As the son of two Eastern European immigrants, I was always taught that the American Dream started with home ownership.  But homeownership is a “dream” and not a right or an entitlement. When we look back on the leading causes of the economic meltdown in 2008, most economists will point to the “run-away” lending policies in the housing market as the culprit. The goal of helping millions of Americans achieve homeownership was a noble one. The problem is that it’s completely void of any reality of the fundamentals of finance, house prices and consumer debt. Most people call it a housing bubble. I would go one step further and call it a housing ponzi scheme. The difference being, that the leadership in America knew the music had to stop. Unfortunately, the ones who didn’t end up with the chair  are the very people for who the American Dream policy was set out to help.

As an old friend of mine likes to say, “If you look behind you, you fall into the hole in front of you.” I don’t want to disappoint him, but I think it’s necessary to take a look at what caused this mess. There is plenty of blame to go around, but here are the main players:

1. Wall Street – As someone who has been involved with Wall Street for 15 years, I can tell you it’s not made-up of dummies. Some of the smartest people I have ever met have come from this arena. That’s why when we have an economic problem they are the ones we tend to turn to for advice. But Wall Street is about making money; it’s the great capitalist machine and one of the reasons America remains a great superpower. Some call Lou Renari, former Vice Chairman of Salomon Brothers in the 1980’s, the father of the mortgage back securities market. But what started as a tremendous and visionary idea to package mortgages for the secondary market which helped the liquidity for mortgage lending, became a perverted and contorted orgy of unknown financial instruments. As long as these highly complex “packages” of mortgage related products made money, Wall Street executives couldn’t say no. The business school MBA’s and their specialized brand of “paper” packing were encouraged by the CEO’s and their Boards. Greed (which I think is not inherently bad and is imbedded in human nature) was taken to levels that had never been seen before. The complexity and nature in which this was performed, in a sick way, almost evokes admiration. Look at Lehman Brothers, which was leveraged 40 to 1 at its height. Is there anybody who really thinks they can bet within a 2.5% margin of error? I saw Jon Guedfriend, former head of Salomon Brothers say that if he (Salomon) got up to 8 to 1, he couldn’t sleep at night. And let’s not just pick on Lehman, how about AIG, Bear Stearns, etc. Now the famous phrase in this industry is “de-leveraging,”  Which frankly, is akin to putting on the brakes after you hit the tree.
2. Mortgage Lenders – I spoke to my mortgage loan officer about an investment property I was looking at buying. “What are my financing choices,” I asked, “Not much,” was his response. A fellow neighbor and real estate agent also confirmed that the biggest problem for homebuyers today is financing. In a little over 9 months, we went from an “offering” sheet that looked like a ten page Chinese takeout menu to a back to basics approach or the “Old School” of home buying. The Old School has three basic rules: a) 20% down; b) income verification and 3) fixed rate products. There are always exceptions to those rules, such as interest only and ARM’s, but they are for 7 year money, which in the homeownership world, is about the average life of a mortgage anyway. Gone is the exotic 1 year, interest only ARM and the pick-a-pay loan. I say good riddance. They were the drug of the mortgage industry. They preyed on the unsophisticated first time buyers and were the nitrose-oxcide of the house flipping speculator. They all bet on one ingredient…house prices would never go down. If you couldn’t afford it, then the answer was you could sell it at a profit. As we well know, this was simply a lie. But the fast talking, high promotional, finance-anyone-who-wants, mortgage lenders couldn’t resist. Everybody was issuing mortgages…even discount online brokers such as E*TRADE. They have since exited the business after taking massive losses and a near obliteration in their stock price (over $25 in June 2007 to $2.19 today.)
3. Washington – I’m not sure where to start on this bunch. Clearly Alan Greenspan went overboard with too much monetary easing, lax credit standards and financial oversight. Congress, rather than tightening the reigns of Fannie Mae and Freddie Mac, let them go wild and aggressively pushed to promulgate the era of risky home financing. The Democrats and Republicans both share in the blame, although yesterday’s referendum at the voting booths suggest that the mortgage fallout debacle clearly favored the Democrats. Congressional leaders should have known better and I would argue that they did. But like Wall Street, their greed for political contributions was, in the end, too much for them to give up. Ironic on how some political leaders point the finger of greed to those on Wall Street.
4. The Consumers, aka the Home Buyers -  My father used to say that American citizens’ biggest problem will be that they have no savings and that debt will kill the consumer. He was right. And not only did the lenders figure out how to heap mountains of mortgage debt on non qualified home buyers, but let’s face-it, consumers have gone way beyond any reasonable sense of fiscal responsibility themselves. The American Dream now includes: Rolex watches, BMW’s or other over-the-top luxury goods. The “want to-look-rich” people have no regard to the fact that they simply don’t have the means to pay for it all. The American Dream of home ownership has been perverted from a “roof over your head” to “rims on your car”. What must change is the sense that people must live within their means and that the answer is not running-up your credit cards to buy that extra Gucci purse or living in a house that you simply can’t afford. Bob Toll, one of the great “mansion builders”, recently stated in his defense, “Home buyers got greedy also”. 

What has to change is the American people’s respect for money. Government can’t dole out endless amounts of stimulus checks. Consumers have to start to accept personal responsibility. We have to start an era of “Being Frugal is Cool”. This will be a tall challenge, as Washington, who should set an example of fiscal discipline, spends like a fleet of drunken sailors. 

Let’s hope that President Elect Obama can truly change Washington for the better. He may want to start with asking all Americans to take more personal responsibility for their own decisions.

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