Anyone who follows all the twists and turns of analyzing the Great Recession, the Wall Street bailouts, derivatives, mortgages, income inequality, indebted households, trade deficits and all the other components of our malaise comes away with a disquieting sense that ethics have been tossed overboard just about everywhere.
The latest information to buttress this concern comes from the faculty at the University of Missouri at Kansas City. In an article entitled “Time to Foreclose the Mortgage Companies,” Prof. Randall Wray gives an overview of the role played by mortgage companies in precipitating the financial meltdown and now a continuing role in preventing mortgage relief for those caught in the meltdown.
Along the way Prof. Wray gives a good description of how the mortgage financing industry has morphed into an expensive feeding frenzy by literally all players in the financial industry.
“Keep in mind that when we destroyed the thrifts in the 1980s, we transitioned to a new “market-based” home finance model that involves independent mortgage brokers, property appraisers, risk raters, title companies, mortgage insurers, credit default swap sellers, mortgage servicers, securitizers, accounting firms, commercial banks, investment banks, and pension funds and other managed money that hold the securities. In this “originate to distribute” model, almost all concerned live on fee income rather than on the interest and principal payments of homeowners (which service the securities). Of course, this is part of the reason that no one ever bothered to check whether the homeowner would actually be able to make the mortgage payments.”
And this description of why mortgage companies make more money if the home is foreclosed.
“When a house is finally foreclosed, the mortgage servicer has first dibs on the revenue from sale of the house. According to the UBS study, foreclosure can take up to two years (depending on the state and on complications) and total costs—including paying off the servicer—can eat up 90% of the revenue from the home sale. This is why the total losses on home mortgages (absorbed mostly by the securities holders) are so huge even if home values fall by “only” 30%.”
If you read many articles about the credit card business this theme appears there as well. Having people make late payments is actually good for the credit card businesses and their partners, the banks. The deeper in trouble a cardholder gets, the more they make.
If you read a post mortem of the derivative business as practiced leading up the the financial meltdown you read about investment banks selling dodgy derivatives, then shorting them later thus making money on both the sale and the subsequent losses of clients who bought the dodgy securities to begin with.
One can be pardoned in thinking that ethics have been totally jettisoned.
Next comes the health care reform debate and one reads about the millions and millions of dollars suddenly descending on Washington D.C. and Congressional campaign coffers, all given by dominant players in our existing health care system. Even though the public strongly supports the reform movement, this deluge of money is drowning the public’s will. It’s drowning the will of President Obama, one of the most popular Presidents in recent memory.
Whether its Wall Street or Health Care it becomes obvious that Congress is severely compromised in its ability to represent the public. This lack of ethics is not complete, but it is pervasive enough to compromise the Democracy we live in.
First the ethics go. Then next Democracy goes. Where we go remains to be seen.