Opinion> Froma Harrop> Henry Potter Or Alan Greenspan

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Henry Potter or Alan Greenspan?

Nowadays, it's impossible to watch the 1946 holiday movie "It's a Wonderful Life" and not feel a twinge of respect for Henry F. Potter, the villainous banker played by Lionel Barrymore. Potter was not above drawing the last drop of blood, but at least borrowers knew whom to hate. And if they were late paying, they knew where to crawl.

That's not necessarily the case today. Mortgage companies often ship the loans to Wall Street, which repackages them into securities sold around the globe.

So if you're a borrower in trouble, and your loan is diced up into some mortgage-backed security, you'd be hard-pressed to find a lender's ear. How's your Chinese?

In olden days, the bank that made mortgages kept them. The borrower's problem became the bank's problem, so it was in the interests of both to keep the loan afloat.

The movie shows a run on the Bailey Building & Loan, during which Jimmy Stewart's George Bailey says this to a panicked depositor: "Hey, Ed, do you remember last year when things weren't going so well and you couldn't make your payments? Well, you didn't lose your house, did you?"

Because old-fashioned bankers were stuck with the loans they made, they cared deeply about who got them. Bailey is nicer and more generous than the nasty Potter, but there's not a lot of difference between their lending standards.

Remember the scene where Potter chews out Bailey for giving a mortgage to Ernie the cab driver? He accuses Bailey of lending money to any pal he shoots pool with.

Bailey responds, "I can personally vouch for his character," but also notes that Potter had the papers documenting Ernie's salary and life insurance benefits. That established his friend as creditworthy.

In other words, Ernie did not have a "no-doc" loan, a modern invention that doesn't require borrowers to provide proof of their financials.

Because applicants could put any income number they wanted on the forms, these mortgages soon became known as "liar loans."

Last year, 40 percent of new home loans were made to people with fragile credit. And more than 37 percent of the subprime mortgages were of the notorious "no-doc" variety. That federal regulators didn't step in to stop the madness is astounding.

The name of the game for the mortgage originators — the guys who put the dancing figures on their Websites — is collecting big upfront fees from borrowers and selling the loans to the investment houses who palm them off on unwitting investors.

To deter a depressed Bailey from killing himself, the angel Clarence shows the hero what the world would have been like had he never been born. In that vision, Bedford Falls turns into Pottersville, an evil place full of bad people and good jazz.

Fewer residents owned their home in Pottersville, but that nightmare town had some things over today's Greenspan City. Pottersville didn't have block after block of boarded-up houses lost to foreclosure, as is currently seen in many American communities.

Former Fed Chairman Alan Greenspan had cheered on the housing bubble that raised home prices to ridiculous levels. And despite the warnings, he ignored the recklessness and downright cons that would inevitably push mortgage market into crisis.

The weak borrowers who couldn't get a mortgage from the sourpuss Potter — and probably not Bailey, either — were better off than the moderns lured by the happy dancing figures. The latter were sucked into paying inflated house prices and fleeced by stiff fees and punishing interest rates. Then they lost their homes.

Which is less attractive, Pottersville or Greenspan City? It's a real tossup.

To find out more about Froma Harrop, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

DISTRIBUTED BY CREATORS SYNDICATE, INC.

Comments

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While this article is delightful and whimsical in its own fashion, it negates to mention any culpability of the borrower. The writer refers to "no doc" loans but never specifies what a "no doc" loan is. More aptly even with sub-prime lending, the issue is with over-documentation and not no-doc's. Most borrowers do not fully read there agreements, do not look at even the clearly stated terms on their variable rate mortgages, and show a generally lack of understanding as to the content and severity of a mortgage. This is one of the biggest purchases one will make in their life and no reading all of the major articles of the agreement (excusing even the minor articles) is indefensible and for someone to argue that there is no culpability of the buyer is ridiculous. These deals were not cultivated under duress nor were they unconscionable either procedurally or substantially. Instead of resting all of the blame on one party, the blame should be evenly dispersed. The government should have directed more attention to the issue (Even Greenspan said in an interview that he didn't learn or think about them until they were deep into the business conscious, whilst all State regulators were screaming about them from the start; however, if you understand the workings between the two you understand that the federal regulators supercede the state regulators by invoking federal jurisdiction). The businesses especially the mortgage houses should have recognized the potential for default and were negligent in preventing it. The originators were unscrupulous and undoubtly glossed over the details of the loan document and sacrificed their own credibility and morality in doing so. Finally, the customer is at fault for not reading, trying to understand, and recognizing the potential situation they were getting into. There is no excuse that the terms are not understandable. A simple google search will give you adequate knowledge to understand the terms and understand the complication of a variable rate, negatively amortized loan. Further if the argument is lack of knowledge than let me be the first to say that ignorance is no excuse for incompetance. I think we focus to much on what every one else does and blame shift way to much. I would know. I was part of these loans and lost my house to them, and I will be the first one to raise my hand and say I was ignorant of the facts and will never be again.

Comment: #1
Posted by: Rob
Fri Dec 21, 2007 8:19 AM