The Sub-Prime Irony October 20
Lots of people are losing their homes these days and everyone has a take on who’s at fault. Are home buyers feckless spendthrifts who took ill-advised dips into a shallow mortgage pool? Or, are Armani-suited lenders a bunch of loan sharks who prey on “the little guy”.
Um, yes.
Certainly home buyers share the blame. They ignored common sense signals that their loans were headed for disaster before the ink dried on the closing papers. Thousands who already struggled to pay credit card bills, car payments, and monthly rent fell for ads extolling the virtues of home ownership on the cheap. Bad credit? No credit? No problem! Buyers listened to shyster lenders dressed in cheap suits and pencil-thin mustaches tell them, “I’d give the money away, but my wife won’t let me.”
Word to the indebted - you don’t get somethin’ fer nothin’. That should have been your first clue.
Handing Keys to the Cat Burglars
It’s true that many laid-off folks simply had an unlucky run of bad luck that prevented them from paying the bills, but many more were rubes who handed the keys to their new houses to known cat-burglars.
Economic literacy in this country is appalling. There are distressingly few who can grapple with day-to-day finances. People routinely run up debt and pay it back in endless minimum payments. Hardly a day goes by without a newspaper story, local TV news series, or ads for debt counseling agencies telling them how stupid massive indebtedness is. Yet, they do it anyway. This sort of behavior isn’t financial illiteracy, it’s life illiteracy.
On the other hand, lenders seem to be OK with the idea that when you take a babe from the woods and feed it salsa you’re not to blame for the upset tummy. “Dumb-assed 14-month old should’ve known better than to eat salsa.”
Mercenary Dream Merchants
Despite the TV persona of kindly bankers who just want to help you realize your dreams, they’re really cold, hard bastards in search of a buck even if they have to sell their grandmother’s kidneys to get it. These mercenary dream merchants couldn’t care less if you ever pay the money back. In fact, they’re more than happy to sell bigger and better dreams for no down payment and “reasonable” 21% credit card interest rates. Just look at the Amazon rain forest of credit card offers that overflows your paper-recycling bin for evidence.
But when they’ve climbed out on a limb alongside the rubes they suckered, they holler that it’s someone else’s fault. “We’ve got to make bankruptcy more difficult!” - and they did. “Deregulate us so we can loan money at 40% to make up our losses on the 21 percenters!” - they’re working on it.
Word to the indebters - nobody forced the rubes to fall for your line of guano, but no one forced you to loan money to people who clearly couldn’t pay it back either. You are a victim of your own success.
Please, feel free to enjoy the irony in your current situation.
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Mike Volpe Oct 20
I am one of the supposed sheisters you mention. I have been in the mortgage business for almost six years. I agree that much of industry is scum and I even refer to most of them as sociopaths. I also agree that the financial illiteracy is pretty stunning and it has a lot to do with the problems created however your View is very simplistic. The problem is much more complicated than you make it seem. Here is how I saw the crisis.
http://proprietornation.blogspot.com/2007/08/larry-lindsey-gets-it-right.html
proto Oct 20
For years I had a good solid job with decent pay. I made the best deal I could for myself. The pay declined, the job went away, prices went up, new jobs were hard to come by. What am I supposed to do — travel back in time and un-buy the house?
Omnipotent Poobah Oct 20
Mike,
I didn’t mean to imply the problem was simple - very few things are.
I read your piece and agree with everything you said. To me this is like most problems, there’s plenty of blame to go around and no shortage of people willing to duck it.
Still, many people do take responsibility for what happens. There are good lenders, there are good borrowers, and they both occasionally and honestly get caught with their pants down. However, I don’t think that’s true of everyone in the current cases.
My wish is that we’d learn from this and educate people into being more careful with other people’s money…on both sides. But, sigh, I’m not hopeful.
Thanks for stopping by.
Omnipotent Poobah Oct 20
Proto,
No, and I recognize your situation can happen to anyone if things go south on the job front. I was speaking about those who took out loans they clearly couldn’t pay even if they retained their job.
For example, if I made $35,000 per year, it should be pretty clear to me that I can’t pay for a $40,000 car, $25,000 in credit card debt, and buy a $200,000 house. It should also be clear that if I took on balloon payments, the payments would eventually go up. If I was a lender, the same thing should be obvious to me and I should know better than to loan them the money.
For people in your situation, I’d prefer that lenders find ways to help you out, even if they’re under no legal obligation to do so. To me that is how a good seller/buyer relationship should work.
I’d be interested in hearing how you’ve handled it. In any case, good luck with crawling out from under. I’m well-acquainted with people who’ve been there and I know it can be tough.
Mike Volpe Oct 21
Omni,
I agree that there are great lessons to learn. People certainly got themselves into loans they didn’t understand and frankly that was not always the fault of some scummy mortgage pro. The fact is people acted as though they understood, signed paperwork, and walked out not knowing what they got themselves into.
My point is there will be policy debates as to what to do, if anything, as a result of this crisis and if we start blaming the wrong people for the crisis our policies will be no better. You saw some of the nonsensical ideas that Schumer came up with. Barney Frank thinks endless regulation will do the trick.
Here are two examples of what mindless regulation can do to the industry..
http://proprietornation.blogspot.com/2007/07/my-business-mortgages-is-frankly-hard.html
http://proprietornation.blogspot.com/2007/07/sb-1167-and-my-favorite-reagan-quote.html
We also have politicians proposing policy to deal with the crisis and because their assumption is that it was all the fault of folks like me, it is a misguided and foolish policy.
Janice Oct 21
Poobah (and Mike) — these are very interesting articles and I have to wonder why the newspapers are not covering it very well (perhaps they should be taking to Mike).
At any rate, every grammar and high school student should be required to take a class in basic economic concepts such as loans, bank accounts and such…. back pre-1900 people were being taught this, but not any more. Perhaps this is the reason why so many people are spending beyond their means. It is not just the housing market that is in trouble… folks are spending the limit on their credit cards.
As much as I feel badly for some folks who might deserve a bail out… I agree with Mike that many of the folks got themselves into their own mess, and dammit they don’t deserve to be bailed out.
Janice
FranIAm Oct 21
Fascinating take Mike and OP, great post, as always.
This is a complicated issue and while greed and stupidity face off for front row seats, the whole country got swept into spending mania. I mean, weren’t we told to go shopping after 9/11? Having lived through it, although in a different part of Manhattan, for once I did not want to shop.
I have more consumer debt than I should by a large margin. And I have a house for sale that is- well surprise - not selling. My goal now is to walk away without a penny. If I can pay off my mortgage and my debt, I am good.
Hah, once I saw myself making money on this. Now I just want freedom. (moving because of marriage relocation)
On a related note, when I bought my house a few years back, mortgage folks tried to convince me I could afford much more- about double what I did borrow. I bought what I thought I could afford, not what they told me.
NYM Oct 22
Actually I think that for the most part it really is that simple. I watched friends & coworkers live beyond their means for years while not-so-secretly laughing at my less-than-yuppie-perfect lifestyle.
Guess who got the last laugh.