Friday, August 17, 2007

JOHN EDWARDS

Complications and Reality Keep the Mortgage Mess From Being Easy Politics

One more reason that the mortgage mess may not be the convenient political opportunity the Democrats expect, from the Wall Street Journal:

The Wall Street Journal has identified 34 New Orleans homes whose owners have faced foreclosure suits from subprime-lending units of Fortress Investment Group LLC. [John] Edwards has about $16 million invested in Fortress funds, according to a campaign aide who confirmed a more general Federal Election Commission report. Mr. Edwards worked for Fortress, a publicly held private-equity fund, from late 2005 through 2006.

Asked about the matter, Mr. Edwards yesterday pledged that he would personally provide financial assistance to New Orleanians who are facing foreclosure by Fortress-affiliated businesses or have lost their homes already. "I intend to help these people," the former North Carolina senator said.

He also promised to cleanse his portfolio of any investments that may be profiting from their losses. "I am going to divest" from any Fortress funds that have a stake in the subprime lenders that filed the foreclosures, he said in a telephone interview. "I will not have my family's money invested in these firms."

Mr. Edwards didn't give details on how or when he was going to proceed, either to alter his holdings or to aid borrowers. He said he plans to begin making amends to New Orleans homeowners first by contacting them and "seeing where they are in the process." He said his help may come from his own cash or in collaboration with a charity that specializes in repairing homes. The foreclosures, Mr. Edwards said, "run counter to what I'm about."

As usual, our friends on the left side of the aisle want to make this situation a story of good people and bad people, with poor working class folk being exploited by greedy CEOs of large companies. I'm willing to concede that in some cases, yes, perhaps some fast-talking lenders did mislead people, and didn't sufficiently explain that their adjustable rate mortgage could change. (That still doesn't excuse not reading the fine print.) But what has happened in many of these cases is that folks began to see buying houses as a way to get rich quick. Not unlike the dot-com bubble, people saw something whose value seemed to just go up and up and up. (In the past it was dot-com stocks, in this case it was real estate). They jumped on the "flipping" bandwagon. They figured they could buy a place with little or no money down, put in marble countertops and a few other changes, and sell it for $100,000 or more than they paid a year or two earlier. For a while, people actually managed to succeed at this.

But it couldn't last forever. Supply kept increasing, because the attitude from coast to coast (with a few exceptions was) "hey! Everybody's buying real estate!" Builders loved it. Real estate agents loved it. Local governments and tax assessors loved it, as property tax revenues were skyrocketing. Current owners who weren't interested in selling liked it, as they now qualified for enormous home equity loans as the value of their property went up fast. The only people who didn't like it were the first-time buyers, as they found themselves in a world where sellers insisted that price increases of $100,000 per year were "the new normal."

And eventually, after several years of a building boom, the market ran out of buyers. Sellers first stopped getting multiple offers, and then they stopped getting any offers. Condominiums, realizing they didn't have nearly enough buyers, started converting to rentals. And prices are starting to decline, more so in some places than in others.

Sub-prime lending was one of the factors increasing the number of buyers in recent years. Offering a mortgage for hundreds of thousands of dollars to someone with a working-class income always included an element of risk. Drastically reducing the down payment necessary to buy a house added to the risk.

(From the Washington Post: "It used to be that we would finance a loan up to $1 million with no down payment for a first-time home buyer," said Daniel H. Aminoff, a senior loan consultant at Washington Mutual Home Loans in Alexandria. "But as of March, we will only finance a loan of $417,000 with no down payment." A million dollar house, no down payment! Who are these people who have the income to make the payments on a million dollar house with a 30 year, fixed-rate mortgage (a $6,000 a month payment, by my back-of-the-envelope calculation) but who can't save any amount for a down payment?)

Not requiring verification of income and assets was always extremely risky.

A lot of people made their bets, and they lost. Trying to paint Fortress or subprime lending units as villains just isn't going to fly.

08/17 12:59 PMShare