TUESDAY, MARCH 20, 2007 OPINION jan :J'rancisco Q:~roniclr 87
The help to something a bit more exotic. "Alt A" alternative documenta-
This unusual advice is a clear ex- tion and a grade "A" borrower. This
ample of a tacit promise that if in- driver might have good credit be-
vestors are reckless and things go cause he paid his $300 car payment
the price of everything except hous-
es goes up as the Federal Reserve
and Congress bailout "homeown-
ers." The Federal Reserve can do it
•
comIng bad, the Federal Reserve will bail on time, but that doesn't mean he
them out will pay his $4,000 mortgage pay-
As a result, mortgage banks no ment when his rate resets. For his
with its current chiefs money-drop-
ping helicopters, or Congress can do
it by using our tax money to payoff
longer worried about a borrower's "alternative" documentation, he the bad debts of investment banks
mortgage ability to repay because they didn't could have written on his loan ap-
hold the note. Instead, you own it plication that he makes $200,000 a
You own it because Wall Street year.
while pretending to "bailout home-
owners who will lose their homes!"
Either way, we taxpayers lose and
bailout sliced and diced these loans into What made home prices rise so
, "tranches" of mortgage bonds con- fast? If credit liquidity defines the
taining different risk classes and market because few people write a
banks win.
U.s. Sen. Christopher Dodd,
D-Conn., suggested that just less
then sold them to your pension check for a house, then loose lend- than $200 billion could rescue these
By Sean Olender fund, retirement investments - ing drives up prices. Lenders and poor "homeowners." But a bail out
even your insurance company. Congress complain, "We need these will amount to at least five times
ally reports for a month now Investors pric~ risk based on re- loans so people can afford the high that when the Alt A market fails.
D inform us of the "surprise" cent experience. As home prices prices." But the truth is the reverse
that subprime borrowers are rose rapidly, delinquencies were un- - it is loose lending that. drives.· up
delinquent on payments. But every- known. A hot market rescues every- prices. The purpose is to have home-
When your congressional repre-
sentative says, "but we have to help
him with your tax money because
one in the business has expected it one because investors seeking deals owners take on big debts so that we he's going to lose his house," re-
since 2004. What happened from buy lists of delinquent borrowers, become an income-generating in- member: He doesn't own his house,
2004 to 2006 in the mortgage mar- and then stop by their homes to ex- vestment Rising home prices bene- the bank does. He didn't put any
kets can be fairly described as a plain how they'll be rescued, for a fited banks, not ordinary Americans. money down and if he walks away,
scam. And you are about to pay for small profit, of course. When your home's price rises, other he doesn't lose anything because he
it Bankers, real estate agents, ap- homes rose in price, too. The capital never had anything. He only had the
Here's how it worked. praisers and mortgage brokers had gains still make you unable to buy a obligation to make a mop.thly pay-
In late 2003, Wall Street invest- an incentive to keep the game go- house without a risky loan. Thus, ment an~ the hope that in 30 or 40
ment banks realized that with in- ing. . Out-of-work computer pro- you continue to live in the same or 50 years, he would "own" a
terest rates so low they could make a grammers, waiters, even a security house, too poor to buy a larger one home. For most of these borrowers,
bundle selling shares in baskets of guard in myoid office building, be- without risky financing .. their house is worth less than when
mortgage loans. Investors craved came real estate agents or mortgage All but a handful of subprime they bought it and they'd be better
higher returns in a low-interest-rate brokers. Some went from $lO-an- and "Alt N' borrowers made no off walking away.
environment and welcomed this in- hour jobs to a $200,000-a-year gig of down payment A few put down Would you like to teach invest-
vestment vehicle. Then-Federal Re- giving away money to anyone with a . 5 percent to secure the loan. The ment bankers that they shouldn't
serve Chief Alan Greenspan encour- pulse. law may protect many of these bor- package $650,000 Zero down loans
aged this scenario by keeping the I've read the mortgage docu- rowers in California. If they walk for people making $42,000 a year?
federal funds rate at a 45-year-Iow of ments of illegal immigrants.. One I away, the law bars lenders from go- Then let's tell the Federal Reserve
1 percent In a Feb. 23,.2004, speech knew worked as a restaurant-deliv- ing after their other assets. and Congress that they cannot give
to the Mortgage Bankers Associa- ery driver making $42,000 a year There are two ways out of this: them our tax money for a bailout
tion, he noted that the common and held a $650,000 interest-only inflation or deflation. Either home
man had long suffered under his mortgage on a home, bought with ' prices drop urttil they return to their Sean Olender practices law in
fixed-rate mortgage and needed zero down. Barikers call such loans historical relationship to wages, or San Mateo.