By FLOYD NORRIS Thursday, December 20, 2007 Copyright © 2007 The International Herald Tribune http://www.iht.com/articles/2007/12/20/business/norris21.php
NEW YORK: I knew it was the Christmas season. There on the television was Henry F. Potter, the mean banker, quizzing Pa Bailey, the idealist from the building and loan society.
"Have you put any real pressure on these people of yours to pay those mortgages?"
"Times are bad, Mr. Potter. A lot of these people are out of work."
"Then foreclose!"
"I can't do that. These families have children."
"They're not my children."
I've always loved "It's a Wonderful Life," with its happy ending that redeems our faith in humanity. There is a reason it blankets the airwaves every December.
I would have liked to watch the entire movie again, but duty called. I needed to study the latest government effort to deal with the subprime mortgage crisis. To great fanfare, the U.S. Federal Reserve proposed new rules this week to keep bankers from doing mean and stupid things.
But as I read the rules, I couldn't get George Bailey (Pa's son and successor, played by Jimmy Stewart) or Potter (played by Lionel Barrymore) out of my mind.
And I began to fantasize about some sort of interactive television, in which the Baileys and Potter could see into our world as we see into theirs.
One rule proposed by the Fed would "prohibit a lender from making a loan by relying on income or assets that it does not verify." In other words, no more liar's loans.
To Bailey, that rule might smack of Potter's evil influence. "I can personally vouch for his character," George Bailey told Potter, defending a mortgage loan he made to a taxi driver. Sometimes you can know a man is a good risk by what kind of man he is.
To Potter, on the other hand, the idea that such a rule was needed would have seemed absurd. Require a banker to only lend money to people who can afford to repay? You might as well require a river to flow downhill.
Potter would have found another proposed rule, to "prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home," even more ridiculous, particularly after he learned that the Fed was worried that lenders will seek inflated appraisals.
Why, he might ask, would a lender purposefully lend more than the home was really worth? As he put it to Pa Bailey, "Are you running a business or a charity ward?"
But Potter's eyes might have brightened when he heard that one proposal would "prohibit seven misleading or deceptive advertising practices," like "using the term 'fixed' to describe a rate that is not truly fixed." The idea of misrepresenting terms of loans might have seemed attractive to him, and the presumption that "misleading or deceptive advertising practices" were O.K. if they were not on the list of seven might have inspired him to look for loopholes.
The reality is that neither George Bailey nor Potter, nor any banker of their generation, could have imagined how the 21st-century mortgage market came to operate.
Lenders, the Fed explains, "may not give adequate attention to repayment ability if they sell the mortgages they originate and bear little loss if the mortgages default."
The idea of a world where lenders do not care about repayment, but instead get rich from fees from securitizations, would be completely baffling.
The Fed's proposed rules might have kept us out of the current mess. But enacting them now will do nothing to get us out of that mess. As the Fed explains in dry understatement, "The market has responded to the current problems with increasing attention to loan quality." The people who financed these securitizations have learned their lesson, and easy mortgage credit for dubious borrowers has vanished. The best explanation the Fed can offer for acting now is that new rules could "help prevent a recurrence of these problems."
With all due respect, the threat of such a recurrence is not pressing.
What is pressing is finding a way to ameliorate the real problems that the Fed does identify.
"When borrowers cannot afford to meet their payment obligations, they and their communities suffer significant injury," the Fed writes in explaining its proposal. "If a neighborhood has a concentration of unaffordable loans, then the entire neighborhood may endure a decline in homeowner equity. Moreover, if disregard for repayment ability contributes to a rise in delinquencies and foreclosures, as appears to have happened recently, then the credit tightening that may follow can injure all consumers who are potentially in the market for a mortgage loan."
Pa Bailey understood that, which is one reason he was unwilling to foreclose during the Depression. He knew his borrowers, and they knew him.
This generation's lenders did not know their borrowers, but figured that did not matter, because house prices were sure to rise. No banker who lived through the Depression would ever have made that mistake.
"Would you have freedom from wage-slavery.." Joe Hill "http://iamawobbly.multiply.com/
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