Is the United States Going Broke?
Guest Editorial by Gerald Colby
I spent 19 years in the mortgage business. I originated mortgages for homes and later for apartments, office buildings, and shopping centers.
Inherent with the making of these mortgages was the necessity to underwrite them so that the mortgages would be repaid in a timely manner. This meant determining if the borrowers had sufficient on going income to make the mortgage payments. I made credit checks, verified employment and income, and made character judgments based on face to face interviews. Property values were verified by a third party professional appraiser.
In the late 1960s the government chartered two organizations to provide funds to mortgage lenders by buying their loan originations. The organizations, Federal National Mortgage Association, a.k.a. Fannie Mae and the Federal Home Loan Mortgage Corporation, a.k.a. Freddie Mac are shareholder-owned and are listed on the New York Stock Exchange.
They provided money to the lending community in two ways. Using good, well-defined underwriting standards they purchased mortgages for cash and with the same standards accepted and placed mortgages in mortgage backed securities. The securities were the property of the originator and could then be sold on Wall Street for more money to be used for more lending.
Prior to mortgage backed securities backed by conventional mortgages, the government was issuing securities backed by FHA and VA loans known as Ginny Maes. A mortgage backed security is like a bond except mortgage payment and payoff receipts are used to payoff the security holder. With good mortgage underwriting, such securities were considered sound investments for many years and were in great demand.
Regulatory change not seen since the Great Depression swept the U.S. banking industry beginning in the early 1980s and culminated with the Interstate Banking and Branching Efficiency Act of 1994. This resulted in mergers and the development of mega banks..
In the late 1980s and early 1990s the Savings and Loan industry had severe problems. It had made income property mortgages and adjustable rate mortgages without good underwriting. As a result Congress created the Resolution Trust Corporation to take over the failing institutions, pay off the depositors, and sell the assets (mortgages and properties). I worked for this organization until I retired.
Since then, many friends in the mortgage industry have told me many times about the low underwriting standards that have developed. Mortgage bankers have become brokers, simply selling their originations to the buyers with capital to pool mortgages for securities. Some large originators with sufficient capital issued their own mortgage backed securities.
The lowering of underwriting standards and continued use of adjustable rate mortgages led to an increase in defaults and foreclosures. This resulted in mortgage backed security holders not receiving the payback on their investments. As a result, the market for mortgage backed securities has become severely depressed and large holders such as Citi Bank have had huge write-downs in their assets.
As Wall Street’s giants take massive write-downs, fears are growing about the impact on technology firms. The consequences could be severe because financial-services companies are far and away the most ravenous consumers of their products in the U.S.
The value of the dollar has been weakened in comparison to all other major currencies. The Chinese recently indicated that the Euro, not the dollar, would be their currency of choice.
I have no crystal ball but I would guess the U.S. economy will get a lot worse before it gets better.