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Mortgage Meltdown
Lessons Learned   

Q. I don't understand what happened with the mortgage meltdown. Can you explain why so many people are losing their homes and the mortgage companies and banks are in trouble? Why are people saying this is like the Great Depression? What should be a Christian's attitude in all this?

Answer:

Speakeasies&Flappers

Prior to the 1929 crash on Wall Street the Federal Reserve had loosened the money supply so that almost anyone could borrow. People played the stock market on margin and indulged in interest-only loans for real estate - just like the past 10 years.

It was "party time." Everyone was making money. "Speakeasies" and "flappers" were the 1920s equivalent of "karaoke" bars in 2003. Everyone and his brother talked "stocks" and "real estate."

Then in 1929 as in 2006, the Federal Reserve stepped in and "pulled the plug." Bankers were required to tighten up their loan requirements for real estate buyers, and investment banks called in margin loans.

The Velocity of Money Dropped after 9/11

If you remember, after 9/11 the Fed dropped interest rates down to 1.5% so that people would borrow money and buy consumer goods and houses. This is because 9/11 had briefly stopped the economy - people felt safer just staying home. They didn't feel like going out shopping for the afternoon.

The "velocity" of money (the speed that money changes hands) dropped. Citizens weren't going to the mall for shopping sprees. They weren't out there buying luxurious new cars. Instead, they were glued to their T.V. sets watching news about the terrorist attacks, anthrax-in-the-mail stories, random shootings of people in grocery store parking lots and gas stations, and learning about new color codes for terrorist alerts.

Brainwashing Ads for Home Mortgages&Lines of Credit

When interest rates plunged, people found they could afford payments for bigger and more luxurious homes and expensive remodeling projects. At the same time our country was repeatedly brainwashed by commercials from hundreds of mortgage companies.

Do you remember those commercials? Every few minutes commercials urged us to take out equity loans or buy no-down, no-interest and variable-interest mortgage loans. The propaganda was relentless - and we fell for it! We became competitive with one another to gain quick, easy riches.


Velocity of Money Increased

Because people could now afford bigger homes, houses began to go up in value. Soon people were "flipping" properties. As soon as a property appreciated in value, owners sold it and bought a better one.

The velocity of money raced. There was a huge turnover in money. People bought and sold properties like buying fruits and veggies at the market. Those who refused to "play the game" were looked upon as dumb and old-fashioned.


ABS&CDOs

Soon there were so many loans held by small, local banks that they needed to sell off some of these notes. Investment bankers devised ABS (asset backed securities) mutual funds to take these loans off of the smaller bankers' books and lists of assets. (Investment bankers are groups such as Goldman Sachs, J.P. Morgan, Bear Stearns, UBS, and other firms who market investment products worldwide).

These mutual funds which hold the mortgage loans from small banks and mortgage companies became known as "CDOs" (collateralized debt obligations). In other words, your neighborhood bank could sell our loans to investment bankers (like Bear Stearns) who bundled up the loans into bigger packages of loans - like little mutual funds.


Who Cares if the Loans were Bad?

The banks and mortgage companies didn't care if you were qualified to make payments on your house. Why? Because they just turned around and sold these loans to investment bankers. They sold off their risky assets.

The investment bankers didn't care if their packaged loans were bad. Why? They just turned around and sold CDOs to pension funds and overseas hedge funds. Everyone "passed the buck."

Foreclosure Problems for Lenders

That is why there are now foreclosure problems for lenders. They moved so fast to "make a quick buck" that they didn't properly record title deeds and legal papers. No one knows who reallys owns many of the foreclosed homes!


Worldwide Greedy Phenomenon

The profits and greed of investment bankers spread worldwide. Overseas bankers pushed real estate loans in the same way American bankers did. Real estate became "hot" everywhere around the globe - from Argentina to Britain to Australia to China to India to the Arab Emirates - everywhere it was possible to profit off of the greed of humanity. This became a worldwide phenomenon of unmatched greed!


Bond Insurers

Because pension funds are required to hold triple A-rated bonds, the insurers of bonds (like MBIA) rated the CDO packages AAA. Why not? No one really knew what was inside these bundled-loan "mutual funds" anyway. When the rating agencies finally began to downgrade the defective loans, pension funds had to sell off the bad debt and raise cash.

Would You Buy Bad Debt?

But, who wanted to buy these bad loans? Would you want them? Would junk bond funds want them - knowing they would go bad? Would overseas banks want them? No, of course not. At this point the Federal Reserve stepped in and began to work out ways to buy back the faulty debt.

A Hidden Tax

So who is now responsible to cover the losses? You are! We are! Americans are responsible - the taxpayers.

The Federal Reserve is printing money to cover the debts. It "dilutes" our dollars so that it takes more dollars to buy coffee, fruits, meats, bread, gasoline, and other necessary things.

In other words, Americans are "paying" for the bad debts through inflation! That's why inflation is called a "hidden tax." Like diluting coffee with too much water, our dollars are becoming "tasteless" or worthless.


All Financial Institutions

Please understand that our local municipalities (cities and counties) included collateralized debt (mortgage loans) in their portfolios. Brokerage firms (like Fidelity, Schwab, etc.) included CDOs in their money market funds. Hedge funds used ABS (asset backed securities) in their portfolios. Local banks used CDOs in their money funds and certificates of deposit. Insurance companies used CDOs in their investment products.

Systemic Risks

It was easy for insurers of bonds and credit-rating agencies like Moody to insure and highly rate these bundles of supposedly short-term, low-risk mortgage packages. Who knew what was in them? The risk was spread out everywhere - worldwide. But, because of this the risk is now "systemic." It is built within our monetary system. The foundation of our economic system is degrading and failing before our eyes.


Dominoes Fall

Once interest rates began to go back up, variable-rate mortgage payments began to go up, too. Those who had bought no-down loans were beginning to be hit with balloon payments and rising mortgage rates - depending upon how their loans were structured. As a result millions of homeowners worldwide are defaulting on their loans.

Shades of the Great Depression

In the United States the problem is especially bad because so many of our citizens own homes. Every day we are hearing about more and more foreclosures, plant closures and job losses. The problem is escalating and it reminds many historians and economists of the beginning of the Great Depression.

Economist Warns of Status Seeking, Greed&Envy!

Some economists and computer experts began to warn the public that these loans would go bad. An economist at UCLA, John Talbot, warned us that housing was a huge, unprecedented bubble. In 2003 he pointed out that status seeking, greed, and envy were the primary motivators for this bubble.

Ouch!

(Where were the pastors? Why didn't our Christian leaders warn us about this? What were we thinking)?


Depression Warning

In the Great Depression unemployment reached as high 30% by some accounts. Can this kind of unemployment be repeated?

Warren Brussee, a computer expert, warned Americans in early 2005 that we were headed for a serious depression starting in 2007 and ending somewhere around 2020. His projections are based on computer models.

He forecasted that by 2008 the number of people giving up on making their house payments would skyrocket. (Was he right or what)?

Warren Brussee's Forecasts

He forecasted that by 2010 the U.S. government will be in huge trouble. Unemployment will be well over 10% and there will be protest marches in Washington. Government sponsored work programs will become popular. By 2013 Americans will have given up. Unemployment will be over 15% and the stock market will be down 70% from its 2003 high.

Brussee projects that our country will become a simpler place once the worst is over. U.S. consumers will no longer buy what is "cool" or trendy. They will settle for having their basic needs met. The world will have withdrawn from us. We will be another "has-been." We will have paid back our debts in dollars which have lost most of their value. But, as a result, the world will be in turmoil because it depended upon a stable-value dollar.



A Christian Viewpoint

As Christians we are called to pick up our cross and follow Christ. The fact that believers were sucked into this atmosphere of unprecedented greed spells f-a-i-l-u-r-e for us and our leaders. In fact, where were our leaders? Did you hear any ministers tell you to jump off of the cycle of debt and envy? Did they warn us before this depression occurred?

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Consider the Bible's Advice:

We should have heard our leaders tell us not to desire our neighbor's house! (Deuteronomy 5:21).

They should have told us not to lust after or love the world or its riches (1 John 2:15).

We should have heard the woes against those who add house to house and field to field (Isaiah 5:8).

We should have heard it is wrong to live in luxurious, paneled houses while our churches are neglected (Haggai 1:4).

Our leaders should have preached to us that we should be content with food and clothing - period! (1 Timothy 6:8).

We should have heard it is wrong to love money and prosperity (Heb. 13:5).

Pastors should have yelled at us not to set "worthless things before our eyes" in our own homes - like television commercials and carnal programs (Psalm 101: 2b-3).

We should have heard not to follow the crowd or favor rich (or poor) people (Exodus 23:2).

Preachers should have warned us about "idols of the heart" (Ezek. 14:1-7).

Finally, we should have learned the biblical approach to money management: "The rich rules over the poor, and the borrower becomes the lender's slave" (Proverbs 22:7). Christians should not be in debt!

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For the lone voices out there who DID warn us about what was coming, we haughtily scoffed at them and accused them of being unpatriotic! Shame on us…

Lord, please forgive us our debts…

_________________________





Recommended Reading:


Brussee, Warren. 2005. The second Great Depression. Booklocker.com., Inc.

De Graaf, John. 2005. Affluenza: The all-consuming epidemic. San Francisco: Barrett-Koehler Publishers.

Simon, Arthur. 2003. How much is enough? Hungering for God in an affluent culture. Grand Rapids, MI: Baker Books.

Talbott, John R. 2003. The coming crash in the housing market. McGraw-Hill.


Authors Ken Emilio holds an M.A. in Biblical Studies from Louisiana Baptist University. Valorie received the M.A. in History from UCLA focusing upon early church history.







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