How it all Began, Almost a Decade Ago

So have I got a treat for you. My friend Mitch dug up this lovely New York Times article from 1999 about how Fannie Mae was changing their underwriting restrictions “in part to increase the number of minority and low income home owners.” Now, almost a decade later, the over-extension of credit is booting these very same folks out onto the street.

A lot of people see financial apocalypse looming, but frankly, I’m not one of them.  If there’s a lesson to be taken away from this, it’s that bed credit is bad credit, and a poor investment is a poor investment. Dressing either up as anything else is a bad idea. Buying up bad mortgage-backed securities to save our banks is kind of like offering mortgages to people who can’t afford to pay them off.

Some people have bad credit, and not enough assets and income to buy a home. Some banks made bad decisions and lack liquidity to cover their debts. Though the repercussions of these things may be bad (inability to own a home makes it difficult for poorer families to get ahead, bank collapses diminish available credit) “correcting” them hardly seems like a market-based solution.

Letting prices tumble until the market is willing to buy them seems like the right way to go about this. Poorer families with good credit have a far better chance of getting a mortgage on a $380,000 three decker than a $650,000 three decker. Investment banks are more likely to find shareholders if their stock price is $.27 a share than if it’s $27. Market corrections are rough, but provided market mechanisms are allowed to operate freely and people act rationally, it all comes out stable in the end.