Tuesday, August 26, 2008


As we’ve pointed out on numerous occasions here and on “The Money Show”, the root cause of the mortgage meltdown/crisis/fiasco was a combination of 1) mortgage lenders basically throwing their core underwriting standards out the window (thus giving loans to countless homebuyers who could not afford their mortgage payments, and thus, the home they were buying), and 2) the packaging of these loans into all manner of investment products that were bought and sold on Wall Street with far too little regard for the possible risks these investment products held. The interesting – perhaps the better word is, frightening – part of the story is that, this mortgage phenomenon has happened numerous times before in U.S. history.

As Burton Frierson of Reuters points out in his excellent article, “Lenders should heed lessons” (published in the Boston Herald on August 15th):

…[M]uch of today’s problems aren’t new at all.

America actually faced six mortgage meltdowns between 1870 and World War II.

All taught the same lesson: Some loans should never be made.

“Apparently no single person on Wall Street knew about these six earlier blowups,” said Robert Wright, financial historian at New York University…
“If they had, they would have held back (on making reckless loans).”

Wright [added that] today’s mortgage-market woes and all six previous meltdowns “all happened for the same reason. [Mortgage] [o]riginators had incentives to make many mortgages as quickly as possible and not to really care about the borrowers’ long-term ability to pay.”

[While Frierson doesn’t mention this in his article, it seems quite apparent that most of those in the mortgage industry weren’t familiar with philosopher George Santayana’s famous statement: “Those who cannot remember the past, are condemned to repeat it,” which, appropriately enough, was first written by Santayana in a book entitled Reason in Common Sense, something far too many in the mortgage industry have lacked over the last number of years.]

Frierson’s article also illustrates that “securitization” – the packaging and selling of loan products – is also not a new phenomenon. Such mortgage securitization occurred six times between 1870 and 1940. And, like the present mortgage meltdown:

[E]ach [of these previous six] times, the market for mortgage-backed securities grew rapidly for a few years – then suddenly collapsed.

Additionally, Frierson’s article points out that, although not all experts agree, many feel that because of this tendency of lenders not to stick to proper underwriting standards during housing booms, laws need to be put in place that regulate and maintain mortgage underwriting standards, thus avoiding overheated real estate markets which, in virtually all cases, ultimately lead to real estate market busts, such as that which we’re seeing today.