The expression is “Think globally. Act locally.” That’s usually a good thing. But in a wicked twist, it’s now apparent how the actions of unscrupulous real estate lenders in Colorado have helped undermine financial markets worldwide.
For more than a year, folks simply nodded at reports that Colorado was at or near the top of the country in foreclosure rates. It was always someone else’s problem, usually somebody poor or at least lower middle class.
“I don’t know anybody who thought the collective consequences would fall as hard as they have,” Boulder real estate lawyer Jon Goodman said of so-called “sub-prime loans.”
Goodman, who has battled inflated real estate assessments and backed full disclosure to investors buying risky loans, likened what is happening to world markets to falling off a financial cliff.
Easy home mortgages were hard on everyone’s investments last week. Repayment failures by people who should never have been loaned money in the first place caused many financial institutions to keep investors from selling out of hedge funds that bought the risky loans, then resold them to investors.
In a letter to investors in a huge British foreign investment trust, executive Paul Niven was frank.
“The crisis emanating from the sub prime lending carnage in the U.S. is spreading throughout the financial system,” Niven wrote.
If you want to know what loose lending and home loan fraud in Denver can mean to your future, check the value of your 401K retirement plan today. Then, compare the value with what it was a year ago.
Of course, Colorado was only one state in a countrywide trend of shoveling money to people who bought into the lie that they could afford twice as much house as their income allowed. But it happened here often enough to drive the state’s foreclosure rate to the top of the heap.
In the credit haven that the U.S. has become, the overextended and underpaid believed they could borrow the American Dream. They rest of us didn’t care.
But sub prime lending in Colorado and around the country was not merely a case of buyer beware. It was too often a case of investor misled.
For an investigative column I wrote in 2006, I documented loan companies giving $1.4 million in a few months to an unemployed 24-year-old Denver woman. The last 795 grand came as she was defaulting on an earlier loan. Puffed up real estate appraisals that proclaimed properties worth more than they could possibly bring in a legal market were everywhere, raising fees and commissions.
Still, we didn’t blanch. If someone wanted to get rich on the backs of the poor and lower middle class, who cared? After all, you and I didn’t have risky sub-prime loans, with their high interest rates for borrowers and their generous fees for mortgage brokers, real estate agents, loan-bundling investment bankers and other middle men.
You and I just owned stock in the companies that made those loans or we owned stock in other businesses that depend on the housing industry. Or we bought the mortgage-backed securities bundled up and peddled by banks and brokerages.
The deceit and greed of a system that sometimes offered hundreds of thousands of dollars to homebuyers without bothering to verify their ability to repay was surpassed only by our naiveté.
Once people couldn’t repay home loans they had no business getting, the ability of companies to repay stock market investors who bought mortgage-backed securities that included those loans evaporated.
Left holding an empty bag were institutional investors like mutual funds, bonds and college foundations, but also the rest of us. The ripple affect has turned into a tidal wave. Last Thursday, France’s largest bank, BNP Paribas, stopped letting people withdraw money from three of its funds that were heavily invested in sub-prime mortgage securities. The bank apparently feared a collapse of those funds. Instead, many world markets teetered in a panic. The European Central Bank and the U.S. Federal Reserve had to make cash available so people who wanted to borrow or who wanted to get their money out of the market could. That hasn’t happened since the 9/11 terrorist attacks.
And to think some of it started in places like Colorado. Here, hundreds of thousands of dollars in mortgage loans not only went to people without jobs, but also to people who were in jail.
So many times in the early days of sub-prime lending, the denizens of free enterprise said not to worry. The market, defenders of sub-prime lending assured, would take care of everything.
Well, it’s starting to.
Thing is, for many of us, the market correction looks like an economic come-to-Jesus. As we huddled around the stock market ticker last week watching the Dow Jones go down hundreds of points, we finally realized that we could not pass the misery of sub-prime lending on to another sucker.
We also grasped something else:
Unless we had buried our life savings in the backyard, the price of avarice and stupidity would be steep.