Imagining ‘It’s a Wonderful Life, 2017’

 The holidays would not be the same without watching “It’s a Wonderful Life” and feeling every moment of struggle as George Bailey discovers that riches are not measured in dollars and cents. The film highlights the importance of family and love and celebrates civic and familial virtues.

Those of you who have seen the classic 1946 movie will remember one of its most famous scenes. George Bailey runs a small community bank with a mortgage business. One day, as he is headed out on his honeymoon, George is confronted by a group of depositors wanting to withdraw their savings because they are nervous about the bank’s solvency.

He explains that he doesn’t keep their savings lying in the bank safe. Instead, he has invested most of the money in affordable mortgages on the homes they own.

Sam’s money is in Chuck’s house. And Chuck’s money is in Dick’s house. And Dick’s money is in Sam’s house…

So it goes, with customers able to own their homes instead of having to pay rent to Old Man Potter, the predatory capitalist villain who owns the leading commercial bank in Bedford Falls – and most everything else in town.

In George Bailey’s day, a lending institution would keep a home mortgage on its books until it was fully paid off. The default risk was held by the bank, which sought to protect itself by granting mortgages only to clearly creditworthy borrowers with stable incomes sufficient to meet monthly mortgage payments and the ability to invest a significant portion of their own money in a down payment.

In a modern “It’s a Wonderful Life”, director Frank Capra could have contributed to an understanding of the financial crisis by turning George Bailey into a rapacious mortgage broker willing to do almost anything to maximize his mortgage origination volume.

A modern-day Capra would present a series of fast-paced sequences showing how George converted low-income homebuyers with non-existent credit into qualified sub-prime mortgage applicants.

No money for a down payment? “Not a problem,” George reassures the applicant. “You can take out a small first mortgage to cover the down payment, then a larger second mortgage to cover the rest of the purchase price.”

“But won’t that mean high monthly payments?”

“Not with adjustable rate mortgages that charge interest only for the first two years.”

“But after two years, when the much higher monthly payments kick in …?”

“Nothing to worry about. The way house prices are skyrocketing, you’ll be able to refinance with a single bigger mortgage to pay off both original mortgages, and give yourself enough extra cash to cover the monthly payments for several years.”

“And after that?”

“As long as home prices keep going up, you’ll be building equity in your house, which you can tap for ready cash by refinancing yet again.”

“So the house keeps paying for itself?”

“That’s what it amounts to.”

“Sounds great. What’s next?”

“Let’s fill out the mortgage applications together right here on my PC. I know how to word the answers to give banks what they’re looking for.”

“Do I need documentation for my income?”

“Nah. It’s all streamlined these days. The banks run your applications against their crazy computer models to see if you qualify for the mortgage. And you will. It’s just a formality.”

“A formality?”

“Banks are mainly interested in generating new mortgages to sell to Wall Street. Each mortgage they sell increases their servicing fee volume, so they approve as many applicants as possible.”

Just then, George gets a phone call from Old Man Potter, George’s hungriest lender for the sub-prime mortgages he sells to his Wall Street buddies.

“Hi Mr. Potter,” George says, leaning back in his desk chair with a big smile. “Just going to call you … No, a first and second mortgage this time … Yeah, I thought you’d like that … Great. I’ll see you at the club around six.

A wonderful life indeed.

Originally Published: Dec 9, 2017

Another housing market of cards

Rising home prices have some concerned that we could be building another house of cards. Housing prices are up 8.1 percent over last year, according to the S&P/Case-Shiller price index.

Sales have been improving too. The National Association of Realtors estimates that 4.65 million previously owned homes were sold in 2012, up 9.2 percent from 2011. Some of the numbers are truly eye-popping. Phoenix home prices were up 37 percent, followed by Las Vegas, where prices rose by 30 percent.

The question is whether the housing recovery is caused by rising demand from people who are doing better economically, or big investment companies, private equity firms, hedge funds and foreign buyers betting on the housing market’s recovery by buying homes, renting them for short-term profit and holding them for long-term price appreciation.

They are buying in places like Florida, Georgia, Arizona, Nevada and Califomia,places where home prices fell the most during the Great Recession.

In the process, they are helping fuel the home price surge, bankrolled by cheap credit made available by the Fed’s zero interest rate policy. They are also shrinking inventory, crowding out local buyers, and making homes beyond the economic reach of first-time home buyers.

It’s like the story about a soapbox orator speaking to a Wall Street crowd about the evils of drugs. When he asked if there were any questions, an investment banker asked, “Who makes the needles?” Never  miss an opportunity.

In the early 2000s, America saw the creation of a housing bubble, encouraged by low interest rate policies implemented in the wake of the 2000 stock market crash and recession that was caused when the dot-com bubble burst. Low interest rates reduced mortgage costs. This stimulated demand for houses and drove up prices.

Rising prices led to the perception that houses were more than just a place to live, they were an investment whose value seemed likely to keep rising, building wealth and funding the homeowner’s retirement. That perception further increased demand for houses, driving prices still higher.

In 2005, Federal Reserve Chair Ben Bernanke said, “House prices have risen by nearly 25 percent over the past two years … at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”

Since the consumer price index we use to measure inflation excludes assets like homes and securities, the index’s nearly flat trend during the middle of the last decade made it easy for the Fed to convince us to be more worried about deflation than inflation and helped justify its decision to keep interest rates low.

China and other low-wage countries were happy to help the Fed keep rates low. By exploiting their non­-union labor forces, they continually reduced the prices of their exports, which Americans bought in ever-increasing numbers. Then they took the proceeds and bought up the U.S. Treasury debt being issued to fund two wars in the wake of large Bush administration tax cuts.

Ours was a nation awash with capital, much of it debt-based, seeking investments that offered generous yields. Home prices peaked in May 2006, stalled and then fell. The American economy officially slipped into recession at the end of 2007.

The housing bubble burst in the fall of 2008, experiencing its Wile E. Coyote moment. Many financial institutions had to write off billions in toxic or worthless mortgage assets. All the large American financial institutions- including Bank of America, Citigroup, Wells Fargo and insurance giant AIG­ ended up getting bailed out by taxpayers. When the housing bubble burst, the 2008-09 recession affected nearly every business in the U.S. and then worldwide.

Let’s hope Wall Street’s speculative housing bet facilitated by the Federal Reserve’s zero interest rate policy doesn’t lead to another crash in which the rise in home prices is not supported by economic fundamentals and ordinary people ultimately bear the cost.

originally published: May 18, 2013