Bruce’s Wealth Blog

The congress just passed a $700,000,000,000,000.00 Wall Street bailout bill.  President Bush signed it immediately after the vote.  Everyone is talking about how the federal government had to step in to bail out a Wall Street that ran amok.  They say it is the result of unrestrained greed on the part of Wall Street and the lenders they funded.  They say we need more government involvement on Wall Street.  Is it true?  Is government the answer or is it part of the problem?

 

In this present crisis, government is not the solution to our problem; government is the problem.   Ronald W. Reagan, January 20, 1981

 

The problem we are facing today actually started during the Carter Administration.  At the beginning of his presidency, President Jimmy Carter signed into law the Federal Community Reinvestment Act of 1977 on October 12, 1977.  This law was designed to encourage lenders to change their lending criteria to meet the needs of the local community, and more specifically the needs of minorities who have a disproportionately low level of home ownership.  In the years that followed lenders faced increasingly more pressure by the federal government to relax lending criteria.  Ultimately this lead to the S&L crisis. 

 

In the 1980s President Reagan signed partial de-regulation of the S&Ls into law.  The hope was that allowing them to invest in riskier loans would offset the losses they were facing as a result of federal government price controls.  In addition, federal regulators allowed the S&Ls to use creative accounting techniques that did not conform to Generally Accepted Accounting Principles (GAAP).  One of these techniques was something called goodwill.  If the S&L had $10 Billion in assets but had liabilities of $12 Billion, the $2 Billion dollar deficit was pushed down as goodwill and then counted as capital to hide S&L’s insolvency.

 

The end result of these actions pushed the inevitable S&L meltdown back to the end of the eighties  instead of them melting down in the beginning of the eighties.  As a result of the S&L meltdown, the Resolution Trust Corporation (RTC) was created in 1989.  Between 1989 and 1995 the RTC liquidated $394 Billion in assets.  The RTC created partnerships with private companies to liquidate these assets.  The investors who ultimately bought them made fortunes almost overnight.

 

The dust from the S&L had not even settled when the Federal Reserve Board wrote a scathing report about lending in Boston, MA.  In {Closing The Gap:} the Federal Reserve Bank of Boston, with regard to underwriting criteria said, “Even the most determined lending institution will have difficulty cultivating business from minority customers if its underwriting standards contain arbitrary or unreasonable measures of creditworthiness.”  The truth is that the underwriting standards were not at all arbitrary.  Underwriting standards come from statistical examinations of thousands of performing and non performing loans.  It is a risk analysis calculation that does not even look at whether the applicant is a minority or not.  The S&L crisis hadn’t taught them anything.

 

Then, in response to increasing pressure from the Clinton Administration, Fannie Mae finally agreed to relax credit requirements in 1999.  Again, this was an attempt to increase home ownership among minorities.  The changes worked.  In the early 2000s we saw more minority homeowners than ever before.  I have personally seen $600,000 homes in Northern Virginia sold to minorities who worked in low paying jobs such as landscaping and fast food.

 

Warning:  Sarcasm Zone

Wait a minute.  Landscaping and fast food jobs usually pay around $20,000 to $35,000.00 per year.  That works out to about $1,600.00 to $3,000.00 per month gross.  That doesn’t count withholding and other payroll deductions.  The last time I looked a $600,000.00 mortgage at 6% for 30 years is more than $3,500.00 per month.  If we amortize over 40 years it is still $3,300.00 per month.  I wonder why that would be a problem for people grossing less than $3,000.00 per year?  I wonder why the default rate is so high?

End of Sarcasm Zone

 

While greed did play a role on Wall Street, it is the federal government who pushed and pushed and pushed the lenders to relax their lending criteria.  So now $700,000,000,000.00 of taxpayer money has been set aside for another bailout.  Nearly two times the amount of the S&L meltdown.  Reagan was right.  Government is the problem.  Government interference will be costly for taxpayers.  But, government interference will also make investors who are smart enough to take advantage of the situation very wealthy.  Those who have specialized knowledge in foreclosures and the foreclosure process will be the big winners in the next 18 to 24 months.

 

Those of you who are reading this right now are finally in the right place at the right time.

 

Bruce..

 

P. S.  If you are looking to acquire the skills you need to take advantage of this situation make sure you join “Dr. Preforeclosure’s” Inner Circle at http://member.drpreforeclosure.com