If you look at the operating principles of every successful enterprise you will see the mention of “accountability”. Why is that?
Accountability is part of every successful organization because if people, teams, and organizations do not feel accountable for their work and results, they will not “own” them. Without ownership and accountability, the responsible individuals will not suffer any consequences for poor work or decisions. As a result, they will be more likely to continue creating the same crap they always have.
So how is “accountability” defined? It is “the quality or state of being accountable; especially an obligation or willingness to accept responsibility or to account for one’s actions”.
Now that I’ve defined what the word accountability means, let’s apply this to something that has failed and therefore someone should be held to account for — the housing market meltdown and resulting financial crisis.
I think people across the political spectrum can agree something went terribly wrong — housing prices have fallen 25-50% in some parts of the country (including Detroit) and experts estimate some $17 trillion in personal wealth has been wiped out in just three years. While a Congressional panel continues to study the reasons for the collapse, several obvious factors seem to have contributed greatly to the problem:
1. Federal Reserve (governmental) policy since 2006 through today has emphasized keeping interest rates artificially low to provide “cheap money” and encourage spending. Low rates encourage people to borrow more money, which results in borrowers being able to pay more for a given property — or even being able to purchase a larger home. This flooding of the banking system with liquidity naturally resulted in higher home prices as buyers were able to bid up the price of properties, from McMansions to condos and lake front property.
2. People who should not have been given mortgages were allowed to borrow money. Other borrowers who should have borrowed less were either encouraged to borrow more than they could afford or just “went along for the ride” as the money was offered to them. Perhaps some people, lacking any basic financial sense, may have been misled about the payments they could afford over the life of their loan. The incentive for these people was that they could enjoy the high life now and worry about consequences later. One key reason why many unqualified borrowers received mortgage loans was due to governmental policy designed to “encourage affordable housing”. While seemingly a worthy goal, government intervention in the housing market came with unintended — but easily foreseeable — consequences. These legal requirements, contained within the Community Reinvestment Act (CRA), became a big club used by “progressive” U.S. Congressmen and Senators to beat lenders into submission to meet crazy quotas and targets for low-income loans. Banks got “brownie points” from the government and permission to expand their operations while borrowers got their money — sometimes with “no documentation required” of the borrower’s income and/or no intention to ever pay it back. Politicians bragged about the number of low-income people they were “helping”. Now the Washington crowd acts like it was all the fault of greedy Wall Street traders.
3. Another reason things went sour was because real estate appraisers sometimes over-valued home appraisals. Their incentive to do so was to maintain or increase their business with the real estate agents and banks that needed their customers to obtain financing. Banks were able to charge big fees to initiate new loans and refinance home loans while having little risk of a loss later on – – because they could sell the mortgages to Fannie Mae and Freddie Mac — two government sponsored entities that buy mortgages and use taxpayers to guarantee them. So as another unintended consequence of governmental involvement in the mortgage market, U.S. taxpayers rather than the original lenders became responsible for any bad loans associated with inflated property valuations.
4. On top of all of this, we had excessive speculation in some areas of the country – – primarily Florida, California and Las Vegas. The easy, low interest government-guaranteed money was available to do “no money down” and “cash out on closing” type real estate transactions. People thought housing prices would continue to climb and a profit could be made by “flipping” the property.
5. Finally, there was an unusually large amount of fraud; hucksters saw how easy it was to qualify for a “Ninja” loan — no income, no assets” documented by the loan applicant. Unfortunately, federal agents failed to quickly respond when fraud occurred. Hucksters found it easy to manipulate the lending process. In one such scheme, buyers persuaded sellers to inflate the asking price for their home and legitimized the higher price with a fictitious appraisal, and had the seller “kick back” the difference in asking price back to the buyer in cash after the closing meeting. Once the “buyer” had the cash, they disappeared and never made a payment on the mortgage obtained.
When the first loan defaults began to occur – whether due to unaffordable debt, lost jobs, or just a lack of understanding of loan terms such as “adjustable rates” – – lenders first denied the scope of the problem and were able to contain it somewhat. But as foreclosed properties hit the market, the lower selling prices began to drag down everyone’s market values in neighborhoods across the U.S. Credit markets began to seize up as lenders took billions of dollars in losses on their loan portfolios. Economic recession led to job losses, leading to more foreclosures and “strategic defalults”. Efforts by the Bush and Obama administrations to stop foreclosures and modify mortgage loan terms have only pushed the problem down the road a bit. On top of that, Congress is still pushing lenders including Fannie Mae and Freddie Mac to meet “affordable loan” targets.
So who is being held accountable for this mess? Unfortunately —- no one.
Lenders have been bailed out by the Federal Reserve (Fed) and the U.S. Treasury. Congress continues to kick the can down the road and not let the market correct the imbalances. It is also continuing to push lenders to make loans to people who can’t afford home ownership. Interest rates are still being held ridiculously low by the Fed, continuing the “easy money” policy. Therefore, you can pretty much expect to see more of the same in the housing market — rising defaults and foreclosures and falling prices. This will not change until we get a Congress that understands basic economics.