On So-Called “Irresponsible” Borrowers
Along with the absurd, Santelli-led revolt of the overclass against efforts to help middle class homeowners, there’s been a larger sense that “reasonable” people can all agree that there’s “plenty of blame to go around” and that on some level “irresponsible borrowers” deserve to take their lumps in all of this. I have my doubts.
When someone applies for a mortgage, there are two parties to the transaction. On one side of it is a teacher or a blogger or an electrician or a lawyer or a nurse or a guy who manages a Home Depot. On the side is a guy who, for a living, as a professional, works in the “deciding on what terms to offer people mortgages” business who works, for a living, at a financial services business. Businesses like that got in the habit of making loans with little regard to actual prospects for long-term payment on the theory that since house prices were rising, the borrower could always sell or refinance. That, to repeat, wasn’t the judgment of electricians and store managers; it was the judgment of people who were professional mortgage-offerers. They, in turn, were being lax in part because they were finding it very easy to sell the mortgages off as securities. And it was easy to sell the mortgages as securities irregardless of their quality, because big sophisticated financial services firms devised tactics for slicing and dicing the securities into packages that could be easily resold. Those packages could, in turn, be easily resold because they had high ratings from the bond agencies. These ratings were based on models which held that a nationwide decline in housing prices was impossible. The ratings agencies and the modeling firms were, in turn, regulated by the U.S. government. And in addition to the formal regulatory agencies, there are a variety of public officials—the Chairman of the Federal Reserve, the President, the Secretary of the Treasury—who have a kind of generalized responsibility for oversight of the economy. Beyond the political system, the American media offers extensive coverage of business and real estate.
There really is plenty of blame to go around here. But I just don’t see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing. Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn’t a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there’s a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists—well, that’s the kind of thing I know a lot about. But our nurse? Why would she know?
Think back to 2006. It’s not as if CNBC and your paper’s real estate section were rigorously probing this question. Alan Greenspan and Hank Paulson weren’t saying “the economy seems dangerously vulnerable to the possibility of a nationwide decline in real estate prices, something that major financial institutions’ models say is impossible but that history says is likely.” And to be fair and non-partisan, it’s not as if Harry Reid was saying it either.
And I just don’t think it’s the responsibility of individuals to know that all the experts, and all the conventional wisdom, are secretly wrong. All kinds of people have been buying iPhones because everyone says they’re great. And if this November, the iPhones all suddenly explode injuring tons of people, I think there’ll be a lot of blame to go around. But really just about none of that blame will land on iPhone owners—it would land on Apple and AT&T and regulators and gadget reviewers and everyone else. If not, if the people who run the country and its media don’t actually expect their pronouncements to be taken seriously, then really they ought to all quit and make way for people who take their responsibilities seriously.
181 Responses to “On So-Called “Irresponsible” Borrowers”
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February 24th, 2009 at 11:46 am
Where borrowers take the blame is instances where they LIED in order to qualify for a loan.
February 24th, 2009 at 11:49 am
“Irregardless” Matt? Really?
February 24th, 2009 at 11:50 am
Here Here (for Matt)
February 24th, 2009 at 11:51 am
Even then, Benny, how many put down inaccurate information or signed on the dotted line because the mortgage originator told them “that’s just a formality,” “everybody does it,” “we just need that for our files,” or otherwise led them to believe that so “lying” was well within the bounds of accepted industry practice?
Driving 66 mph on an interstate is speeding, but when everyone is doing 70, and the police aren’t pulling anyone over for driving 66, it’s tough to tsk-tsk at someone who drives 66.
February 24th, 2009 at 11:54 am
Matt,
You’re going to be accused of elitism for allegedly implying that teachers, electricians, and Home Depot managers are too stupid to make decisions for themselves.
This will be done by people who use the word “negotiate” to describe the process by which an immigrant laborer and the owner of a chicken processing plant contract for him to make extremely fast motions with extremely sharp knives for minimum wage and no health care. Que?
February 24th, 2009 at 11:56 am
This post might be a perfect distillation of the liberal mindset: adults, by and large, are children and need to be looked after by their betters in government.
February 24th, 2009 at 11:57 am
@Benny
Responsible lenders should make like Reagan and trust, but verify what applicants tell them.
Irregardless of the usageing of that most annoying of words that isn’t a word, great post.
February 24th, 2009 at 11:57 am
My mother in law barely escaped getting a home that was far beyond her means. The people selling her the house knew she did not make the necessary salary but told her it was no big deal, basically telling her to lie on the forms. This is the consequence of incredible greed. Everyone is a party to that by the way but where were the regulators of this thing? The market knows all I guess.
February 24th, 2009 at 11:57 am
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=
February 24th, 2009 at 11:57 am
The obvious retort is that anyone who signs a mortgage should know whether or not they can afford the monthly payments. Of course, it was also common practice for the mortgage brokers to outright lie to individuals about what they could afford — or simply not ask them at all.
February 24th, 2009 at 12:00 pm
Ha ha @ Brad.
BTW, we can’t allow workers to sign up for unions on their own.
February 24th, 2009 at 12:03 pm
So what I hear from people is that I could have lied on my loan application about my income in order to buy a property with no money down in order to flip it. One of those negative amortization interest only pay option adjustable rate mortgages. The market goes south and now I can’t flip my home or pay the mortgage. But I’m not culpable because a lender gave me the loan? I’m sorry, I don’t buy it.
February 24th, 2009 at 12:04 pm
I think we need to re-set the notion of blame, punishment, etc. vs. a special grace received. It is not punishment when someone goes into foreclosure and loses their house when they fail to make payments: that is the default condition, by contract and by law. Nobody is considering any consequences for defaulters beyond what has always existed, unquestioned, since mortgages were invented. The question is whether we should issue (and pay for) a special grace that relieves the usual consequences of default, a decision that historically has been left to the other party in the contract, rather than to the government.
I’ll say yes to that, but only to the extent needed by the macroeconomy and by neighborhood/local/regional stability. If that entails relatively generous conditions to a relatively wide range of people, some or most of whom did things I consider irresponsible, then (grudgingly) so be it. If we can do those things with less-generous conditions to a narrower range of people, then by all means. But I don’t have any concern for the defaulters in themselves. My position, scarily, is pretty close to McCain’s initial position last summer.
February 24th, 2009 at 12:05 pm
I remember hearing from the start of Reaganomics and deregulation that a major collapse would be the ultimate outcome of these policies. It wasn’t a secret. Thirty years of voodoo economics and flim-flam have come home to roost as projected.
Now the no so “ruling elite” are running for cover and playing the blame game. The only one they truly know how to play.
February 24th, 2009 at 12:10 pm
Of course, part of the issue I have with people looking down on those who “bought more home than they should have” is the implicit moral judgment about how much home a person needs.
It’s one thing to look down on someone who purchased a McMansion on the basis of “well housing prices will always go up, so this will be an investment”. But in any given market, even in a “buyers’ market”, there are only so many housing options available at any given time (and place). What happens if you have a family of 3-4 and want a two bedroom living space with enough space for the kid(s) to expend energy without driving you nuts as they bounce (literally) off the walls?
Either you have to move out to Hotzeplotz (and have ginormous gas bills and ruin the environment by commuting a long distance — so much for being a good liberal and being able to commute to work using public transport from who knows where) — and even then most likely all that’s available are over-sized, over-priced ranch homes on ‘roids, you have to buy more house than you could afford, you have to continually pay money to enrich some landlord for all of your life (in the long run costing even more than that mortgage you can’t afford) or you need to remain in that cramped one bedroom with a growing family.
Sorry to be such a “priority troll” here but, any discussion of our housing crisis that does not address the absence of affordable housing — particularly affordable housing with adequate access to public transport, shopping, etc. — is really pointless, IMHO.
*
Also, if mortgages are to be sold as investments, etc. — why don’t we actually, well, make mortgages investments, as they are under, e.g., Jewish law (which limits when/how interest can be charged)? When you buy a house with 20% down and 80% on mortgage, what you would really do is buy a 20% share in your house with a pre-determined plan to buy the remaining share of ownership from the “mortgage holder”. The payments assume a particular increase in housing prices, with an effective option to buy the remaining share of the house for a fixed price (e.g. 150% of the house’s value at purchase) … if there is a housing price crash, however, the de facto borrower, however, only has to buy the house for 80% of the new price of the home (plus maybe a fee of some pre-determined sort).
Investments have to follow a “no pain no gain policy”: you don’t get returns without risks. Of course, this precludes the use of investments for savings purposes (which itself, IMHO, is a problem in our economy — too many people depend on investments for their, e.g., retirement savings … we need a more robust social security system so that way investments can actually have risk without creating massive social panic and also to prevent large numbers of people ’saving’ for retirement from putting so much money into markets that all it does is blow up bubbles — the tech bubble, the real estate bubble, etc.) … but if we had a real “Social Security” program in this country we’d have actual social security in the form of not having so many market bubbles.
But I’m rambling OT, so I guess I better just get to work now.
February 24th, 2009 at 12:13 pm
Benny
Who said that flippers weren’t culpable? The Obama bailout has a residency requirement it’s not for investment properties.
February 24th, 2009 at 12:15 pm
I did not know that Matt had such a low regard for human intelligence. No money down, teaser rate, negative amortization, house a gazillion miles from civilation, my little brain just didn’t understand. Now if I hadn’t relied on those “money professionals,” I would have paid 30% down, got a fixed rate self-amortizing mortgage, and bought a house in an established neighborhood.
February 24th, 2009 at 12:15 pm
While I agree that the bulk of the blame should go to the system and its representatives, this is way too generous to Jerry the Plumber. Jerry the Plumber can add. Jerry the Plumber knows how much money he makes. Jerry the Plumber knew he was taking a risk, although I’m sure he wasn’t aware of all the details and implications.
When the Dot.com bubble collapsed, nobody apologized for (let alone bailed out) Susie the Electrician who lost thousands day trading in her spare time.
February 24th, 2009 at 12:16 pm
Thanks for the post, Matt. Demand for crappy mortgage-backed securities definitely drove mortgage brokers to make risky loans. Don’t forget that the first wave of trouble came from ARM resets. A lot of people had no idea that their interest rates could take off as sharply as they did, or assumed that they could refinance out of their ARM mortgages in a rising market. When I bought my house in 2007 brokers were still aggressively peddling ARMs while minimizing the risks.
February 24th, 2009 at 12:17 pm
Thanks for this post, Matt. I’ve been getting so sick of the “outrage” directed at, of all people, those who are losing their homes.
Did people not read the stories of lenders who rushed people through the lending process, who misled them about how their ARM would change, etc.?
February 24th, 2009 at 12:17 pm
or simply not ask them at all. – Andrew Dupont
This is not just a problem with mortgages. It is true with all loans. Somehow loaning of money has been decoupled from the ability to pay that loan back. I blame this on the power of the credit reporting bureaus actually.
It would seem to me that if I were in the business of making loans what I would do is ask people for a budget answering the question “how are ya gonna repay this?”. I’d then see (looking at tax returns, etc) if their figures check out. If they did, I’d loan ‘em the money … if they didn’t, I wouldn’t loan ‘em the money. And I’d make sure not to charge so much interest as to ensure they couldn’t repay.
OTOH, what happens is that somehow this information, instead of being verified by a bank/S&L interested in your ability to repay, is compiled by some credit bureau somewhere who magically attaches to you a number. And this number tells people what they can loan you and how much interest to charge (if you are less likely to be able to repay — according to the pseudo-utilitarian calculation — the more interest you have to pay to make up for the risk … without any thought as to how that interest rate will affect your ability to repay the loan!).
I’ve had loans/credit cards almost forced upon me that I couldn’t afford. I’ve been denied loans which I could very well have afforded. And beyond a perfunctory “how much do you make?” and some investigation as to my current debts, nobody ever even asked me “how are you going to repay this money you’re asking me to lend you?”. They just looked at a number issued by some credit bureau (probably calculated by the ACJGLU3000 or HAL9000) and ran with it.
February 24th, 2009 at 12:19 pm
You can hear whatever you want, Benny. Nobody has said anything remotely like that.
Rather than making simplistic, black-and-white arguments, I was merely refuting yours.
February 24th, 2009 at 12:20 pm
Matt,
The average comp of Chicago pit traders is under $100k (and a lot less for ancillary staff). Who is really a member of the “overclass”? I’d say it’s you, a twenty-something guy who has far more political influence than his expertise or experience warrants.
And if you don’t like the term “irresponsible” borrowers, feel free to call them what they were: dishonest borrowers. If they were all honest about their income, 90% of sub-prime mortgages would never have been issued. A big part of this (especially in the hardest-hit state, California) involved a Mexican immigrant laborer colluding with a Hispanic mortgage broker to defraud the buyers of the mortgages in the secondary market.
February 24th, 2009 at 12:21 pm
Thanks for this Matt. I’ve been having this same argument with people for a couple of years, now.
It’s not about absolving borrowers of blame, but it is about making the financial services industry take responsiblity for their poor decision-making and greed. And it was greed in many cases that drove the decision-making process. Originators make their money by getting a pre-funded chunk of the return from the mortgages they issue, and the more onerous the terms, the more cash they received.
I’m a professional liability insurance underwriter, and I can tell you that if I accepted the kinds of risks that mortgage originators and issuers did, I’d be out of a job. I couldn’t get away with arguing that the doctors I approved for coverage were at fault for killing somebody when they had a history of killing people. Mortgage originators did the equivalent by taking people with insufficient income and/or bad credit and placing them in big money mortgages, yet they got massive bonuses for doing it. The corporations that employed them had the choice to set higher standards and fire these people, but they didn’t. They should pay the consequences.
Unfortunately, that makes us all pay the consequence.
February 24th, 2009 at 12:21 pm
4
Driving 66 mph on an interstate is speeding, but when everyone is doing 70, and the police aren’t pulling anyone over for driving 66, it’s tough to tsk-tsk at someone who drives 66.
We aren’t talking about people driving 66 in a 65 zone, we are talking about people claiming an income of $140k/y when their actual income is $30k/y and the like.
February 24th, 2009 at 12:22 pm
Demand for crappy mortgage-backed securities definitely drove mortgage brokers to make risky loans. – mark
And why ultimately did this demand exist? Because people wanted “safe, secure mortgage backed securities” for their retirement funds. If we had a robust system of Social Security, none of these bubbles that have bust so spectacularly would have been inflated in the first place. But certain people want to privatize social security putting more money into potential bubbles?
February 24th, 2009 at 12:22 pm
I agree that lenders bear much/most of the blame, and should take a big hit for their bad bets. But the argument that, by definition, NO buyers knew what they signing, or should have any obligation to, seems absurd, and dangerous.
Many people surely were mislead by lenders and brokers, or had their questions brushed off. But I personally know a few people who signed up for no-interest loans, or bought houses intending to sell them within a few years (and some did, for handsome profits–hey, where’s the talk about “clawing back” the huge gains pocketed by people who sold at unsustainably high prices? Not serious about this, of course, but… think about it.). So it’s really hard to see those who didn’t realized the big gains they dreamed of as victims, or at least not to a significant degree as victims of themselves.
I write this as someone who does not own a home but has lost more than twice my annual take-home pay in the stock market in the last 6 months. I’m not a hugely sophisticated person financially, but I do understand the basic principle of risks and returns. No one feels particularly sorry for me right now. Nor should they.
February 24th, 2009 at 12:22 pm
Very well put, Rich in PA. My sentiments exactly.
February 24th, 2009 at 12:22 pm
truth in all that you speak. much like an entertainer’s first contract that they’d leave to the skill of the lawyer or attorney, it’s so far over their heads as far as the understanding every nuance of it. these professionals nearly coerce these individuals who are so overwhelmed by it all. it’s just too surreal in the moments of it and you’re listening to a pro who’ telling you “it can be done” (according to ones income). these professionals basically cheer these people on into something they really can’t accomplish. whether a new car, a home or a recording contract the professionals know the ropes more than the contracted signees. commission is the evil behind this
February 24th, 2009 at 12:22 pm
Plus, don’t forget the fact that with housing prices soaring and wages staying level, there was a real “it’s now or never” feeling among many homebuyers. Buy now or be priced out of the market.
February 24th, 2009 at 12:26 pm
You’re going to be accused of elitism for allegedly implying that teachers, electricians, and Home Depot managers are too stupid to make decisions for themselves.
To which the response is: Not too stupid — too ill-served by the people from whom they seek accurate information on which to base those decisions.
Stupidity is not the issue. My wife and I have five degrees between us. But none of them are in economics, and we both found negotiating our first home purchase bewildering — while hastily planning a move, starting a new job in a different state, and on deadlines (offers expire, leases run out, etc.), in 2006 when everyone was buying. Straight answers from our bank/lender were very slow in coming even as the process marched on. What would be the monthly payment? What about property taxes? How much would utilities cost us a month in this state we’d never lived in? What were our rights and obligations at each stage of the process? Frankly, in retrospect I’m amazed we didn’t get screwed worse than we did. We can afford the payments, thankfully, with otherwise-modest spending habits, but the house has lost close to a third of its value, so yeah, we’re underwater. Fortunately we don’t have to move (knock wood) and can ride it out.
I realize now that there’s lots more information I should have sought out. But when was I going to do that? And moreover, at the time, I didn’t know what it was that I didn’t know — what questions I should have been asking. And that’s the nature of the business — you trust people to help you, people’s whose interest is actually in making the sale happen, not in making sure the terms are good for you and that you understand them.
February 24th, 2009 at 12:26 pm
Dave, you are changing the argument. We weren’t discussing the Obama bailout. We were discussing blame. Flippers were borrowers, often secretaries or waitresses or the like. And they often lied on their 1008 (especially in California).
I just don’t see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing.
Matt is saying that the mortgage professionals deserve more of the blame than the borrowers, even though the borrowers often lied. I disagree. If we are going to get into the argument of property flipping and the like, that’s fine. But flippers were often lying borrowers, and they deserve blame. Matt and Joe seem to disagree with me.
February 24th, 2009 at 12:26 pm
The use of the archaic term “irregardless” used to make me crazy too. Oddly enough, I found Matt’s use of the term amusing and charming. Go figure.
Waiting for Matt to bring back the equally archaic but charming term “whilst.”
February 24th, 2009 at 12:27 pm
Brad Says:
February 24th, 2009 at 11:56 am
Informational asymmetries are a bitch
February 24th, 2009 at 12:27 pm
I’ve gotten use to the typos but the repeated use of “irregardless” is really inexcusable, Matt. It’s not a word. http://www.merriam-webster.com/dictionary/irregardless
February 24th, 2009 at 12:29 pm
Sorry, should have read “lied on their 1003″.
February 24th, 2009 at 12:29 pm
I love how all the sniffy rebuttals to Matt’s point suggest that there was an epidemic of loan applicants who lied to the poor, victimized mortgage lenders, and simultaneously suggest that liberals who want to bail out homeowners are horrible, patronizing snobs who falsely assume that the proles are too stupid to figure out whether they can afford to repay a loan.
It’s strange how this tidy worldview seems to eliminate any sense of responsibility or moral agency from the other side of the deal. Lenders couldn’t possibly have bothered to run a background check on the loan applicants to determine if they’re lying about their income.
I mean, it’s not as if there are several credit reporting agencies that collect data on people’s credit history, or bank statements that might be checked to determine what someone’s monthly salary is. And it’s certainly not as if there are decades of history within the industry of using such a model to determine whether or not to grant a loan. Really, we shouldn’t assume that anyone working at a bank ought to be smart enough to assess risk.
And, God knows, it couldn’t possibly be the case that lenders and licensed realtors ENCOURAGED people to take loans they couldn’t repay and smooth-talked them into basing their decision around an assumption that the house would increase in value. I mean, it’s not as if they had any incentive to make a handsome sum of money from the deal and bundle the risk of non-repayment into some sort of exotic derivative that became someone else’s problem. And even if one of them did such a crazy thing, the home buyer shouldn’t possibly have assumed that these people who work in the industry had some sort of expertise that might be worth listening to.
No, seriously, fuck you.
February 24th, 2009 at 12:29 pm
Our lawyers, our doctors . . . these professionals are hired to have our best interests at heart; they owe us candor and wisdom and counsel. By contrast, since the dawn of man, borrowers have understood that lenders are an adverse party. No one looks to or relies upon their banker for wisdom or advice when negotiating contracts with their banker. No borrower could reasonably think that the fact that a lender is willing to give him money means that the lender can comfortably take it. So what Matt writes is very weird, because it’s completely inconsistent with reality. I understand why he makes his argument–he has to in order to affix blame on his intended target. But I can’t see how this argument could be convincing to anyone who isn’t already convinced.
February 24th, 2009 at 12:30 pm
“American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage,” – Alan Greenspan, 2004
February 24th, 2009 at 12:31 pm
I must disagree. There is plenty of blame to go around. Still, the person borrowing the money should be smart enough to figure out that you can’t buy a 400,000.00 house on a salary of 50,000 a year. You can’t cash out all your equity because you want a new car or a second home or a dream vacation you can’t otherwise afford.
I opted to rent the last 4 years because I felt that this was not sustainable. I make considerably more than the average person and live in what I thought was a middle to slightly upper middle class neighborhood and was astounded by the spending of my neighbors who salaries were less than 1/2 of mine.
The ownership nation of GWB just shows how clueless the right is on this situation. There are some people who are doomed to be poor because they are stupid or refuse to face reality. The best the govt. can do is make the American dream obtainable and strive for fairness. Both sides overshoot. This bubble started under Clinton but it was Bush who upped the throttle and the average Joe voted for those who said that they could get more for less and now they will vote for whoever says “it’s not your fault”.
February 24th, 2009 at 12:32 pm
“Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others.”
Or! She could have loooked at her paycheck and said, “Hey, I make $42,000 a year. I wonder if I can really afford a $535,000 house? Maybe I’ll just stick with the one I am in now and know I can afford.”
I have visions of MY’s new condo crammed full of machines designed to give him six-pack adds becasue he was watching late night TV and head a doctor endorse all the prducts. And, being doctors, they are experts that we all believe because we are dumb.
By the way, I have about five new vacuum cleaners to sell you. I heard experts selling them on TV.
February 24th, 2009 at 12:32 pm
How is Jerry the Plumber supposed to know whether a reasonable mortgage rate is 15, 25, 35, or 55% of his income?
More precisely, how is Jerry the Plumber supposed to know that he needs to reinvent the wheel and figure that out in the first place, when the people who make loans for a living, and supposedly make their money by having those loans paid back, have told him that they’ve determined he can afford an X-sized mortgage?
Oddly enough, it was never necessary for Jerry to know this for the couple of centuries that preceded this fiasco, as relying on the lender to determine if you could afford your mortgage was a perfectly reasonable, even overly-conservative, thing to do. Jerry’s grandfather did. Jerry’s father did. Jerry probably did so himself, when he bought his first home. And yet, for not realizing that the opaque business of mortgage lending had changed dramatically in the course of a five or ten years, we’re to blame Jerry, who doesn’t do this for a living?
Jerry hasn’t changed one whit from his father and grandfather. Doing things the way Jerry did them was perfectly fine for centuries. What changed was the lenders.
If I take my car into the garage, and Mike tells me my car is making that noise because I need a new fetzer valve, I’m going to get a new fetzer valve. It doesn’t make me stupid or irresponsible if I don’t realize that the fetzer valve company put Mike on its payroll since my last visit, and he’s telling everyone they need a new one.
February 24th, 2009 at 12:33 pm
LaFollette Progressive,
I hope I make it clear that I am not exonerating the mortgage professionals, for I am not. There was fraud from all parties. The shoddy construction of PUDs by Pulte and Toll Brothers. The lying borrowers who couldn’t afford the loans. The dishonest brokers who pushed these bad loans and gobbled up money in bogus fees to boot. The lenders who underwrote loans they knew were bad. The banks who bought and sold these bad loans and leveraged themselves precipitously on them.
There is plenty of blame to go around!
February 24th, 2009 at 12:36 pm
Jeff, speaking of weird, your post is truly bizarre. Are you saying that lenders aren’t culpable for making bad loans because everyone knows lenders are evil? Who would be able to buy a house without a loan? And this:
No borrower could reasonably think that the fact that a lender is willing to give him money means that the lender can comfortably take it.
What are you talking about? A lender’s job is to make a loan that the borrower can repay. Otherwise, the lending institution gets more money. In your mind, are credit companies just loan sharks?
February 24th, 2009 at 12:39 pm
You know, a promissory note is only 3 pages long. They aren’t complicated documents. The security instrument, yes that is a very long document often with difficult wording. But the terms of an ARM loan are clearly spelled out. People often signed these notes without reading them. I feel sorry for them, because they were often duped. But on the other hand, I have the suspicion that buyers often spent more time reading the fine print on their HD TV service contract than they did their mortgage. Mortgages are usually the single biggest investment a person will ever make. They used to be a life defining moment. Wouldn’t you think a person would take the time to read what they were signing? I know there is a lot in a mortgage. Hundreds of pages. But the note is only 3.
February 24th, 2009 at 12:39 pm
you still have to take into account that it is a surreal experience for first timers. the “american dream at las” effect.
you’re incoherently sitting there waiting for the dream to produce the end of the ride. very very hopeful for the thing you might want most in the world or your life. you’ve just left it all up to the pro who in turn has a personal bottom line…his very own well being. get the commission! there’s nothing else to say, really.
February 24th, 2009 at 12:40 pm
If you can’t trust a professional, who can you trust? How was I to know that that professional, certified Lamborghini salesman didn’t have my best interests at heart when he practically held a gun to my head and forced me to buy that Lamborghini that got repo’d?
February 24th, 2009 at 12:42 pm
“she could have loooked at her paycheck and said, “Hey, I make $42,000 a year. I wonder if I can really afford a $535,000 house?”
Let me be the first to come forward and say that I don’t know what sort of house you can afford on $42k a year. I haven’t bought a house yet; when I do, I’ll do research to find out what I can afford. But part of that research will be a conversation with a home lender. If you ask a lender—an expert, as MattY notes—if your loan is affordable, and they say, “Sure,” what test have you failed?
“Maybe I’ll just stick with the one I am in now and know I can afford.”
But she’s not in a house, she’s in an apartment. And that’s shameful, right? Not at all in line with the ownership society. And with prices going up and up, she’s getting priced out. She should act now now now!!
February 24th, 2009 at 12:45 pm
How is it that borrowers could lie so easily about their income? When I applied for a mortgage, I needed employment letters and pay slips for proof. I’m in Canada – do lenders in the U.S. operate differently? If so , then there definitely needs to be more regulation.
February 24th, 2009 at 12:48 pm
tomemos,
Most people have several credit cards. They each have a credit limit. The credit card companies aren’t trying to tell the card holders that it’s wise to spend that limit every month, and a credit card holder probably shouldn’t max out his credit cards every month. Just because someone is willing to give you something doesn’t mean that you should always take it. When you go to the grocery, you can fill your cart with ice cream. The cashier isn’t going to refuse to sell the ice cream to you because it’s unhealthy. Again, just because someone is willing to sell you something, that doesn’t mean you should buy it.
Are banks to blame? Of course . . . but for what? They are to blame for their own failures. They lent money unwisely, and many of us feel they should pay the price for this by failing. Similarly, some borrowers are to blame for borrowing money unwisely, and some of us feel that they should fail too. There are a lot of us who didn’t buy homes because we didn’t want to incur the debt. It’s hard for us non-homeowners to understand why we should subsidize something for others that we ourselves can’t afford and didn’t buy.
You write that a lender’s job is to make sure that the borrower can repay. That’s not true, not in any technical sense. The lender’s job is to gather that data that the bank uses to analyze risks. And by risks, I mean the risk to the bank, not the risk to the lender. Every bank expects a certain number of foreclosures–if they try for none, then that means they are overly cautious and turning away qualified borrowers. So when a bank lends to someone, it’s not a statement of assurance that the borrower won’t default. And any borrower would be a fool to think it was.
February 24th, 2009 at 12:49 pm
James B Shearer,
We aren’t talking about people driving 66 in a 65 zone, we are talking about people claiming an income of $140k/y when their actual income is $30k/y and the like.
Actually, we’re talking about both. I can certainly agree that the borrower bears a great deal of the responsibility in that situation (again, though, depending on what the originator knew and told him). I’m taking exception to the categorical dismissal of the idea that borrowers are supposed to know they need to overrule lenders who assure them they can afford a loan of a certain size, and that income reporting is a mere formality. I don’t know what is and is not normal, responsible, harmless industry practice, because I’m not the expert.
Jeff,
By contrast, since the dawn of man, borrowers have understood that lenders are an adverse party. Not so! Where did you get this idea that they’re an “adverse” party?
Last time I checked, borrowers and lenders entered into a mutually-advantageous contract. The borrower benefited by getting money up front, and the lender benefited from the borrower paying off the loan with interest. It was a cooperative relationship, with the lender gaining nothing from making a loan that couldn’t be paid back.
The only thing that made the mortgage industry different in 2004 than in 1964 was on the lender’s end – they (or a subset of them, anyway) were no longer engaging in that cooperative relationship, where their self-interest was advanced by giving borrowers loans they could afford. With the rise of the secondary mortgage market, it suddenly became in lenders’ interest to make loans regardless of the borrower’s ability to pay.
February 24th, 2009 at 12:49 pm
Since when does the consumer not have responsibility to decide what they can afford? No one looks at the guy buying a car he can’t afford and says, oh wow, “the govt should help him. That nice used car salesman gave him too big of a loan.” Why are we suddenly doing it with housing?
I walked into a bank on a grad student salary three years ago and they offered me a 200k loan right there. I smiled and backed out the door slowly. I’d run the numbers and knew what I could afford. Just like when I go to buy ANYTHING else.
Of course the buyer should be held accountable.
February 24th, 2009 at 12:49 pm
There is another side of the issue has not been discussed by the media – what are the costs of the foreclosure and bankruptcy crisis to society? In some respects, I think this should also be viewed as an attempt to avoid having tent cities and overcrowded shelters (as well as the need to build new shelters), and situations where crime rates are rising and yet police forces have to devote man power to draining pools to prevent the spread of diseases by mosquitoes and or having empty homes looted. Thus, there is a legitimate question to be asked that regardless of whether the plan “rewards” irresponsible people, is it yet the most cost effective way to deal with the situation? Has anyone done an actual cost comparison of Obama’s plan and these other “hidden” costs of the crisis?
February 24th, 2009 at 12:52 pm
…and we all know what “legalese” does to common folks.
people like to pretend they understand…and this all falls back on american schooling. producing inadequate pupils for the way it’s society runs. even within these fields, you have the worst and the best luring these people in with jagged advise. mostly, you’re left learning from your mistakes even at monetary levels such as these. a 50k incomer has no business learning this type of mistake on a $700k loan. who knows better than he/she? the man/woman with the lure
February 24th, 2009 at 12:55 pm
I have done pro bono divorce cases in Montgomery County, Maryland. As far back as 2005, masters/judges hearing those cases did not hold the parties responsible for the stated income on mortgage loan applications when determining child support or alimony. This is a systemic recognition that the borrowers were relatively blameless for income misstatements egged on by predatory lending professionals only concerned by the fees they earned on these predatory lending practices.
Elliot Spitzer wrote an op-ed in the Washington Post on February 14, 2007 outlining how the Bush Administration outrageously erased all state laws protecting these borrowers from such predatory lending practices. Spitzer was taken out by Bush operatives within two weeks and was never permitted to testify to Congress, if you recall.
In the fullness of time, we will recognize that these were premeditated financial crimes executed with malice aforethought at the highest levels. The right wing moaning about moral hazard for foreclosure protection will be seen as especially repugnant, then.
February 24th, 2009 at 1:01 pm
A couple I know bought a house with a 5-year ARM a few years ago, putting very little down, which was the best they could do given their limited credit history. They anticipated that if they made their mortgage payments on time, and made efforts to pay down additional principal, they would be able to refinance into a traditional mortgage at the end of 5 years. They made their payments, and made some additional principal payments. However, due to the substantial drop in housing prices in their area, they do not hold anything like 20% equity in their house, and will find it difficult if not impossible to refinance. (The fact that the appraisal will be based in large part on the few comparable recent sales in their area, most of which are foreclosure sales, does not help.)
I would not claim that this couple is blameless for their situation: they took a risk, and the risk materialized. That said, there are degrees of imprudence, and if our highest short-term priority is making sure that everyone gets the vigorous beat-down they so richly deserve, we are going to see a lot of foreclosures that don’t really need to happen.
February 24th, 2009 at 1:02 pm
shout out ot Steve Sailer
that’s what i’m sayin’..it might as well be a gun to the head. that commission impulse is somethin else, im sure. garden of eden type of thing. I mean, you can’t even go to a mechanic and get honesty out of them. some car manufacturer could tell us all how simple the car operates and how simple it is to repair/troubleshoot, but who has the real time to ingest all of this education? this is why these specialist jobs come about.
February 24th, 2009 at 1:03 pm
Dishonest members of the liberal overclass such as Matt are making this more complicated than it is. Most first time home buyers have rented before. Why is it that they couldn’t apply the same common sense about rental payments to mortgage payments? Even a “lowly” teacher or plumber knows that rent payments shouldn’t be more than about a third of your income; so why the sympathy for borrowers who signed up for mortgages that were much higher (or would reset much higher in a few years)?
February 24th, 2009 at 1:06 pm
I wholeheartedly agree with tomemos in challenging Jeff’s assertion that people should have assumed that lenders were willing to recklessly lend. For years and years, the question people asked themselves was “can I qualify for a home loan”? The lenders were the gatekeepers. They evaluated people’s ability to pay, and if they didn’t think the borrower could do it, they didn’t loan them the money.
I think a rational borrower could perfectly well walk into the transaction and think “If they didn’t think I could afford this, they wouldn’t loan me the money. Otherwise they wouldn’t get their money back, and OF COURSE they don’t want that to happen.” That’s the way things worked for years, and no one made a public announcement that this time-honored system had been revoked. Does trusting a mortgage broker to evaluate your ability to pay represent a shirking of individual responsibility on the part of the borrowers? Well, sure… no one should blindly take the advice of any professional without having thought things through to the best of one’s own ability. But, in realtity, people take the shortcut of “trusting the experts” all the time.
What was really perverse about the recent period of insanity is that the incentives were aligned in such a way that mortgage brokers NO LONGER GAVE A DAMN whether the lenders would be paid back, and all too many borrowers were a little too willing to be told what they wanted to hear without realizing such a shift in incentives had taken place.
February 24th, 2009 at 1:07 pm
Where does Private Mortgate Insurance (PMI) fit in to all this? My lender required me to have it it until I paid 20% of the loan amount- then it dropped off. My understanding that I paid PMI in case I defaulted and the PMI paid the lender. Are the PMI policies broke too?
February 24th, 2009 at 1:11 pm
Jay, good question. I live in the U.S. and had to provide paystubs as proof of income.
February 24th, 2009 at 1:11 pm
I don’t know. I had a small vacation oceanfront condo in South Carolina. In 2004, rents covered most carrying costs. In 2005, they covered less than half – not because rents went down, of course, but because real estate prices skyrocketed. Now, I may be from out of town, but that didn’t seem like a sustainable ratio to me. So I sold.
February 24th, 2009 at 1:12 pm
No borrower could reasonably think that the fact that a lender is willing to give him money means that the lender can comfortably take it.
In fact, for most of human history, lenders were quite over-conservative, and would often deny a large % of loans that the borrower could afford, choosing to leave a large, conservative margin.
The change in practices was on the lenders’ end.
February 24th, 2009 at 1:12 pm
Hey, all you glibertarians: do you honestly expect all consumers to be able to reliably second guess the opinions of the experts in their lives? Their doctors, dentists, plumbers, electricians, car mechanics, etc.?
In my world, when the experts are engaged in systemic fraud of the consumers, they should bear responsibility commensurate to their purported expertise.
February 24th, 2009 at 1:16 pm
Every bank expects a certain number of foreclosures
Traditionally, this was based on the knowledge that a certain % of their borrowers would die, lose jobs, or otherwise suffer a reversal of fortune – NOT on the loans themselves being beyond the borrower’s ability to pay at the time they took the loan.
Once again, and this has bee well-established: lenders changed their practices, and made loans they knew to be beyond borrower’s ability to pay, because they figured they could sell the loan on the secondary market, or the borrower would be able to refi or sell at a profit before running out of money.
February 24th, 2009 at 1:16 pm
Benny Lava — “I hope I make it clear that I am not exonerating the mortgage professionals, for I am not. There was fraud from all parties.”
Hey, I smelled a rat when I considered buying a house in 2006 and decided to continue renting, and I’m annoyed at the people who fell for the tripe that realtors were peddling about prices that only go up. And I certainly don’t advocate for any program that bails out people who actually committed fraud or primarily benefits speculative flippers who got burned. Any housing bailout should be designed to get people to renegotiate saner terms for their mortgages in order to keep their homes.
I’m just tired of the damn hypocrisy. Conservatives advocated for a deregulated, self-policing market on that grounds that businesses would make decisions in their own financial interest without being held back by the hated nanny state. So what happens when they all make spectacularly short-sighted business decisions and the whole fucking economy goes pear-shaped? “Well, sure, we need to bail out the people on Wall Street who gambled trillions of dollars on stupid assumptions… but it’s all the fault of our greedy customers!
We can’t help them… it create be a moral hazard!”
Uh, no. Nice try.
February 24th, 2009 at 1:18 pm
Nice explication of the chain of custody of responsibility for this debacle.
There were some people doing and saying something back in 2006. On Feb. 14, 2006, Barack Obama introduced the STOP FRAUD Act, but it soon died in committee. According to Obama’s campaign site, the Act “would increase funding for federal law enforcement programs, create new criminal penalties for mortgage professionals found guilty of fraud, and require industry insiders to report suspicious activity.”
Then in March 2007, “Obama urged Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson to bring together lenders, consumer advocates, federal regulators and housing agencies for a summit meeting on preserving home ownership. The bill also provides counseling to homeowners and tenants to avoid foreclosures.”
February 24th, 2009 at 1:19 pm
Stever Sailer,
Walk into a Lamborghini dealership. Tell them you make $40k per annum and can only put down 2%.
Let us know what they say.
February 24th, 2009 at 1:20 pm
Give me a break, Al. There are obviously all sorts of areas in life that people consider so straightforward that they don’t need the advise of an expert. Certainly burger purchasing is among them.
There are also all sorts of areas in life that people DO feel the need to consult experts: medicine, law, accounting, complex repairs, technical advice, etc.
I think something as complex as a home-buying transaction is a heckuva lot more likely to fall in the latter category than the former.
February 24th, 2009 at 1:20 pm
Hmmm. I wonder if Matthew is having trouble paying his mortgage and wants a bailout?
February 24th, 2009 at 1:23 pm
As I predicted.
The glibertarians are so utterly incapable of coming to grips with the concept of information asymmetry and the radical change in lender-side practices (ie, the people who think that immigrant laborers “negotiate” the minimum wages they receive) that all they can do is call Matt names for being smarter than they are.
“I can’t refute your argument, but maybe I can make you feel bad enough that you’ll be afraid to make it again. Elitist elitist elitist! Did it work?”
February 24th, 2009 at 1:24 pm
Ugh, pulled an Yglesias in #71… “it would create a moral hazard,” obviously.
Al, that was one of your worst trolling efforts in a long, long time. I especially liked the part where you ignored the actual content of the post entirely in order to share with us a lame slippery slope argument that was stale by the time FDR shuffled off his mortal coil.
February 24th, 2009 at 1:27 pm
Joe from Lowell said
among other things.
Joe — I don’t have a big gripe with most of what you said which is why, as I said in my post, most of the blame for this falls on the system and its representatives.
It is the height of silliness, however, to absolve consumers for any blame whatsoever (which is, unless I’m mistaken, your and MY’s position on this) because they’re not capable of understanding that a 50K income isn’t enough to afford a 400K house. Sure, the details are complicated, hidden, deliberately withheld or misrepresented. But we all know that in America there is fine print and we know that we avoid understanding it at our own risk.
But let me reiterate and expand — if we’re just talking about blame, the vast majority of it does not belong with consumers.
February 24th, 2009 at 1:27 pm
dob-
When you hire a lawyer or a doctor or a dentist, or even a plumber, or electrician, or car mechanic, you are hiring them for their advice as well as their service. Since you’re purchasing their advice, it’s understood that you are relying upon it, and since they expressly acknowledge that they are selling you advice, it’s reasonable for you to rely upon it.
When you go to a bank for a loan, you are not hiring them for their advice. They are not telling you that they think you should buy the house or take out the loan in question. They are, as I said, an adverse party to a loan agreement with you. That doesn’t mean they are trying to hurt you . . . if both sides benefit, wonderful. But they care only that THEY benefit from the agreement. Their only duty is to the bank’s shareholders. Now, you might infer from their lending that they think you are a decent risk, and you can choose to rely upon this if you wish, but you assume risks when you do this. People who relied on the bank’s evaluation instead of their own gambled, and some of them lost. To blame the bank for this is absurd. If I go to Vegas and put my money on Red at the roulette wheel, you might sidle up to me and do the same. But when we lose, don’t blame it for it–I didn’t tell you to bet on Red. You made that choice, and you should accept responsibility for it.
February 24th, 2009 at 1:27 pm
I doubt that the problem was that Cletus the Plumber didn’t know how high a monthly payment he could afford.
The problem is that the supposed experts – realtors, bankers, brokers – probably all told him with a wink that he could easily cash out his fast-rising equity in 6 or 12 months and make up any shortfall.
It’s all well and good to blame people who are so unsophisticated that they fall for this, but honestly it’s very understandable. You’re new to the market, and a bunch of people who are all richer than you are sitting around a table telling you how the game works. You want to play that game, and so you become gullible. It’s a mistake but it’s very understandable. After several years of news stories about average schmucks and idiots who became rich in real estate, even mildly unsophisticated or inexperienced buyers will start feeling like suckers for not jumping in.
February 24th, 2009 at 1:30 pm
I think Jeff @ 80 makes a good point about the difference between professionals and everyone else. Real professionals – doctors and lawyers and furniture salesmen – have ethical obligations to their profession and to you independent of their financial incentives. Theoretically. Mortgage salespeople and realtors pretend that they do as well, but they don’t. And inexperienced buyers often have trouble knowing the difference – mortgage originators will happily deceive their own grandmothers for a nickel. They’re not real professionals.
February 24th, 2009 at 1:30 pm
Here’s a question: does anybody have an anecdote about a borrower taking his mortgage lender’s word for what could afford, and that assumptions turning out to be wrong, from the 1920s, 1930s, 1940s, 1950s, 1960s, 1970s, 1980s, or 1990s?
Hello?
Anyone?
And yet, it is suddenly so obvious that this is bad practice that everybody should have known all along – and this just happens to coincide with a massive but largely invisible-to-the-general-public change in the mortgage- and overall financial-industry.
Uh huh. This is a story about homebuyers suddenly becoming irresponsible. And also too, poor people and minorities and Barney Frank. Hey, look over there!
February 24th, 2009 at 1:35 pm
I think Jeff @ 80 makes a good point about the difference between professionals and everyone else.
I think Jeff @ 80 is ignoring the fact that crediting the bank’s evaluation was a responsible, effective, even overly-conservative method of determining if your loan is affordable for, literally, centuries.
Not because they thought that bankers had some “ethical obligation,” but because they (rightly, for centuries) understood the bankers’ self-interest to be aligned with their own, in terms of the loan amount being income-appropriate.
It was not from the bankers’ charity that people got their judgement about ability-to-repay, but from his greed.
February 24th, 2009 at 1:36 pm
Matt, I think your “exploding” iPhone analogy is a poor choice. A better analogy would be the people that rushed out and bought the first iPhone’s at $600. Those people were either fools or had the extra kizash to waste on overpriced electronics. (FWIW, I have an iPhone and love it.) Now the retailers knew that the iPhone was overpriced, but they went ahead and marketed and sold it any way. Who is to blame when the iPhone turns out to be a (hypothetically) piece of crap? The retailer? Apple? Or the consumer who paid $600?
The other piece that gets overlooked so frequently is that a vast majority of the borrowers who have become caught up in the mortgage crisis were not obtain purchase mortgages, that is, they weren’t getting a mortgage to buy a home. Most people were refinancing an existing mortgage. And many times (I would hazard the majority of times), the refinance borrowers very willingly agreed to pay off other debts (like credit cards) or to simply to “cash out” (to take a vacation or buy a new car), sometimes as much as $30k, $40k, $50k (only limited by their inflated equity).
I think there is an enormous amount of blame for the lenders and regulators and bond raters and investment banks. But, especially in the case where the borrowers went along time and again and reaped HUGE benefits, I don’t think they should get a free pass on the iresponsibility train.
February 24th, 2009 at 1:38 pm
The experts in TV-selling at Best Buy told me I need a 100″ plasma TV and the experts in hamburger-selling at McDonalds told me I need a Double Quarter Pounder every day. For some unexplained reason, I had a heart attack after eating all the cholesterol in the burgers and sitting in front of the boob tube for 16 hours a day. And so, now I can no longer make the payments on the TV and can’t go out to pick up the burgers. Woah is me. I BLAME THE EXPERTS – they knew better than me, so I don’t deserve any blame for this predicament!
Funnily enough, the “experts” you cite here are not in fact experts, but simply salesmen. And truly, in that case, caveat emptor, at least to the extent that the salesmen are not acting fraudulently. As Jeff so kindly points out, bankers shouldn’t be considered experts, but rather salesmen. The problem here is that bankers used to be experts, at protecting their bottom line if nothing else. Now, not so much.
How exactly is Joe Public supposed to know that the bankers can’t be trusted, especially when the real putative financial experts like Allan Greenspan are going out of their way to encourage them to consider very, very risky mortgages as prudent alternatives? That’s the point Matt made and the one the glibertarians continue to ignore.
February 24th, 2009 at 1:43 pm
– Tyler Cowen
February 24th, 2009 at 1:50 pm
As much as…
…according to one (unnamed) recent study.
Many…
In some cases…
Sometimes…
Too often…
…many…
Impressive stuff.
February 24th, 2009 at 1:51 pm
“I think Jeff @ 80 is ignoring the fact that crediting the bank’s evaluation was a responsible, effective, even overly-conservative method of determining if your loan is affordable for, literally, centuries.”
Suppose I bet on Tiger Woods to place in the top 5 of a golf tournament. That might be a reasonable bet, since Tiger has been the dominant golfer for the last decade. If he chokes on the 18th hole, however, I can’t really blame him for my lost bet. I knew I was betting. Yes, I was betting on someone with a great track record and proven, tested results. But I was still betting. And even though my interests were aligned with Tigers on that 18th hole, he wasn’t playing for me and I knew it. I was try to piggy back off his success, and that meant I assumed the risk of his failure.
Yes, the banks were pretty good at assessing risks for a long time. No, that doesn’t mean that consumers were entitled to rely on the banks’ assessment of the risk of their particular loan.
Now suppose you went to the bank and handed them a twenty and said, “Give me financial advice on whether I should buy this house and take out a loan.” If the bank takes this money, then it is accepting responsibility for its advice. It is assuming the risk of error, just like lawyer assumes the risk of error when he gives you legal advice, or just like a doctor assumes the risk of error when he gives you medical advice. You aren’t just piggybacking on their own self-interested judgment in this case; rather, you are paying them to not self-interested, but rather, to be interested in you. You have the right to wise counsel here; you have the right to rely.
We “glibertarians” aren’t saying the bankers didn’t mess up big-time–they did. But they messed up with respect to their obligations to their shareholders and creditors. They didn’t mess up with respect to any obligations to the homeowner, because they didn’t have any obligations to the homeowner besides what was in the contract. The contract said these homeowners would be lent money; assuming they received the money at issue in their agreement, the bank fulfilled its duty to the borrower. When the borrower fails to fulfill his corresponding obligation to pay back the loan, let’s not absolve him of the blame–that failure rests on him.
February 24th, 2009 at 1:54 pm
“This one of the worst Yglesias posts in a long, long time.”
Which only confirms how truthful and effective it is.
I’ve worked in real estate lending for ten years. While I strongly suspected that the McMansion and $500K condo boom in Chicago was unsustainable, there was still great pressure on me and everyone I worked with to jump in. Many sophisticated, conservative people I know find themselves underwater as a result of the trends Matt described.
LaFollette nailed this issue on his comments upthread. The idiots challenging the basic substance of Matt’s post need to stop getting their economic information from Rush Limbaugh and the Republican Party, because the world that they describe exists only in their fevered imagination (comparing buying a first home to buying a TV set or a hamburger? What a maroon!). And yes, people look to their lenders to tell them what they can afford. The dodicy simply abouds on this thread.
The reflexive blame of the people least able to sort through the bullshit that caused this meltdown, presumably by people much like those being blamed, is the height of arrogant, heartless hypocrisy. You really should be ashamed of yourselves.
February 24th, 2009 at 1:56 pm
Does your utility have an obligation to tell you the lowest rate available to you? This may come as a shock, but utilities charge different rates to different classes of customers, but they won’t tell you into which class you fall or the lowest rate for which you qualify. Calling those in the finance pyramid (that’s what it was) “professionals” doesn’t make them any more responsible than calling the electric company a “utility.”
February 24th, 2009 at 1:58 pm
Of course, the “idiocy” in this thread “abounds.” And the Dude abides.
February 24th, 2009 at 2:02 pm
“And it was easy to sell the mortgages as securities irregardless of their quality …”
Harvard called; it wants your degree back.
And count me among those who still think there are a lot of borrowers who are largely at fault for their own predicaments. You can’t blame them for the financial collapse, since there’s no way the average borrower could have foreseen that. But all those borrowers knew their actual income, and knew or should have known that paying more than 30% of your gross income on your house payment is a recipe for getting foreclosed on.
This is not to say that we shouldn’t help these dumbasses if that’s what it takes to get the economy back on track. After all, we’re bailing out Wall Street, as we should, and they certainly don’t deserve it. Desert is a quaint ethical concept that has little place in public policy.
February 24th, 2009 at 2:04 pm
brewmn, thanks for proving the point. After feeding at the trough with the other “professionals” in the financing pyrmamid he now feels so badly about it he wants the government (meaning all of us) to bail out his former customers.
February 24th, 2009 at 2:05 pm
There was no large market, primary or secondary, in residential real estate loans with extremely high loan to value ratios until Congress decided to create one. After Congress created one, underwriting standards continually eroded over many years, and as private sector actors became more adept at generating fees with such mortages, such loans became more and more prevalent, now often outside of the channels that Congress created. Those Congressionally created entities saw the fees being collected by the private entities, and the Congressionally created entities got ever more involved in unsound lending pratices. Congress, quite happy with collecting campaign contributions that resulted from these loan practices, was quite happy to, as Representative Frank put it, to “roll the dice” some more. Everybody else, both in the GSEs and private sector, was happy to pay themselves ever larger bonuses. Borrowers were happy to roll the dice as well.
There are plenty of bad actors here, but the notion that this is an example of the dangers of unalloyed free markets, as expert/charlatans like Stiglitz have been recently saying, is too stupid for words. The U.S. housing and residential mortgage industry has for several decades resembled a free market about as much as the U.S. aircraft carrier industry.
February 24th, 2009 at 2:11 pm
“brewmn, thanks for proving the point.”
You’re truly a fucking moron. I perform due diligence and draft commercial real estate loan documents. I don’t touch the financial underwriting portion of the process.
I know it makes it easier for your pea-sized brain to simplify any concept requiring relatively complex analysis to the point of absurdity. But you’re really better just keeping your stupid yap shut, and maybe turning off your AM radio once in awhile.
Braindead assholes like yourself are as much of the problem as a greedy, shortsighted, unregulated financial sector. They need idiots like yourself to keep their shenanigans in the shadows, and to be hailed as master if the universe..
February 24th, 2009 at 2:13 pm
The U.S. housing and residential mortgage industry has for several decades resembled a free market about as much as the U.S. aircraft carrier industry.
That does not follow. There was no secondary market in mortgages until Congress relaxed the constraints forbidding them, relaxed the underwriting standards, and forbid regulators from interfering with the market. Congress created an unregulated free market in mortgage securities, and this financial catastrophe is the result.
February 24th, 2009 at 2:14 pm
I agree with the idea that there is plenty of blame to be spread around, but only a small fraction to fall on borrowers?
If you take out a mortgage you should expect to have to make repayments. People do have a responsibility to think the financial implications of taking out a loan of that size. Clearly there is blame should go to those selling and repackaging those loans, but surely those taking out the loans should believe they are capable of paying them back.
Another way of thinking about the banking bailout that is politically impossible for people to say, is that it is effectively subsidising people who have taken out bad loans. Mortgage losses are not originating at the banks, but with the original homeowners, and it is them (albeit in a very inefficient way) that taxpayers will effectively end up bailing out. The impression being given that this money goes entirely to the banks is only partially true.
February 24th, 2009 at 2:26 pm
Yes, actually. GE was huge in the business. They are having difficulties now, and might exit the lightbulb and appliance business altogether. The others – RMIC and MGIC – are having troubles.
And the risk on these PMI companies was sold to insurance giants like AIG. And you know what happened to them.
February 24th, 2009 at 2:30 pm
This place is usually pretty civil. But not right now, in here. Lotsa hot heads in need of large chill pills, if you ask me.
February 24th, 2009 at 2:30 pm
There is a difference between reducing the pricipal or interest rate on a mortgage, and helping a homeowner to borrow a bit more money so they have a roof over their heads while they look for a job. I’m facing foreclosure later this year. I don’t want anyone to reduce my principal or interest rate. I just want to be able to borrow enough money to keep a roof over my head for, say, 6 months, because the way this economy looks (I live in California) I may not be able to find a job for another 15 months. I’ve owned and lived in my home for over 20 years. I believe I have a lot of equity in it, all of which I would lose if I lose the home. In any economy that wasn’t completely collapsing, I would be able to find some work (I’ve applied for one $10 / hour job) and refinance a little ($20,000 would make a lot of difference). It’s an incredible feeling to live in the United States in 2009, to be a perfectly productive person with a fine work history, and give away possessions to friends because I must plan for losing my home in late 2009 or early 2010. Please don’t assume that all people, or even most people, in my situation or real-estate speculators. Perhaps that was true a year ago, but all kinds of Americans are losing their homes right now.
February 24th, 2009 at 2:31 pm
Several years ago you could get a loan that was SIVA – Stated Income Verified Assets. So you wrote down what your income was and your assets were verified traditionally. These loan programs started with people who were self-employed. Often it is hard to deduce the income of someone who is self-employed. Tax returns might not tell the whole story, especially if the business is young and just took off. This isn’t to say that SIVA was a bad or good idea. It had a fairly limited application that increased risk.
From there some genius had the idea to make SISA loans – Stated Income Stated Assets. These have been called “liar’s loans” or NINA loans – No Income No Assets or sometimes NINJA loans – No Income No Job or Assets. Honestly, I don’t know how the industry ever rationalized this invitation to fraud. It was stupid, but a lot of people signed them. Like I said, I saw a lot of these in SoCal. And, unsurprisingly, SoCal is ground zero for the housing implosion.
February 24th, 2009 at 2:33 pm
You’re going to be accused of elitism for allegedly implying that teachers, electricians, and Home Depot managers are too stupid to make decisions for themselves.
I’m a secretary. I can read. I rent. The implication that a poor little secretary or nurse just can’t be expected to understand her own personal finances in the same way that a super-sophisticated blogger can understand his is really offensive to me. And people who bought beyond their means, whether they’re electricians or couples with “five degrees between [them],” should accept their responsibility for their situation.
February 24th, 2009 at 2:41 pm
Trig or Treat, you are right. And it’s not just a left/right difference. Contrary to reaction to my comment, I support a government subsidy to lower the debt service for some home owners. But the public is in no mood for a government give away to those who were either foolish or greedy. And how else can one describe someone who puts no money down, gets a teaser rate, negative amortization mortgage to buy a house in a field located a gazillion miles from civilization. And this isn’t a value judgment. If Obama loses support for some kind of mortgage relief because the public views it as a give away, that’s bad for everybody.
February 24th, 2009 at 2:42 pm
When you go to a bank for a loan, you are not hiring them for their advice.
I think that many of the in-trouble borrowers thought that was *exactly* what they were doing. Mortgage salesmen don’t exactly have a “we do not work for you or represent your interests” sign in their offices – in fact, they go out of their way to make the victim borrower believe that they are “helping you afford a home”, rather than “shoving you into a terribly risky financial decision while sucking as much money as possible out of you at the same time”. The former image leads to more sales.
February 24th, 2009 at 2:43 pm
shout out to Jeff
…i’m with you man.
the money is so great that people with the best common sense fall short of comprehension when “dream” is attached to it.
and the other surprise is the fluctuation of these payments. the fine print talks in another language most are not used to.
when $1500 monthly for 20 years turns into $3000 monthly, “somebody’s in trouble” registers too late. this inconstant math is a new education for most. these gatekeeper folks know of these trapdoors when the consumer has never experienced this on the scale they’ve just inherited
February 24th, 2009 at 2:46 pm
The Republicans on this thread are beneath contempt. All of this complete garbage about evil fraudulent borrowers, yada yada yada…
Assume that real estate prices plunge by, oh, a factor of two. Lose your job. Then come here and listen to complete jackasses braying about how it’s all your fault because you’re a fraud.
Live next to a foreclosed home for awhile, and watch your property values plunge. Get a divorce. Get sick. Then come here and watch a collection of malicious people say it’s all your fault.
Bright side: no one will ever take a libertarian or republican any more seriously than they do a communist. Your god failed too.
February 24th, 2009 at 2:47 pm
You had me until I read “irregardless”…and it was going so well…
February 24th, 2009 at 2:54 pm
Ellen,
I think the point that many of us are trying to make is that home buying involves more than “your own personal finances”, just like a decision about whether or not to have that gum graft is about “your personal healthcare.” Unless you have the time and resources to put in months of independent research, you’re research will consist of relying on experts.
The rational consensus is that there is plenty of blame to go around. But crafting legislation should not be an exercise in emotional catharsis. We can have a housing crisis truth and reconciliation commission to help the sadists let go of urge to See Someone Punished.
The only argument to be made here is the following:
will housing crisis legislation help us collectively maintain our standard of living and avoid further economic collapse. If your answer is “No”, then mathat argument.
February 24th, 2009 at 2:57 pm
My typos vote Republican. Screw them.
February 24th, 2009 at 2:58 pm
Uh, no, dob. The secondary market in mortgages was intitially entirely created and funded by Congress, because private entities did not see such a secondary market as being a viable way to employ capital, ESPECIALLY on loans with little downpayment. Say, you aren’t among those who claim that Fannie Mae and Fredie Mac were private entities prior to last fall, are you?
February 24th, 2009 at 2:59 pm
“Assume that real estate prices plunge by, oh, a factor of two.”
Another innumerate liberal. All emotion and hysteria, no ability to carefully way facts. Typical lefty.
February 24th, 2009 at 3:00 pm
“Weigh”, not “way”. But you knew that.
February 24th, 2009 at 3:05 pm
Marc,
No one is saying that they enjoy the fact that people are hitting hard times and that they may lose their homes. I don’t want anyone to lose their homes. I don’t want people to lose jobs. This is awful, awful, awful. But that’s not the question. The question is whether those who were more risk-adverse should have to pay to keep people in their homes. I don’t own a home. Should I pay so that others can keep something that I don’t have? Why shouldn’t these others just become renters like me? It’s a matter of fairness. It might be too harsh to say that it’s the homeowner’s fault that he defaulted. It’s clearly too harsh to say that it’s my fault. If one of has to pay, it seems more fair that he pay than that I pay.
Tragedies happen every day to people who don’t deserve them. People get in car crashes. People get sick. People make mistakes, even when they try to do the right thing. I can feel terrible that these things have happened, and still believe that it’s wrong to force strangers to compensate these people. We don’t raise taxes to pay back the guy who had his car stolen. We don’t raise taxes to pay back the guy whose house was hit by lightening. We don’t insure every calamity. We couldn’t, even if we wanted to. When someone loses a job and can’t pay for his house, it’s awful that he will lose his house. In the grand scheme of human suffering, not owning a house isn’t the worst thing in the world–there are lots of us who don’t own a house and we don’t feel like we need to demand the charity of others.
Surely there must be some renters on this thread who are defending Yglesias’ post. Why? Why should you pay so other people can keep something you don’t have? There were other solutions. The Government could buy homes and rent them to the current occupants, for example.
And I don’t think anyone on this thread wants to excuse banks for bad behavior. If bankers lied to homeowners . . . if they misrepresented something in their dealings . . . then they should be liable to the homeowner for fraud. But we have a remedy for that . . . it’s to bring an action for fraud. And fraud in the inducement can be used to get out of contractual obligations too.
Telling people that they are “beneath contempt” isn’t exactly engaging them on the merits of their arguments. And since we’re talking about spending a lot of money, we need to be engaging the merits of the arguments.
February 24th, 2009 at 3:07 pm
shout out to DAS
yep! it’s in a machine that takes in manual input with no human factor on the output. I’ve beaten an eviction notice later to find out the eviction was on my record. ???? makes no sense , unless you’re just trying to make fast money. and yeah, some of these bloggers actually believe there aren’t any wolves in our midst? when prices escalated, they only got bigger and hungrier. we’re talkin’ real world. i don’t know these people who don’t know humanity and it’s realism. they can see the pictures of a wasteland and not believe it’s real or tune it out all together
February 24th, 2009 at 3:15 pm
“Surely there must be some renters on this thread who are defending Yglesias’ post. Why?”
For the collective good of the economy. Foreclosures hurt economies just as unemployment does. Why should those of us who had the foresight to choose jobs that we can keep support those who made different choices.
Beyond that, I agree that the US has a house fetish.
February 24th, 2009 at 3:20 pm
I lost a home. The bank and I had this deal: I miss payments and they repo the house and collect mortgage insurance (for which I paid the premiums). So, in the end, they got the house and the insurance pay out. It has NOTHING to do with me if some Wall Street a-hole made a side bet for a billion dollars that I would or wouldn’t make the payments – not my concern or fault at all. I had a deal – I stuck to it.
February 24th, 2009 at 3:24 pm
b9n10nt,
You’re absolutely right about the need to rely on experts in making a decision about a dental procedure or a home purchase, but you’ve still got to shoulder your own share of the responsibilty for the decision. I’m not arguing for one legislative course or another; I agree that that should be a matter of what gets the best results rather than what’s most fair. We agree that “The rational consensus is that there is plenty of blame to go around”– but the post suggests that “no more than a tiny fraction of it could possible[sic]adhere to a… secretary.” No more than a very tiny fraction of the crisis as a whole, but for her own situation, I’d venture to say that her fraction of the responsibilty is at least 1/2. Suggesting otherwise, suggesting that secretaries and teachers and nurses are helpless and thus innocent, is pretty insulting.
February 24th, 2009 at 3:38 pm
Ellen,
Your thinking like a secretary, keenly aware of the limitations and foibles of human resources within a bureaucracy. But let’s think like a social scientist. The phenomenon we’re discussing is meta-personal: as with crime, any individual criminal act represents a personal failing, but a change in the crime rate requires an explanation that can based on evidence. “More people are bad guys” is not an evidenced-based explanation. Likewise with the “personal responsibility” housing crisis schtick: sure, there were individual failings aplenty, but that doesn’t explain the dramatic change in the rate of foreclosures.
We can notice something about mortgage markets, as with most markets. Consumers/borrowers are atomized; they do not collude with other consumers to change the terms of transactions. Sellers/lenders have several individual customers. Therefore, there is apriori a case to focus our explanations (not blame) for the crisis on institutions.
February 24th, 2009 at 3:40 pm
Re: 103:
And in many cases, the numbers that were “stated” on those NINJA loans were made up by the mortgage broker rather than the borrower (on “This American Life’s” show on the mortgage crisis, they read to a guy who was being foreclosed what the income on his mortgage app was and he reacted in disbelief)
Seriously, all you caveat emptor types: get a clue, and also fuck off. Sure, there were fraudulent buyers out there, but the scale of this problem comes from the fact that most people who didn’t make a hobby of discussing the arcana of the changes in the global finacial industry rather reasonably thought that people offering to let them borrow hundreds of thousands of dollars were concerned about getting paid back.
February 24th, 2009 at 3:44 pm
Lots of people out there cranky about paying other people’s mortgages – like the 92 Percent Group
http://92percentgroup.org/
Calling for an April mortgage strike
http://92percentgroup.org/Mortgage_Strike.html
February 24th, 2009 at 3:45 pm
It’s not a bet, Jeff. It’s not playing the odds.
It’s following standard practice. It’s as much of a bet as thinking the bridge you walk over won’t collapse.
I’m a secretary. I can read. I rent. The implication that a poor little secretary or nurse just can’t be expected to understand her own personal finances in the same way that a super-sophisticated blogger can understand his is really offensive to me. Good thing nobody’s suggested that the, Ellen. Care to take a stab at any arguments that have actually been made? For example, that it was rational and intelligent to treat lenders’ qualification process as an effective measurement of your ability to pay, because it served as such very effectively for a couple of centuries, until the lending industry went off its rocker?
February 24th, 2009 at 3:55 pm
I’m just tired of the damn hypocrisy. Conservatives advocated for a deregulated, self-policing market on that grounds that businesses would make decisions in their own financial interest without being held back by the hated nanny state. So what happens when they all make spectacularly short-sighted business decisions and the whole fucking economy goes pear-shaped? “Well, sure, we need to bail out the people on Wall Street who gambled trillions of dollars on stupid assumptions… but it’s all the fault of our greedy customers!
We can’t help them… it create be a moral hazard!”
Uh, no. Nice try.
=========================================================
Hypocrisy – plenty to go around
http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print
September 11, 2003
New Agency Proposed to Oversee Freddie Mac and Fannie Mae
The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.
”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Representative Melvin L. Watt, Democrat of North Carolina, agreed.
”I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.
February 24th, 2009 at 4:11 pm
You can make excuses and have sympathy for all the borrowers. But this is the bottom line that we all know in our hearts. We all know what we can afford to pay for and what we cannot afford. There is no grey area. There may be a little voice in our heads saying “maybe this is risky” or “everything has to go perfect”, but we all know when we write the check whether it will bounce. So the borrowers are fully culpable. Don’t lay it off on some other party that was the lender or mortgage agent. Those that borrowed the money knew fully that either they could afford the payment or they could not. I have no sympathy at all.
February 24th, 2009 at 4:19 pm
b9n10nt,
Let’s go ahead and use your imperfect crime rate analogy. I’m not arguing that “More people are bad guys”; I’m not arguing that there aren’t larger forces affecting the crime rate. I’m saying it’s insulting to imply that certain groups of people just can’t be expected to know what’s illegal and what’s not. But at this point I can tell that I let some personal insecurities cloud my reaction to the post’s tone and that it’s time for me to stop spouting off on the internet.
February 24th, 2009 at 4:21 pm
“There is no grey area” (sic)
correction: there is no grey matter
February 24th, 2009 at 4:25 pm
Bankruptcy is the answer to this debt spiral. Bad loans don’t get repaid…they just sit out there until people face the music. Default has been the solution to bad debts since the beginning of civilization.
We should remove the stigma of default, especially in the case of collateralized obligations like mortgages. A mortgage is a business transaction, not a holy promise. Non-recourse is the effective termination clause of the contract. Noone cries irresponsiblity when a borrower defaults in a rising housing market. Its only when the banks have to honor the out clause in their contract that we now hear the mewling. Defaults on homes that are underwater are not painless, the defauling party would lose any principle paid in, and of course the interest paid in the bank. It is certainly not the homeowner’s fault that a property appraised by the bank upon the granting of the mortgage has fallen in value.
February 24th, 2009 at 4:25 pm
In the late eighties I tried to get a loan to buy a house. I was waiting tables at the time and bartending. My bank looked at the numbers and said no way. That simple. For the last 8 years years nobody said no. Except me. Now I rent.
February 24th, 2009 at 4:28 pm
That’s very self-aware, Ellen. Props to you.
But please understand, the argument is not that “certain types of people” can’t be expected to behave responsibly, but that it was rational and understandable for people – all types of people – to believe that lenders were performing sufficient due diligence regarding ability to pay before approving loans.
Somebody mentioned hamburgers earlier; I don’t carry a meat thermometer with me, and test the temperature in the center of the patty to make sure that the guys working the grill cooked it all the way through.
February 24th, 2009 at 4:28 pm
I mean, the commitment to righteous ignorance is impressive.
I guess Rick would argue that every flu season consists of individual decisions to not sanitize one’s hands. In terms of explaining a social phenomenon, affecting thousands at the same time, is my analogy really so off base (especially now that we have flu shots and “little voices in our head” saying, “I really should get that shot”)?
February 24th, 2009 at 4:30 pm
That’s nice Campesino. I’m glad that your wingnut mailing list has figured out how to use Google. It’s true that Republicans were more interested in keeping an eye on Fannie Mae’s books, but I’ve never seen any evidence that President Bush actually wanted to tighten Fannie and Freddie’s lending standards. Remember the whole “ownership society” thing? Remember also that the GOP ran both houses of Congress from 2003-2006 and controlled all the relevant federal regulatory agencies.
Anyway, this is only marginally relevant to what happened. Fannie and Freddie played a very large role in the distortion of the housing market and the creation of the bubble. But a mere doubling of the US foreclosure rate would not have bankrupted Bear Stearns, AIG, and Lehman Brothers and brought the entire global economy into a severe recession unless other, more important factors were at work.
The little ideological shell game you guys are playing isn’t fooling anyone. This crisis was birthed on Wall Street in the corners where the regulators weren’t looking. There’s plenty of blame to go around for the housing crisis… Fannie, Freddie, Dem Congressmen, and greedy housing speculators deserve their share. But the housing crisis was just a catalyst for the financial crisis.
The financial sector hanged itself with its own lack of foresight or ethics. They begged to be left alone by regulators to manage their own affairs and then they bankrupted themselves in a tangled web of “innovative” derivatives and unregulated default swaps. Traders on the floor of the Chicago exchange are in absolutely no position to lecture homeowners on fiscal responsibility.
February 24th, 2009 at 4:41 pm
The troglodyte analysis of the housing crisis is the same as the troglodyte analysis of any social issue: the individual morality play is the only possible analysis of a social phenomenon.
The idea that the housing crisis is “lazy borrowers” or “greedy mortgage lenders” or “greedy Wall Street financiers” is simply not an explanation. Its so bad its not even wrong.
Laziness and greed (and compassion and self-discipline etc.) are two of the many constants of human nature. No evidence is ever presented (what would such “evidence” even look like?) that such variables correlate with social phenomenon X.
February 24th, 2009 at 4:55 pm
La Follette, in my view the worst actors in the private sector have been the ratings agencies, which in my opinion have engaged in straightforward, unsophisticated fraud, which at a minimum should be looked at by the criminal division at the Justice Department and a grand jury. However, and unfortunately, straightforward fraud is often hard to discover until after the crime has gone undetected for a while.
At the same time, I think you underestimate the importance of Congress and several Administrations’ role in bringing us to this unhappy state of affairs, via their distortion of the housing market through the GSEs, tax code, and other actions. The Federal Government has encouraged muisallocation of capital into residential housing for decades, with ever greater erosion of underwriting standards in the mortgage industry, and no, I’m not primarily referring to the subprime sector or the CRA. This momentum built over time, and this problem did not start in the last 10 years. Absent the Federal Government incentivizing the misallocation of capital into residential housing, the bad actors in the private sector would have been far, far, less dangerous. When a city is constructed entirely out of highly combustable materials and very narrow roads and alleys, the fact that it eventually burns to the ground due to carelessness and/or mendacity is not exactly a shocker.
February 24th, 2009 at 4:55 pm
La Follette, in my view the worst actors in the private sector have been the ratings agencies, which in my opinion have engaged in straightforward, unsophisticated fraud, which at a minimum should be looked at by the criminal division at the Justice Department and a grand jury. However, and unfortunately, straightforward fraud is often hard to discover until after the crime has gone undetected for a while.
At the same time, I think you underestimate the importance of Congress and several Administrations’ role in bringing us to this unhappy state of affairs, via their distortion of the housing market through the GSEs, tax code, and other actions. The Federal Government has encouraged muisallocation of capital into residential housing for decades, with ever greater erosion of underwriting standards in the mortgage industry, and no, I’m not primarily referring to the subprime sector or the CRA. This momentum built over time, and this problem did not start in the last 10 years. Absent the Federal Government incentivizing the misallocation of capital into residential housing, the bad actors in the private sector would have been far, far, less dangerous. When a city is constructed entirely out of highly combustable materials and very narrow roads and alleys, the fact that it eventually burns to the ground due to carelessness and/or mendacity is not exactly a shocker.
February 24th, 2009 at 4:58 pm
Wasn’t George W. Bush talking up the “ownership society?” Weren’t these people just living the American dream as defined by the president at the time? Weren’t there lenders more than happy to give out money?
So were these lenders telling people, “It’s probably irresponsible of me to give you this money, but I’m going to do it anyway.” What the hell?
February 24th, 2009 at 5:00 pm
This is all about 3 of the Deadly 7 – Envy, Greed, and Gluttony.
For decades, we have had this haunting sense of entitlement. If you’re born in America, you NEED a college education. If you graduate from college, you DESERVE a six-figure salary, or at least to live like you have one. If you are an employed adult, you SHOULD “own” a nice home. If you get engaged, people EXPECT a huge diamond and a huger wedding. At the moment of conception, you HAVE to get an SUV. Let’s not mention that this thinking will cost hundreds of thousands of dollars. It’s okay because this is what everyone does, right? No, it’s not right. It doesn’t even sound right and we’ve realized that a little late in the game.
So who is to blame? You and me. We consume more than we need, we try to outdo each other, and we have failed ourselves in financial education. Who here took a class in personal finance in high school and remembers what it covered? Who here has never ever lied on a credit card application to increase the limit and thus eventually boost your credit score? Matt is right. The average American doesn’t know what he needs to know about handling money. And how can he? He was never taught. The company he works for and the country he lives in doesn’t get it, either.
Get over the liberal vs. conservative nonsense, and stop insulting the character of people you don’t even know. Unless we can find a way to influence our lending, borrowing, spending, and saving behavior so that this crisis never happens again on such a large scale, we’re all screwed. Let’s band together and learn from this mess.
February 24th, 2009 at 5:05 pm
I’m as liberal as they come, but I do think homebuyers who overbought have a lot of responsibility. There’s the monthly mortgage payment on a form. Either you can afford it or you can’t. Be smart. I do think some people were duped into buying interest-only and other exotic mortgages that seemed affordable by fast-talking lenders, but even then I have a hard time letting people off the hook for sheer stupidity. I bought (relatively modest homes) twice in the last 10 years, nobody tried to sell me weird mortgages, but the offered adjustables and it just freaked me out. The whole concept of maybe paying more down the line just seems too risky to me. And I’m basically a financial idiot. So I’m not going to let anybody else off the hook either.
February 24th, 2009 at 5:15 pm
Stepahnie, what you write has value, but it glosses over the fact that there are millions, yes, millions, of your fellow citizens who HAVE behaved in a very prudent risk averse manner, and they are going to get hammered along with everyone else, and policies which exacerbate the exposure the risk averse to hammering caused by the behavior of the imprudent/mendacious discourages prudent risk averse behavior in the future. I don’t have any easy answers, mind you, but the glib way in which many in this thread dismiss the real danger of moral hazard is completely unfounded.
February 24th, 2009 at 5:19 pm
LaFollette,
Steve Sailer has been way ahead of you in heaping blame on Bush. But that blame is also shared by Chris Dodd, Barney Frank, and other Dems in Congress who shared Bush’s zeal for giving easy credit to unqualified borrowers, especially minority borrowers.
February 24th, 2009 at 5:27 pm
Fred, that dog won’t hunt. The total amount of bad subprime mortgages is a rounding error when compared to the size of the derivatives market.
February 24th, 2009 at 5:29 pm
Fred,
Sailer has only attacked Bush as a way round toward his favorite groups to blame for, well, everything: greasy Spics and lazy n*ggers…
February 24th, 2009 at 5:33 pm
I bet after reading this, a lot of salesmen are going to coldcall Matt and tell him that they are professional experts so of course he ought to trust whatever they have to say about whatever they are selling.
February 24th, 2009 at 5:37 pm
Will, you have a very good point. Such is life. The misguided (or purely malevolent) actions of a few cause the destruction of many. But just because some people didn’t buy a house they couldn’t afford doesn’t mean all their financial decisions were sound and made no contribution whatsoever to America’s status as a nation of crippling debt. Instead of espousing an “us vs. them” mentality, it might make more sense to skip all that and equip everyone with the tools we need to be fiscally responsible.
I don’t have any easy answers, either, but a solid education in personal finance and economic history is a good place to start. I even learn a lot just by reading the fine print on bills, leases, investment reports, and other such documents. Any other suggestions?
February 24th, 2009 at 6:29 pm
Did I miss something or –after 145 posts — did you brainiacs actually fail to address the real issue: Why should taxpayer money be used to bail out either the banks or the underwater homeowners?
The solution has always been simple: the bank works with the delinquent homeowner and either works out a repayment plan or forecloses and takes the house. End of story. What’s the problem here? Is people can’t pay the mortgage, they should rent or live in public housing. If a bank is fucking stupid enough to lend more money than 80 percent of the house’s stable value, then it’s shareholders deserve to take it in the shorts until they wise up and appoint better management.
Why are the taxpayers and government even getting involved in this mess. Obviously, someone’s gonna get fucked — but why is it us? We weren’t even party to the original deal.
February 24th, 2009 at 6:42 pm
Don, the argument from day 1 hasn’t been subtle: bailing out banks and wall street, just like bailing out the increasing ranks of the unemployed people with extended benefits, supports the economy. You’ve heard many an economist say “we’re not gonna solve the financial crisis or the economic crisis generally until we stabilize the housing crisis.” That’s what this is.
Did I miss something, or after 80 plus fucking days (I’m borrowing your writing style, take is as flattery) of reading up on the issues, are you still pretending you can’t fucking understand the difference between post-Enlightment rational public policy and motherfucking pre-Enlightment Judeo-Christian reductive Judgement Day right vs. wrong zero gray area bullshit?
WTF, fucking fucker?
February 24th, 2009 at 7:22 pm
Why shouldn’t we hold the teachers and electricians and so forth to their contracts? Every one of them had an opportunity to read all their mortgage documents. They all had an opportunity to ask questions about them, or even to hire a lawyer to review them (in some states, it’s even required that a lawyer participate). If people are going to agree to contracts worth hundreds of thousands of dollars without knowing what they are agreeing to or considering whether they can afford them, then they shouldn’t get any special treatment. Teachers and electricians and so forth aren’t dumb; and I think just about any reasonable person should read all the documents in a financial transaction of that magnitude.
Then again, I may be unusual because I did actually read all the sale and loan documents for not one but two houses when I bought my house in 2006. I turned down one house because they wouldn’t make changes in the price or in some of the sale terms. I know that my title company said I was unusual in reading everything, but I can’t understand why other people would agree to something that important without reading it. Plenty of people, teachers, electricians, and mortgage brokers, were willingly blinded by irrational expectations and greed.
But it’s important to remember too that the vast majority of even subprime loans are continuing to be paid, so it’s really a matter of just some minority of careless homeowners who didn’t realize what they had gotten themselves into because they didn’t read the agreements. Those of us who bought in 2006 and made payments ever since don’t need to bail out those careless people who couldn’t even be bothered to understand the 30 year, hundreds of thousands of dollars obligation they were taking on.
February 24th, 2009 at 7:29 pm
Will Allen,
You forgot the big one: suburban snob zoning.
Yes, government policy has certainly pushed for the misallocation of capital into homes, but that by itself could not have produced a financial meltdown. There are all sorts of problems we can attribute to government distortion of housing and real estates markets, in the form of pushing big houses on big lots in the suburbs, but the story of the financial meltdown isn’t primarily about there being a bust in the housing markets, or even about lenders going down as a result; it’s about the shady paper people were ginning up. If it wasn’t mortgages, it would have been something else.
February 24th, 2009 at 7:55 pm
Santelli was speaking in front of garden variety floor traders. If those are the “overclass” you refer to in your first paragraph, I suggest you get to know floor traders in Chicago pits. I knew plenty in my time in Chicago. They were about as far from an overclass as you could get.
Middle class guys mostly, with no elite schools or family money. Most of them eked out a pretty modest living executing trades.
Regarding how only “a tiny fraction of the blame” could adhere to electricians or teachers , should we revisit whether they are qualified to serve in those capacities if they cannot understand very basic concepts like debt and falling asset prices?
Shoot, my grandpa didn’t finish high school, and he understood those things quite well. He learned from … experience.
February 24th, 2009 at 8:05 pm
Whole lotta the blame lies with the state governments that had poor regulations concerning who DID, and who DID NOT, qualify for mortgage broker licenses.
The epicenters of the subprime mortgages were California, Florida, Nevada, and Arizona. (Michigan and Ohio too, but for more complicated reasons).
Anybody could get a broker’s license in California and Florida. Those 2 states didn’t even do criminal background checks on the applicants, and a whole lotta convicted felons, with very little expertise, knew EXACTLY which 2 states they could run their scam in, and do it easily.
While the “gettin” was good, California and Florida was loving the taxes paid in for those sales. As soon as the “gettin” was gone, they jumped on the federal gravy train.
I suggest we require national standards for the brokers, and that if California and Florida are unwilling to comply, they don’t get a dime.
Anybody know why Congress willfully EXEMPTED Fannie & Freddie from the Sarbanes/Oxley law? Political contributions and connections, anyone?
February 24th, 2009 at 8:32 pm
Well, the bizarreness continues.
Michiganguy, Sisyphus,
The plan is sold to help what the admin. calls “responsible homeowners”, those living in foreclosure-rich neighborhoods, and the economy in general.
Thus, you would have to argue that the unfairness of the plan to responsible homeowners and non-owners outweighs its benefits to society as a whole.
You, as well as too many others, are in essence arguing that
-only reckless borrowers or cheifly reckless borrowers would benefit
-only responsible homeowners and renters would suffer and
-no external benefits are remotely conceivable.
With your obsessive focus on the “bad guys”, you give no indication of having the slightest understanding of what’s going on.
There are no shortage of web-accessible criticisms of the plan which actually consider, ya know, the plan. There are equally many praises that the plan accomplishes its stated goals, in whole or in part.
But you would rather add to the emotionally-infantile and intellectually void perspective whereby you actually don’t have to consider any supposed benefit or even give the slightest indication that you understand what such a benefit might be, even though said arguments have been over the front pages for weeks.
Stupidity will not resolve your visceral drive to see bad-doers punished.
February 24th, 2009 at 8:38 pm
b9n10nt:
Um, no, I don’t.
No, I am not.
Are you embarrassed yet, or do you need more of your own words repeated to you?
February 24th, 2009 at 8:45 pm
Real estate in Florida is a snake pit. Always has been.
February 24th, 2009 at 8:52 pm
I rather enjoy gettin’ all lathered up in debate.
Look, your point was
a) Chi town floor traders aren’t the overclass and
b) educated adults should be expected, as a matter of public policy, to understand contracts that they sign before they sign them and -as a corollary- face the consequences.
Great. My point, which I am trying to make with equal parts and contempt and eloquence, is that everyone agrees with argument b. I have yet to hear a single advocate on this blog or elsewhere saying “Gee, people making 50 buying a home for 400 should be subsidized because, darn it, home buying is complicated”.
There’s actually proposed legislation re: the housing crisis. Wouldn’t it be interesting if, instead of stating truisms (that would be argument “b”) you actually adressed a relevant issue.
Feel free to paste and mock these words, but please give an indication of understanding them in the effort.
February 24th, 2009 at 9:06 pm
Re b0b10nt’s comment “Don, the argument from day 1 hasn’t been subtle: bailing out banks and wall street, just like bailing out the increasing ranks of the unemployed people with extended benefits, supports the economy. You’ve heard many an economist say “we’re not gonna solve the financial crisis or the economic crisis generally until we stabilize the housing crisis.” That’s what this is.”
—————-
1) I have heard the argument and I have repeatedly noted why I think it is utter bullshit.
2) Citing “economists” as authorities does not impress me — I think most of them are dicklicking whores for the rich who make mortgage bankers and Wall Street CEOs look like moral giants.
3) Five months ago I clearly argued that if the government was going to use tax dollars, it should use them to supplement or replace the bankrupt banks — not pay Citibank’s gambling debts. The government could have set up new National Banks with clean balance sheets and invested money in real businesses to keep the economy going.
4) Maybe you can explain why this $10 Trillion clusterfuck is superior to my proposal.
Otherwise, your claim that it “supports the economy” is the epitome of “motherfucking pre-Enlightment Judeo-Christian reductive Judgement Day right vs. wrong zero gray area bullshit”
February 24th, 2009 at 9:16 pm
I love seeing Yglesias speculating when there is actual evidence of what was going on at the time:
http://articles.latimes.com/2005/apr/03/business/fi-afford3
Looks like the cocktail waitress knew precisely what was going on.
February 24th, 2009 at 9:30 pm
Dear Matt:
I’m a certified, professional, expert bridge salesman. I think you should buy the Brooklyn Bridge from me for just $1 million. In my professional opinion, it’s a helluva deal! Just think if you charged every car that went over the Brooklyn Bridge a penny. Think how much that would be! Personally, I don’t know, I haven’t done the math, but in my expert opinion, it would be a lot.
Trust me.
Steve
February 24th, 2009 at 9:34 pm
Don
“Maybe you can explain why this $10 Trillion clusterfuck is superior to my proposal [The government could have set up new National Banks with clean balance sheets and invested money in real businesses to keep the economy going].”
I would argue 2 points:
-Your proposal could do nothing to help people who were or will be unprepared for a sudden drop in home value through no fault of their own. Using this housing crisis as a tool to radically reorient how Americans live would be politically counterproductive.
-Relatedly, but on the banking side, its not politically feasible. On the “far left” you have Krugman’s etc. proposing the “Swedish” model which is temporary nationalization in which bank investment is still a private-interest policy.
I’m not sure Obama’s plan would in fact support the economy. I just know that critics would have to argue against that fact with reason and evidence. The chorus of “let the dimwitted and greedy borrowers lay in their bed” isn’t by itself an argument against the housing “bailout”.
February 24th, 2009 at 9:43 pm
I love it — someone who bought in 2006 is getting all righteous
enjoy that equity burn
February 24th, 2009 at 10:08 pm
Re b9n10nt’s comment “Your proposal could do nothing to help people who were or will be unprepared for a sudden drop in home value through no fault of their own.”
—————-
The drop in home value should be meaningless. If someone actually bought a home — and is living in it — then it doesn’t matter what the home’s value is in the short term.
They are happy to profit from its appreciation — they need to swallow the fact that its value may decline at times for a while.
If someone can’t pay a mortgage then they should rent until they can. That is not hardship — that is how most people lived until recently. Hardship is living under a tarp because the US economy has been destroyed by irresponsible debt.
February 24th, 2009 at 10:48 pm
Re b9n10nt’s comment “Your proposal could do nothing to help people”
————
Watch: Nothing in this hand. Nothing in this hand.
From the speech Obama just made to Congress:
“First, we are creating a new lending fund that represents the largest effort ever to help provide auto loans, college loans and small business loans to the consumers and entrepreneurs who keep this economy running. ”
Bwahahahahahaha
February 24th, 2009 at 11:02 pm
uh, matt, i think you need to tackle this bullshit at some point: http://meganmcardle.theatlantic.com/archives/2009/02/asymmetrical_information.php
firemeganmcardle.blogspot has been pretty slow lately so i need my mcardle take down fix.
February 24th, 2009 at 11:12 pm
Don:
People who can’t afford their mortgages should lose their homes? I agree during an economic expansion or a regular recession. This isn’t a regular recession.
We all benefit if temporary support for homeowners adds wealth for neighborhoods. There’s a reasonable logic that loan defaults lead to financial insolvency lead to further decreased investments leading to, inter alia, further loan defaults etc…
If this deflationary spiral is in fact occurring, the belief that “people who can’t afford mortgages should lose their homes” is entirely unresponsive to the threat our economy faces.
Would you also argue that “people who lose their jobs should just find other work” without federal intervention?
February 24th, 2009 at 11:45 pm
Re b9n10nt’s comment “Would you also argue that “people who lose their jobs should just find other work” without federal intervention?”
—————
no, but your metaphor/analogy is false. People need a job to survive — they don’t need to own a house. They just need shelter. And if you give them a job, they are earning the pay. They aren’t getting it for free.
If someone has $5000 down on a $100,000 house at 7 percent and the house has declined to $60,000 then the best thing for the homeowner may be to mail the keys to the bank and try again once the economy is better and he has money saved up.
If someone is in trouble because he then borrowed $10,000 on the house and blew the money on consumer goods, then I don’t have much sympathy for him.
When you turn 18, you are supposed to be an adult.
February 25th, 2009 at 2:47 am
How is Jerry the Plumber supposed to know whether a reasonable mortgage rate is 15, 25, 35, or 55% of his income?
Google?
February 25th, 2009 at 2:57 am
Liberals love to call out business and corps on their irresponsibility, but when a worker fucks up, there is always an excuse.
It would be great if obama accepted this stupid line of thinking. Droves of people will “buy” homes and refuse to pay the bills, citing their ignorance as a “get out of jail” card.
February 25th, 2009 at 10:19 am
Cb, what is wrong with Megan’s post (can you think for yourself)? It’s a sound and simple point that many people who call themselves liberal can’t seem to get: it is reasonable to expect someone that borrows money to know whether he/she can pay it back. The bank isn’t going to be able to tell you, and neither is your mortgage broker, and your real estate agent isn’t going to be able to. If you think that certain classes of people shouldn’t be able to make simple financial decisions for themselves than you should be at least be honest about I and argue the point outright.
February 25th, 2009 at 11:32 am
Brad Says:
February 24th, 2009 at 11:56 am
This post might be a perfect distillation of the liberal mindset: adults, by and large, are children and need to be looked after by their betters in government.
Spoken like a true live-off-the-land farmer, rancher, electrician, plumber, mechanic, chef, weaver, and carpenter who keeps his cash under a mattress, lives off the grid and never depends on a professional for anything.
February 25th, 2009 at 12:10 pm
There’s your problem. You think there is actually such a thing as a code of business ethics which protects the consumer.
Well, there is. Despite generations of propaganda inveigling us to ‘trust’ business –to believe their utterly spurious claims of integrity, honesty, and public responsibility– the one thing one must ALWAYS remember is: “Caveat Emptor” (”let the buyer beware.”)
In the USofA, no one should EVER imagine that anybody in “business” will do the ‘right’ thing.
They’ll do the (immediately) profitable thing.
End of story…
February 25th, 2009 at 12:13 pm
I’ve read a lot of stupid things previously, but much of this takes the cake. If you don’t think that people that are asking a professional if they are going to be able to take out a second mortgage from that same professional in 5 years are going to believe him, you’re idiots. And why would he know that the idea that he’ll be able to refinance might be shot full of holes in the mean-time?
Here’s my real problem with the whole thing. The interest-only, no-money-down loans that were issued, remember them? How is it that nobody saw, that in the event of home prices downturns, that these were walk-away, rental loans? As soon as I heard what their conditions were, I knew that was what they are.
Why isn’t there some rightful indignation about these asshats who planned this stupid shit? It was a catastrophe looking for a place to happen. Wasn’t it? And Wasn’t it obvious to anyone who should have been overseeing these greedy, stupid asshats?
February 25th, 2009 at 2:31 pm
Wait, “so-called ‘irresponsible’ borrowers”? Why is irresponsible in quotes? There’s nothing so-called about it–many of these borrowers were irresponsible.
It’s paternalistic to suggest that millions of Americans, and each of them, are not at fault for not understanding the consequences of borrowing hundreds of thousands of dollars. Are they children? Should we hold their hands when crossing the street, put them in high chairs and attach their bibs when they eat? Since when did we start excusing the financial stupidity of adults?
I make no bones about heaping blame on bank execs, mortgage lenders, and rating agencies–they all screwed up in their own special way. But that doesn’t mean that the individual borrowers are somehow absolved of blame. The same goes for people who are in over their head with credit card debt–easy credit is partly to blame, but so is the person maxing out that card on a shopping spree. People who are financially irresponsible should not flinch from being labeled as financially irresponsible.
February 25th, 2009 at 2:52 pm
It’s irresponsible of those people who died from eating Salmonella infected peanut butter not to have gotten it tested before they ate it.
http://www.patriciashannon.blogspot.com
http://www.myspace.com/patriciashannonsongs
February 25th, 2009 at 3:15 pm
When I was growing up my father would seethe whenever the name Mutual of Omaha came up (and it came up a lot because they sponsored one of our favorite shows). Apparently, Mutual of Omaha refused my father’s parents life insurance back during the depression, at a time when my grandfather was very sick. In a lot of ways it makes sense that they wouldn’t insure the poor guy, but on a personal level it made an unsteady time even moreso. This deal with the banks and the mortgage companies and the government blaming people who were accepting their loosened terms is insanity. Why would an individual refuse or question a loan that’s been deemed sturdy by all those who would be impacted? The onus is on the lender and his controlling bodies, not the poor bastard who finally sees his luck changing.
February 25th, 2009 at 3:22 pm
We bought our home in about 2001, prior to that I never thought I would do anything but rent. But we got a sweetheart deal on the price from the owner, who had become a friend. I’m glad we bought.
Between us, my wife and I have two masters degrees and a law degree and lots of additional knowledge. But there was no way that we could keep up with the information flow and ever get our mortgage if we had insisted on understanding all of the transaction in detail.
We had to rely on the professionals. I don’t think it’s degrading to suggest that most Americans were in the same boat when they bought a house.
We, at least, knew enough to say “No” every time we head anything about ARM and adjusting rates.
“This post might be a perfect distillation of the liberal mindset: adults, by and large, are children and need to be looked after by their betters in government.”
Let me translate: “How the heck can I, the money shark, make my fortune screwing other people over financially, if the government gets out there and acts like a lifeguard actually protecting the suckers, I mean citizens.”
February 25th, 2009 at 4:50 pm
You do know that the word “irregardless” is a make believe word…Right?
February 25th, 2009 at 4:50 pm
Yes, yes, Patricia Shannon, failing to have one’s peanut butter tested everytime one buys some is rather like failing to spend 20 minutes adding and subtracting before taking on a multiyear or multidecade obligation. Really, really similar. Really.
Where DID you get your doctorate in analogies?
February 25th, 2009 at 5:39 pm
Benny Lava wrote: “Where borrowers take the blame is instances where they LIED in order to qualify for a loan.”
Unless the mortgage broker tried to get a customer approved for a regular loan, had it rejected, and then suggested the customer use a stated-income loan with an inflated income estimate, in order to qualify.
In that case, I’d argue the mortgage provider was at fault, having instigated the fraud knowing the customer couldn’t qualify using the true income information.
If, on the other hand, the customer came in and asked for a stated-income loan from the start, then it’s most likely the customer’s fault.
February 25th, 2009 at 8:54 pm
Will Allen,
I have an M.A. in math. I am not so ignorant that I expect everybody to have my knowledge in math, esp. people who have a job and family. If you knew what you were talking about, you would know that it takes more than adding and subtracting to know what an ARM is in the first place. I know it would be hard for you to understand, but decent, honest people expect professionals to be decent and honest. I agree this trust is misplaced, but it is not a reason for contempt for the trusters. It is reason for contempt for those who misuse the trusters.
February 26th, 2009 at 11:32 am
I am in the finacial services business. My company sells stocks & bonds to individual investors.
If we sold investments the way mortgages were sold, ” Borrow all you want. The price of your home will always go up and you can always refinance or sell the house for more.” we would be banned from the industry and possibly be sent to jail.
February 26th, 2009 at 5:25 pm
I guess I’m confused by this strong desire to find a morally culpable party. In the absence of fraud, duress or mistake (the typical legal justifications for a voidable contract) I think we have a moral obligation to treat both the borrowers and the lenders as adults, and require that they take responsibility for their actions. To do otherwise either dehumanizes the borrower (by saying that he is less than an adult capable of making his own decisions — kind of like if your dad discovered that you traded the Babe Ruth rookie card he gave you to the 50 year old collector up the street for two Bo Jackson rookies and a pack of big league chew, and so he went to the guy and got the card back because you didn’t understand that two cards, even coupled with a pack of gum, aren’t necessarily better than one card) or rewards the bad decision of the lender (by saying it doesn’t have to suck up the foreclosure on its balance sheet, lose its ability to qualify for funding, and go out of business). Sure, the lender wanted to get his commission and put on the hard sell, but was it actually fraudulant for him to tell a borrower that he could afford the home on his income with a five year arm loan, provided that market conditions remained the same and he sold before the 5 year window closed? I don’t think so — certainly not any more than it was the borrower’s fault for the lender’s strong desire to make the loan, “irregardless” of whether the borrower did come in and say, “Please go ahead and financially rape me.” (Would we really accept this as the lender’s defense — the borrower was so stupid I couldn’t help myself, he was just too attractive a target and the temptation was too great, I simply had to give him the money, even though I knew there was some chance he might not be able to pay me back?) In the absence of a statute requiring disclosure (securities laws), I don’t believe that having more information than another party to a transaction requires you to disclose that information, even if it would help the the other guy (See Plato’s example of the grain merchant for one of the earliest examples of this issue). Indeed, I think just the opposite; you have to accept that the other party is responsible for his actions and that he has accepted the risk that the limitations of his knowledge present, or else affirm that he is less than a responsible adult, in which case he cannot contract with anyone because he lacks the capacity.
March 5th, 2009 at 11:01 am
Insane. The responsibility is with the borrower, period. Nobody is forcing you to borrow money. Are you actually telling me that if someone doesn’t know their limits society has to pay for it? Maybe I should ask for a bailout if I gamble on the stock market and lose, after all my broker didn’t inform me of the risks. A nation of babies.
March 6th, 2009 at 2:59 pm
The people with the money were the only ones who had the power.
March 7th, 2009 at 4:33 pm
I’m late to the party but…
What I’m hearing here are a lot of people who expect Citibank – for example – to lie, cheat, steal and basically defraud 50 million people by misrepresenting themselves and the deal they’re offering. And they’re just fine with that. All in the name of a robust free market, right?
What I’m not hearing alot about is that people who are not educated, or not sophisticated, or are in a constant state of food and housing insecurity, when offered a house they can sell for 2x what they paid for it (and that IS the conversation most of these people had), should not be expected to turn it down. This is the ’snake oil’ crisis of the 20s and 30s repackaged.
The end all argument here is: when a doctor suggests a treatment, and even your second opinion suggests a treatment, but that treatment is KNOWN to cause severe injury in most cases and has little clinical efficacy, that doctor is liable. In fact, they may be criminally negligent.
These brokers and accountants are the ‘doctors’ of our financial system. They committed malpractice, and many people are suffering – regardless of their initial reason for getting the loan. Frankly, they should be held civilly liable for their actions, much like doctors would be. Can you imagine that class-action?
March 7th, 2009 at 8:30 pm
The ‘irresponsible buyers’ decided to stick it to the man with stated income (liar) loan and ninja (no income, no job) loans.
They made the same assumptions, knowing they could not pay, that houses would continue to go up, and when rates reset & they got kicked out, they would sell, make a tidy profit and go back. They were in rentals anyway, so … Read Morethey get to live in the 750K house for a few years and then move back to the rental with a supposed boat load of money.
Why should the average Taxpayer pay for these moochers. Nobody was willing to share their $200,000 gain when the market was frothy so suddenly why should they share their losses when they are ‘upside down’ on the house.
The bank / bankers are suffering (Citi is for sale under $1 at the dollar store) so should they.
A politician once said, do not make the mistake of assuming that an illiterate man is an idiot when infact he is probably much more clued in than a educated person blinded by his prejudices.
March 8th, 2009 at 3:17 am
#185
The simple reason, when self-interest is your only motivator, to help massive amounts of people who are losing their homes, is this:
A man with no money and a family to feed won’t think twice before he robs you blind.
Bank/bankers aren’t suffering; they’re getting more public money that any group of organizations have ever received in the history of the united states and probably the world.
In October, Merrill Lynch doled out more than 3 billion in bonuses to it’s employees.
That sure sounds rough.
March 12th, 2009 at 5:44 pm
So if I borrow $500k to buy a tech stock, and said stock ends up worth $50k, I can just shrug my shoulders and blame the fact that I wasn’t aware of the fundamentals? Or blame those who lent me the money?
I agree there’s plenty of blame to go around, but it’s shared by the foolish homedebtors AND the mortgage marketeers.
April 16th, 2009 at 10:11 pm
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April 18th, 2009 at 2:37 am
So online retail sales have been up for 2009. Thats great, I can’t believe people are still buying things online like hobby products, and what not. I want to get one of those rock tumblers. Seems like a nice hobby. Not too expensive. Don’t have to be around another person to enjoy it.