All the talk in Washington and New York these days is about the subprime mortgage collapse and the writedowns at financial institutions like Merrill Lynch (MER) and Citigroup (C). Isn't anyone concerned about homeowners these days? More than one million Americans will lose their homes this year because they cannot keep up with their mortgage payments. So far only Treasury Secretary Henry Paulson seems worried about the homeowners who are being tossed out on the street.
I raised this issue in front of several thousand real estate developers on Oct. 26 in the course of presenting my book, True North. While most of the real estate folks were sympathetic to the plight of homeowners, the head of a large real estate investment trust was first up in the Q&A session. He described people who are losing their homes as "nothing but a bunch of speculators who falsified their mortgage applications."
Predatory Lending Practices
Not exactly, sir. These homeowners are common folks who got talked (might I say conned?) into home purchases with no-down-payment mortgages that offered low rates in the early years until they were adjusted upward. Those people are being forced out of their homes because they can't make the increased payments, and the value of their homes has sunk well below the amount remaining on their mortgages.
Mortgage brokers like Countrywide Financial (CFC), the nation's largest mortgage broker, have been aggressively pushing these offerings. They have been permitted to operate outside the complex regulatory system that governs our banks and the traditional mortgage companies. Now homeowners are paying a big price for the Bush Administration's lack of regulations to protect consumers.
On Oct. 26 Countrywide announced writedowns of $1.2 billion. Its stock has collapsed from $45 earlier in the year to the mid-teens at present, a loss to investors exceeding $16 billion. Has its leader taken the hit for these problems? On the contrary, Countrywide Chairman and Chief Executive Officer still has his job and is a rich man to boot. Mozilo sold $130 million of his Countrywide stock earlier in the year at prices averaging $40 per share. It's too bad the rest of us weren't as capable as Mozilo to see this disaster coming.
Tight Regulations Protected Banks
Merrill Lynch CEO Stan O'Neal (BusinessWeek, 10/30/07) wasn't so lucky. O'Neal, a competent executive who reshaped and diversified Merrill's business in recent years, got too far out on the risk curve in financing these mortgages. O'Neal was forced to resign and take the fall for Merrill's $8.4 billion in writeoffs.
It is noteworthy that more conservative banks with huge mortgage portfolios like Wells Fargo (WFC) and Royal Bank of Canada (RBC) have not experienced unusually high mortgage failures. Authentic leaders like Dick Kovacevich of Wells and Gordon Nixon of RBC stuck to their traditional lending standards and lived within the tight regulations that govern North America's banks.
In mid-October I was in Montreal to speak to executives of the Canadian Mortgage and Housing Corp. CHMC, which has insured $130 billion of Canadian mortgages, has avoided the writedowns that have plagued its U.S. counterparts. As I learned from CHMC CEO Karen Kinsley, the Canadians are more concerned with ensuring their citizens can meet their mortgage obligations than they are with short-term profits. The wisdom of their long-term view is paying off.
Mortgage Brokers Should Be Regulated
In late October Treasury Secretary Paulson took up the concerns of U.S. homeowners. He successfully jawboned institutions like Countrywide to restructure some mortgages to ease the pressure on homeowners. Why didn't any of our regulators think about this problem several years ago before the mortgage brokers were allowed to run free? They could have saved a lot of people a lot of pain by preventing these brokers from offering misleading mortgages and repackaging them for resale to the financial institutions.
In spite of these concerns, don't look for me to be an advocate of more regulations. Instead, I think we should protect U.S. consumers with responsible regulations that all the players in the system have to abide by. It is wrong to put tight restrictions on our nation's leading financial institutions and to permit others, such as mortgage brokers, to operate outside those regulations. This type of uneven playing field only encourages greed and allows unscrupulous businessmen to push the limits of capitalism and foul the ground for everyone else. Free enterprise and aggressive competition offer amazing benefits as long as we all play by the same rules—and understand that we can only be successful if we truly serve our customers' best interests.