Five years ago, it seems only yesterday, we completed a series of four articles trying to explain to our readers how a conspiracy of intelligent financial folks who should have known better helped create a financial nightmare that affected the lives of many blameless Americans. Whether losing their jobs and careers, or their much needed funds for retirement and college tuition for their kids, I am sure that by now those folks who lost so much in the collapse of the Enron company still show the scars of the wounds created by greed and fraud. Now, I am afraid, “the monster has resuscitated and is baaaack!
Every winter, like clockwork, we get the sound advice to get a flu shot to protect us from a new strain of the influenza virus. I have the suspicious feeling that these newfangled viruses are actually created by some retired marketing genius from Detroit who used to work for the automobile industry and likes to come up with a new virus model every year to make money. And, not to outdo those creative folks, it is possible that the new Enron bacteria has resurfaced as a new stronger strain of stupidity and greed as well. The new version is called “the home mortgage crisis.”
The basis.
One of the biggest if not the biggest of our life dreams is home ownership. When you finally can call the place where you live your own, you stake your possession on a piece of land of this huge continent of the free. You have arrived and people give you a seal of community approval. A home is a man’s castle so to speak and is, of course, a woman’s also. Home is where we belong. The responsibilities you acquire with that deed are large and proud.
Of course, there is a big difference between owning a home and owning a mortgage. With the latter you owe a large part of what you own; with the former it is the other way around but, who cares? Not too long ago, our President boasted that home ownership in the United States was on its way up during his administration and he was mighty proud of it. Of course, Mr. Bush was not keeping his eye on the housing ball any more than he has done on other issues that have become traumatic during his tenure and this foul ball hit the bleachers indeed. It seems that the number of home foreclosures during his administration have also hit the ceiling, but he would not own to it. But enough of word games. This article is not about the President; his home is secure.
The current mortgage crisis is the result of released market forces that collided like converging multiple trains at a central crossing: increasing home property values and increasing property equity (the difference between what the home is valued at and what you owe the banks,) a rising appetite for all kinds of consumer goods, the availability of easy credit, the proliferation of credit cards, unbridled appetite by mortgage banks, mortgage lenders and investors. And last, but not least, an immature conviction that all of those factors would eternally go up and never come down. There was no ceiling to hit.
Unfortunately the balloon busted precipitously and we are now witnessing a large size financial debacle that has no end in sight. We will try to address each of the factors listed above in this and other future articles and then try to present a summary of what we see happening in the horizon. But in the meantime, however, have yourself a good weekend and relax. This problem is going to take much longer to be fixed than you will have to wait for my writings. These buzzards are going to be flying around us for a very long time indeed. Promise.
And that is my point of view today.
By Paul V. Montesino, PhD, MBA.
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