Yesterday the President spoke about the economy at a “backyard discussion” in Albuquerque. He made some interesting comments on housing which I’m going to analyze today.
I like when the President does unscripted Q&A because I can learn how he thinks about an issue and sometimes figure out how his advisors have briefed him. This is one of those cases.
I will intersperse my observations within the President’s long comment. You might be surprised at how much I agree with the President’s remarks on this topic. I know I was.
Q: And I guess my question is, what are we doing to prevent people from losing their homes?
THE PRESIDENT: Well, the housing crisis helped to trigger the financial crisis.
I agree. There’s a difference between “trigger” and “cause.” I think trigger is right.
THE PRESIDENT: And it’s a complicated story, but essentially what happened was, banks started seeing money in peddling what looked like these very low-interest-rate mortgages, no money down. Started peddling these things to folks. A lot of people didn’t read the fine print, where they had adjustable-rate mortgages or balloon payments, and they ended up being in situations where they were in homes that they couldn’t necessarily afford.
Close but not quite. Mortgage brokers were providing much of the increased volume of new mortgages, especially adjustable rate mortgages (ARMs) to “subprime” borrowers. Some banks were on the front end of this increased volume, but to just say banks is incomplete and a bit inaccurate.
With the word “peddling” the President emphasizes the theme of unscrupulous and shady lenders taking advantage of unwitting and uneducated borrowers. This is correct in many cases but it’s far from the whole story. Your bailed-out neighbor with the home-equity-withdrawal-financed boat in his driveway is another part of the story, and he knew exactly what he was doing. I wonder if the questioner wants the government to subsidize that knowing neighbor as well as the unsuspecting lending victim. In practice a government policy cannot easily distinguish between the two.