It's a wonderful mess

Nowadays, it's impossible to watch the 1946 holiday movie "It's a Wonderful Life" and not feel a twinge of respect for Henry F. Potter, the villainous banker played by Lionel Barrymore. Potter was not above drawing the last drop of blood, but at least borrowers knew whom to hate. And if they were late paying, they knew where to crawl.

That's not necessarily the case today. Mortgage companies often ship the loans to Wall Street, which repackages them into securities sold around the globe.

So if you're a borrower in trouble, and your loan is diced up into some mortgage-backed security, you'd be hard-pressed to find a lender's ear. How's your Chinese?

In olden days, the bank that made mortgages kept them. The borrower's problem became the bank's problem, so it was in the interests of both to keep the loan afloat.

The movie shows a run on the Bailey Building & Loan, during which Jimmy Stewart's George Bailey says this to a panicked depositor: "Hey, Ed, do you remember last year when things weren't going so well and you couldn't make your payments? Well, you didn't lose your house, did you?"

Because old-fashioned bankers were stuck with the loans they made, they cared deeply about who got them. Bailey is nicer and more generous than the nasty Potter, but there's not a lot of difference between their lending standards.

Remember the scene where Potter chews out Bailey for giving a mortgage to Ernie the cab driver? He accuses Bailey of lending money to any pal he shoots pool with.

Bailey responds, "I can personally vouch for his character," but also notes that Potter had the papers documenting Ernie's salary and life insurance benefits. That established his friend as creditworthy.

In other words, Ernie did not have a "no-doc" loan, a modern invention that doesn't require borrowers to provide proof of their financials. Because applicants could put any income number they wanted on the forms, these mortgages soon became known as "liar loans."

Last year, 40 percent of new home loans were made to people with fragile credit. And more than 37 percent of the subprime mortgages were of the notorious "no-doc" variety. That federal regulators didn't step in to stop the madness is astounding.

The name of the game for the mortgage originators — the guys who put the dancing figures on their Web sites — is collecting big upfront fees from borrowers and selling the loans to the investment houses who palm them off on unwitting investors.

To deter a depressed Bailey from killing himself, the angel Clarence shows the hero what the world would have been like had he never been born. In that vision, Bedford Falls turns into Pottersville, an evil place full of bad people and good jazz.

Fewer residents owned their home in Pottersville, but that nightmare town had some things over today's Greenspan City. Pottersville didn't have block after block of boarded-up houses lost to foreclosure, as is currently seen in many American communities.

Former Fed Chairman Alan Greenspan had cheered on the housing bubble that raised home prices to ridiculous levels. And despite the warnings, he ignored the recklessness and downright cons that would inevitably push mortgage market into crisis.

The weak borrowers who couldn't get a mortgage from the sourpuss Potter — and probably not Bailey — were better off than the moderns lured by the happy dancing figures. The latter were sucked into paying inflated house prices and fleeced by stiff fees and punishing interest rates. Then they lost their homes.

Which is less attractive, Pottersville or Greenspan City? It's a real tossup.

Providence Journal columnist Froma Harrop's column appears regularly on editorial pages of The Times. Her e-mail address is fharrop@projo.com