Setting the Records Straight

LAST WEEK, THE WORLD OF BASEBALL BRACED ITSELF for the release of former Sen. George Mitchell’s detailed report about steroids in the game. The findings of the investigation have now come out and been made public. Now baseball can begin the arduous task of rebuilding its image. It may be time for similar measures to be taken in the mortgage industry.

Between the years of 1998-2002, numbers in baseball reached and surpassed historical levels. The incredible boom in the power and longevity of players raised suspicions of doping and cheating and finally prompted a comprehensive and independent investigation. The increase in homeruns during this period was so swift and large that something sinister had to be going on.

The same can now be said for the mortgage lending practices that plagued our economy for the first half of this decade. Interest rates hit basement levels as housing prices skyrocketed between 2002-2005. During this housing bull, mortgage lenders began to realize that they could be cashing in on a large piece of the housing pie. Adjustable rate mortgages were being passed around like “B-12” shots in a locker room. But the lenders were not hiding in the shadows. This was going on right in front of us. Just as we saw marginal players begin to sock 50 homeruns in a season, so too have we seen single mortgage brokers pocket as much as $750,000 in a single year by relaxing their lending practices and preying on uneducated borrowers.

In baseball, we have seen a great deal of blame for this mess being passed around, and for good reason. Players who knowingly took performance-enhancing drugs to boost their production deserve to be punished. Teams who allowed their players to participate in this form of cheating deserved to be scorned. The commissioner of baseball who allowed this problem to persist under his watch deserves to be criticized. And fans who shielded their eyes from the truth that was painfully obvious for so many years deserve what they got.

The parallels between the actors in both these scandals are many. Too many mortgage brokers took advantage of loose lending practices with their eyes on fat bonuses and inflated commissions. The CEOs of big lending houses allowed this to go on as they collected their huge salaries. Borrowers too blinded by the ease and availability of cheap money took what they could get and entered into agreements that they simply could not afford. And the chairman of the Federal Reserve sat idly by as the bubble grew so large that it could no longer be contained.

Baseball has finally done the right thing. By hiring Sen. Mitchell, Commissioner Bud Selig has now shown the public that not only is he aware of a problem, but he is also interested in a solution. He has allowed the names of some of his most revered and marketable stars to be printed in a laundry list of cheaters for everyone to see. He has shown a willingness to single out the perpetrators and has even assigned a share of blame to himself. We have the names — all 85 of them — and now we know who’s done us wrong.

So who are we going to blame for the subprime mortgages?

President Bush has decided to step in and offer a plan to help those who have been hurt by this fiasco. He is offering relief to borrowers who find themselves threatened by resetting interest rates. Many homeowners signed on with cheap adjustable-rate mortgages that will soon be much more expensive than they had been. The reason this subprime lending has become such a mess is that while rates are increasing for these borrowers, the prices of their houses are falling.

The president has proposed a freeze on rate increases in order to protect borrowers who are unable to manage the coming reset. What this move does is bail out any low-credit individual who made the faulty decision to purchase a house out of their price range. Unfortunately, this is not new legislation, nor is it a government mandate. The president is merely suggesting that, for the good of the economy, lenders help out the poor souls who will soon be unable to afford their dream house.

This is quite similar to how Commissioner Selig originally handled the steroids crisis in baseball. While steroids have been considered illegal in the game since the 1970s, baseball had never specifically tested for their use until 2002. Players were told not to take them, but neither the league nor the teams ever actively investigated their use or punished any offenders. The players were left to police themselves, and the situation quickly got out of hand.

Baseball has now learned the error in its apathy. Congress has hinted at taking steps toward fixing the situation, but that seems to be out of its jurisdiction. Baseball recognized what it had to do and decided to take action. Major League Baseball paid the $20 million tab for this investigation and is now living with the results. Marquee players, including Roger Clemens and Miguel Tejada, have had their names and reputations sullied. Fans can now have improved confidence that the epidemic of cheating should largely be over. When will we be able to say the same thing about mortgage lending?

As long as mortgage company CEOs continue to take their million-dollar golden parachutes on the way down, the problem of shady lending practices may persist indefinitely. The president can urge freezes to help people who are suffering now, but someone is going to have to pick up the tab for all the unpaid debt. Perhaps we should follow baseball’s lead and begin to publicly out those who have done their customers and our economy wrong. Perhaps we need a list of names to show everyone exactly who is at fault.

History will remember the “steroids era,” just as it will the subprime housing crisis of 2007. Baseball appears to have learned from its own mistakes. Only time will tell if mortgage brokers can change their ways and avoid repeating the irresponsible behavior that has gotten them into this. Just like fans, borrowers will now have to be cynical and incredulous going forward. Whether it’s homeruns or houses, ‘roids or rates, if something seems too good to be true, it probably is.

Until next time,
Jamie Ellis

December 21, 2007

The Daily Reckoning