bank from other local residents. They made money by the spread between what they collected from your mortgage interest and the interest they paid on the savings accounts.
It all worked well until Ronald Reagan deregulated the industry. Greed and avarice took over and taxpayers wound up spending tens of billions of dollars rescuing the industry. Some of the scoundrels involved were named Bush (the president's brother Neil) and McCain (Senator John, one of the 'Keating Five'). The savings and mortgage industry has never been the same. Mortgages are now issued by brokers, giant financial companies who bundle loans together and buy and sell them on markets controlled by unregulated hedge funds.
Some homeowners have difficulty keeping track of who owns their mortgage. They got transferred so often it was hard to remember who to write the check to each month. The good news is that madness has probably ended. No one can find buyers for mortgage securities anymore meaning they're worthless on the financial markets.
Meanwhile foreclosures are increasing and many Americans are desperately trying to keep from losing their homes. Add pressures from increasing energy and health care costs and the middle class is in desperate financial straights. George W. Bush ran for re-election in 2004 largely on the issue that more Americans owned their homes than ever before. He took huge credit for these numbers. I attended (well, protested outside) an event he held in Ardmore early in his campaign where he was celebrating one of the few positives he could claim as President: increasing home ownership.
My how the mighty have fallen. Bush didn't explain that those numbers had been built on a house of cards. He didn't explain how precarious many of those loans were and how, by refusing to regulate the industry and markets it could all come tumbling down, taking the economy along.
Update: The Federal reserve cut interest rates 1/2 point this morning. This action serves only to reward the reckless behavior which led to the crisis.
