A crisis of responsibility

James Simpson
Published: September 25, 2008

We truly have a crisis in this country now. To be more exact, in regards to the mortgage industry failure, what we are experiencing is a crisis of responsibility.

For decades, perhaps centuries, people have been able to determine, with a few simple calculations, whether they could afford a home, and how large a home they could comfortably fit into. Working
these numbers is so simple that even the uneducated were able to comprehend what was affordable and what was beyond their means. On the other side of that coin, those who provided mortgages
would determine if the risk was worth lending money to a potential buyer.

Granted there were instances of immoral lending practices, the most popular was known as “red-lining.” Essentially this would prevent people in certain communities from acquiring loans. It was an easy
way for financial institutions to pre-disqualify potential borrowers without having to actually go through the trouble of processing a loan. Frequently the division was racially unbalanced.

So why do I believe the true crisis is related to responsibility and not mortgage failures? Because we are now a nation of people who believe that the result of their station in life is due to external factors.
Many Americans support the view that it is other people, or society in general, that holds them down or even owes them in some way.

The rule of thumb has always been to limit the amount of a mortgage to a certain percentage of the household income (usually around two to three times the annual salary), and the house payment
should not exceed 25 to 30 percent of each paycheck.

When people are responsible and held accountable these formulas work well.

In the past few weeks I have heard many people argue that it is a failure of the free market that caused the mortgage problem. It astounds me how many people are so misguided and so easily persuaded
by “group-think” into believing that a self balancing system could cause such a tremendous problem. Any time a system gets out of whack — mortgage, health care, trade, etc — you should always look
to where some amount of force or control is being exerted. In the case of the mortgage industry, our government decided that only allowing those people who could reasonably afford a home to obtain a
mortgage was “unfair,” so they took steps to intervene and “solve” the problem.

Along came the Community Reinvestment Act of 1977. According to Wikipedia, “The purpose of the CRA is to provide credit, including home ownership opportunities to underserved populations and
commercial loans to small businesses.”

This tampering with the system was not sufficient to those in control. So in the late ‘90s changes were made to the Act that encouraged “no doc” loans and created “sub-prime” mortgages. To make
matters worse, add in risky lending practices like “interest-only loans” and you have created a recipe for disaster. If someone can’t get into a house unless they squeeze through with no down-payment
using a limited term loan that artificially lowers the payments quite significantly, they probably shouldn’t be buying a house; what reputable and respectable lender would ever take such a risk? It’s like a
game of musical chairs. Everyone knows that the bill is going to come due and the only way to not lose everything is to hope that when the mortgages need to be refinanced, the economy is going
stronger than ever. But that’s not the way any economy works, so when the music stopped you find people trying to grab a seat and instead they are now landing hard on the floor.

Now the rest of us are told that we are to be held accountable for this mess.

Let me offer a similar scenario: Sam, Fred and Harry get together and decide to rob a bank. They successfully pull off the heist, but are eventually caught. A trial is held and they are all found guilty of the
charges. The next day police show up at your house to arrest you and take you to jail. You inquire as to why you are being incarcerated. You are then informed that everyone is going to have to serve
some time for the bank robbery committed by Sam, Fred and Harry.

In fact, when your kids are older they are also going to have to serve time for the bank robbery. You see, this is what happens in a society where people are not held accountable for their actions — we
are all forced to pay for their crimes. (In this production the roles of Sam, Fred and Harry were played by Uncle Sam, Freddie Mac, and Harry Homeowner. )

The free market would never have allowed this to happen; it is tampering by our government that truly caused the failure of the mortgage industry. What really irks me is that these politicians are now in
the news, patting themselves on the back, telling the American public that they are working hard to help save us without admitting their culpability. Disgusting … to say the least.

James Simpson lives in Lake Ridge.