This post by Matt Yglesias makes that argument:
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.
This assumes, of course, that the primary risk is a decline in house prices. The lenders should have known that house prices might decline, and therefore the lenders should bear the losses attached thereof.
It seems to me that this sort of acts like borrowers shouldn't have any obligation to repay money on an asset that has fallen in value--as if there were some sort of moral right to take highly leveraged bets on housing and pass off any losses to someone else. The borrowers ought to have known that they couldn't be repaid, because of course the natural and right thing to do, in the event that an item you have purchased on credit falls in value, is to default on your loan.On the other hand if we assume as a matter of public policy that people who have signed a loan contract are actually obligated to pay back the money they borrowed even if their house is not rapidly appreciating, then the primary risk is not a fall in house prices; it is that borrowers will not be able to repay the loan.
Who knows more about your future income prospects: you, or a bank? Who knows more about your budgeting skills: you, or a bank? Who knows more about your health, personal habits, and home maintenance skills? Who knows better whether you're likely to move two years after buying for a boyfriend or an employer? Are bankers somehow more aware than ordinary Americans that recessions happen, companies fold, people lose their jobs?
Of course, falling house prices make things harder because you can't sell or refinance your way to stability. But unless you just suddenly lost your job--in which case, you probably can't be helped by a workout, because you don't have any income--then it's not reasonable to say that all the information was on the banking side. People knew a lot. They just chose not to think about it.
On the other hand if we assume as a matter of public policy that people who have signed a loan contract are actually obligated to pay back the money they borrowed even if their house is not rapidly appreciating, ...
Public policy is embodied in the law. In California at least there is no such obligation (money borrowed to buy a house is nonrecourse).
Well the obvious answer to your argument is that people routinely refuse to engage with complexity or ambiguity: people refuse to think.
Now, your arguments are all right and proper: the borrower does know more about these things than the lender.
But it doesn't follow, as you note, that merely having information means you will use that information when deciding to take out the loan.
Bottom line: real estate ownership is something to which the vast majority of people ought not aspire. Its carrying costs are too high and it is too illiquid and investment to be a viable option for any but the most cash-rich of buyers.
At least, that's my opinion on real estate.
What James said.
See here for listing of mortgage status by state.
um, not quite.
seems to me that since the banks are all failing, looks like they dropped the ball on their primary responsibility which was prudence. they made bad loans, they encouraged bad loans and they were in the loan granting business. guess what? they effed up.
i love this rush to blame the homeowners and freddie mac and fannie mae, the subtext being "oh, if only those poor unwashed people didn't take out loans everything would be sunny."
the bankers gamed the system. they needed the borrowers because it was the only way to keep their profits in the stratosphere.
people break contracts all the time.
the kicker i'm waiting for however is the banks inability to produce the note that proves they have the right to foreclose.
there is a lot of paper missing boys and girls.
Megan
1. You are right.
2. What you just said applies even more to every FIRE executive.
3. Are the bonuses nonrecourse, like the mortgages?
4. Are the mortgages bailoutable, like the bonuses?
Isn't this mindset, that an electrician or nurse is too stupid to understand the risks of owning a home, indicative of the paternalistic attitude of most liberals?
Greenspan was saying the housing market was going to collapse. He just said it in an obtuse Greenspan way.
Why do you think he was complaining about Fannie Mae and Freddie Mac in 2005. When the largest mortgage backing companies are making investments that are so risky Greenspan talks about them directly, you know the bubble is about to pop.
First, on a tangentially related point, I encourage anyone who is interested in CDOs, CDSs, etc. but doesn't understand their background thoroughly, to read this article from Wired (courtesy of Todd Zywicky at The Volokh Conspiracy.
Second, though I'm not particularly sympathetic to Yglesias' poor-ignorant-homebuyer hypothesis, in all fairness any competent lender knows a great deal about its borrowers' habits and prospects, in aggregate. The main problem now is that lenders made inadequate allowance for a nationwide housing bubble bursting, with linked effects causing a nationwide (indeed worldwide) recession that impaired very large numbers of borrowers' prospects for repaying mortgages.
Again, the sophisticated lenders should in fairness have understood that a bubble had formed, that it must burst, and predicted at least roughly the effects thereof. Indeed, a few did so. But for reasons as much psychological as economic, most did not. When so many of the financial high-flyers have crashed and burned (certainly not an outcome they desired), it suggests that any faults on their part must have been endemic to the system, rather than inherent in particular bad guys.
You have a good moral argument, but not a sound policy argument. It makes more sense both legally and naturally (i.e. in the absence of laws) that the lender be more prudent than the borrower, for it is the lender's money at stake.
Now whether or not the banks were in fact fulfilling their fiduciary duty to depositors, bond holders and share holders is a separate issue.
It seems to me that this sort of acts like borrowers shouldn't have any obligation to repay money on an asset that has fallen in value--as if there were some sort of moral right to take highly leveraged bets on housing and pass off any losses to someone else.
Yglesias doesn't say that, and I'm willing to bet neither do any of the other liberal bloggers you've read. What they are saying is that, given the national scope of this downturn, the way it's impacted not only those who borrowed but those who didn't (other taxpayers), given that we've handed out billions to bankers who've in turn handed out millions to themselves, it seems a little odd to suddenly discover moral outrage when it comes to the homeowner who was expecting house prices to keep rising...foolishly maybe, but not anymore foolishly than the experts on Wall Street who premised the value of CDOs on the fact that housing prices would never come down all at once.
Who knows more about your future income prospects: you, or a bank? Who knows more about your budgeting skills: you, or a bank? Who knows more about your health, personal habits, and home maintenance skills? Who knows better whether you're likely to move two years after buying for a boyfriend or an employer? Are bankers somehow more aware than ordinary Americans that recessions happen, companies fold, people lose their jobs?
It's interesting you should bring all that up, especially since there were home lenders who did not appear interested in learning basic things like the borrower's income, or whether they had a job.
I found his comment pretty outrageous; I'm glad you responded to it. Really, because professional bankers want to lend me more than I should borrow, I should assume that's it's safe and I'm able to pay it back? (And when they offered me $40,000 lines of credit in graduate school, I should have assumed I had the ability pay that back too?) If people are so trusting of professionals, I sure hope that part of the stimulus money is going to be used on a basic personal finance education in public schools.
And perhaps those average teachers, managers, and others weren't hearing any warnings from Alan Greenspan, but how could they have missed Suze Orman and Oprah warning them about the perils of too much debt? (Whose audience is greater? Harry Reid's or Oprah's?) And doesn't anyone have a grandparent who survived the depression? Professional bankers tried to coax my grandfather into big loans to expand his farm during the post-war boom. He said "no" and undoubtedly saved his farm from bankruptcy during the following bust.
Please....I can live with the housing bailout for the greater good, but to have to pity all homeowners with bad loans as victims is more than I'm willing to stomach. There were actual victims of predatory practices by unscrupulous lenders. I'll save my moral indignation for them.
Thank you for calling out this virulent strain of "thought." Simple application to other assets, like stock holdings, easily topples this assumption. If you buy stock on margin, and the stock price declines, imagine telling your broker "sorry, I lost the bet, I won't be paying you back."
This "I have a right to rising housing prices, regardless of the consequences" attitude is not only conceptually unsound but baldly self-interested. It makes me sick.
I have a hard time seeing how the lenders and borrowers were not roughly equally idiotic. Clearly, the lenders miserably failed at what is supposed to be their core competency. But on the other side, the borrowers were making the largest financial transaction of their lives. If they didn't understand the terms of their mortgage and the possible risks, it really shouldn't have been that hard to find somebody who did, or spend a weekend with Google.
given that we've handed out billions to bankers who've in turn handed out millions to themselves, it seems a little odd to suddenly discover moral outrage when it comes to the homeowner who was expecting house prices to keep rising
Nobody was making the case that the bankers actually deserved to be bailed out. The argument for doing so was that it was necessary in order to prevent the financial system from literally collapsing. I didn't buy that, but it's at least vaguely plausible. In the case of underwater homeowners, we're talking about direct transfers from the responsible to the irresponsible, and it's much harder to argue that people having to move to more income-appropriate housing is the end of the world.
Dave is right
People are unwilling to think
If a little guy bought a house for $250,000 in 1998 and sold it for $875,000 in 2006, should they be asked to give back half or more of that money?
Talk about asymmetrical information
People are always kvetching about privatizing gains and socializing losses, but the "populists" think it is fine and dandy if, say, Charlie Rangel or Chris Dodd act like pigs at the trough, or if public sector retirees get a $100,000 pension then go and get their old job back at $95k a year (it happens all the time, people)
Those sorts of payoffs, like the housing outcome I described above are quite common, there are a hell of a lot more of them (thousands more, I'd venture to say) than a corporate exec with a $50 million golden parachute. The John Kerry's and Barack O's of the world are only interested in one kind of asymmetrical outcome, but what is killing us - the real money - is being shoveled out the door to public employee retirees, UAW retirees, and urban scam artists. New York is full of people who don't work and manage to go to Las Vegas and Florida - no they aren't Wall Streeters or born rich, they are part of the huge scamster class in the country. My neighborhood is full of them. I wonder if the president will discuss them tonight.
If those nurses and electricians cannot understand that debt must be repaid, even if the asset is worth less than the debt, I have two thoughts:
(1) perhaps they are like my children and should not be allowed to contract for anything.
(2) They are probably not possessing of enough intelligence or maturity to be nurses or electricians, since lives may depend on their maturity, judgement and intelligence.
Liberal support for the housing proposal is mostly pure politics. I have little doubt that this same proposal, if it came from the Bush administration, would be recognized and attacked as the subsidization of upper-middle-class profligacy that it is.
Moreover, it's pretty clear that the Obama administration knows that this is pure politics. Their economics team knows that fighting the deflation of the housing bubble is counterproductive and ultimately futile, but they feel required by public sentiment to have some program "for the homeowners" since they had some program "for the bankers". So they have produced a relatively small program -- only about $75B goes to actually preventing foreclosures. The money is basically throw-away, but it does take the political heat of public sentiment off their backs and let them get on with real work.
That the rest of us get to watch liberal bolivators tout the program as some kind of paragorn of fair play and economic wisdom is just a bonus entertainment effect.
It is beyond the pale that Yggy can make this argument with a straight face and further that anyone would agree with him.
If you took out a loan that you were systematically unable to repay, it is YOUR FAULT. Yes, it is also the fault of the lender. You will bear part of the cost in the form of being foreclosed on and having your credit shattered into a million pieces, and the lender will bear part of the cost in the form of the costs of foreclosure. But let no man suggest that someone with an income of $50k who buys a house for $300k (much less a *second* one) cannot have been expected to know better. Getting caught up in a speculative mania is not a valid excuse.
The argument for doing so was that it was necessary in order to prevent the financial system from literally collapsing. I didn't buy that, but it's at least vaguely plausible. In the case of underwater homeowners, we're talking about direct transfers from the responsible to the irresponsible, and it's much harder to argue that people having to move to more income-appropriate housing is the end of the world.
You think the collapse of the housing market, which underlies the subsequent collapse in securitized home mortgages, has less impact on us than the financial system they are built on? You are confusing direct for proximate causation. The bailout of the financial industry is necessary primarily because we cannot rescue banks stuffed to the gills with bad mortgage-backed securities by attacking the root of the problem, collapsing house prices. And how is a payment to the bank, which in turn becomes a bonus to a bankers, not a direct transfer from the responsible to the irresponsible?
As for your last point about income-appropriate housing, I think you're right and I actually think most people agree. Measures like the $75 billion package exist only to dull the pain, not end it.
But let no man suggest that someone with an income of $50k who buys a house for $300k (much less a *second* one) cannot have been expected to know better. Getting caught up in a speculative mania is not a valid excuse.
Again, please explain how homeowners don't deserve a break, but bankers who got "caught up in a speculative mania" in the form of mortgage-backed securities, do. Skip the argument about policy; I want to know if you think that it is more morally egregious to speculate with someone else's money, or with your own?
I was watching Bill Maher the other night because he is usually funny and often makes good points even as sometimes he is insane. None of his 3 panel members put ANY blame on people who took out these bad mortgages. And the audience applauded when they blamed the BIG BAD BANKERS.
Then I thought back to when my wife and I took out our mortgage at the height of the bubble -- the adjustable rate mortgage seemed like a ridiculously stupid thing to do. The fixed rate mortgage told us exactly what our costs were now and for the next 30 years. Considering that incomes tend to rise, this meant if we could afford the mortgage when we took it out, it would likely only get EASIER over time to afford it. Which of course is true except in the case of a serious deflationary period in which everyone is screwed.
So now we have foreclosures all over the place -- mostly for people who made what seemed like a ridiculous decision to take out an ARM. It's not pc to say, but , by and large, the current crisis is a kind of intelligence test -- if you were stupid enough to take out a loan that was too big, then you are most likely to be screwed. So what do we want do do now -- reward the idiots by giving them money that largely comes from the non-idiots. What a great message.
The truth is that many people who took out these crazy mortgages NEVER SHOULD HAVE HAD A HOUSE in the first place, so is it so terrible that they lose the house now.
Of course, this does not apply to everyone who is losing a house now, but if people took responsibility for their own financial futures, then we wouldn't be in this mess.
Sure, the bankers are complicit in this mess and deserved to be punished for their predatory practices, but these loans simply didn't happen for responsible borrowers because if someone offers something that looks too good to be true, it ain't. I thought we all learned that when we were still teenagers...
As far as liberal/conservative distinctions, I thought that liberalism meant giving people the choice to live the way they want on a level playing field, but doesn't that mean taking responsibility for those choices...
If we assume we have to protect people from being stupid, then we are transforming into a nation of children, which doesn't seem very good considering we are competing in a global market place where other countries are gong to be working there buts off and taking responsbility for their actions...
Sigh. Thanks for encouraging more know-nothingism, Megan. All right, everyone, hands up: Who is willing to loan $300K to someone making $50K/yr to buy a house? Who is willing to loan someone who makes $20K/yr $200K to buy a house? Who here even thinks that loans of these magnitudes to people who make so little is anything but a marginal prospect?
This notion of fiduciary responsibility is so basic, so fundamental to running a business, that at this point anyone who professes to be unaware of it simply should be banned from commenting.
That this even gets thrown out there as some sort of serious argument shows just how far from reality a lot of people are.
In California, where the excesses were the worst, people had the least excuse. It was as recently as 1992 that real estate prices in Silicon Valley and other parts of California fell by 25-30%. People got burned. 15 years later, "real estate never goes down in California" was all you heard.
No excuses at all.
As fate would have it, some people actually documented what was going on in 2005:
http://articles.latimes.com/2005/apr/03/business/fi-afford3
From the article:
People knew exactly what was going on. They were indeed entering into the transaction knowing that the only way they could afford the home was if prices went up. They, even the nurses and electricians, were speculating.
I wouldn't want to take blame away from the lenders, but that's supposed to be the markets job. We just don't have the marbles to let it happen.
I think that one of the problems we have with so much regulation and so many regulators is that we take that responsibility out of the hands of individuals. It is a mistake to think that because its regulated, its safe. I watch people every day signing contracts that they haven't even bothered to scan over. Maybe people will learn from this, if we let them.
Megan, this is just plain intellectually irresponsible. Seriously. Matt Y explicitly said that the borrowers share some blame; then you claim he doesn't. This deserves a retraction.
So, how about the electricians, nurses, and teachers who did not buy a house because they were too expensive and prudently remained renters?
I don't get why both parties can't be punished by the market?
Foreclose the homes and let the bank lose money on the home's value.
I'm pretty damn liberal. And I think the argument that the bad mortgages are more about predatory borrowing than predatory lending is patently false, ridiculous, and dishonest (not that M-squared was making that argument, but I'm just making a general point about blame). And my heart absolutely goes out to people who are seeing their worlds crashing around them (which includes not only those with foolish interest-only, zero percent down, option ARMs, but also financially responsible folks with traditional, 10% or even 20% down, 30-year fixed loans). And my empathy for these people has become all the more stronger as I actually have more and more friends lose their jobs and I can actually see up close what it's like when someone's world, "guaranteed" assumptions, and future plans crash about them (for example, "that $150k I took out in MBA or JD loans will surely pay off," or "that kid I just birthed will easily have her education paid for," or "that job I took at BofA instead of at the SEC will insure that I can pay for my mom's alzheimer's treatment," etc).
But, I must admit, this issue reminds me of what an old friend of mine once said: "I don't believe in free will, but I act as if I do. After all, we can't have Charles Manson running around on the streets just because it's not his fault."
No matter how much I wish socialism works and would solve all of this crap (which, after all, was created by those capitalist pigs who thought that nationwide real estate prices would never decline, since they haven't declined since WW II, even if real estate prices also have never increased about 10% annualized for 9 years in a row as they did from 1998-2006...oye), I still have to accept reality as it is. And no matter how liberal I am, reality tells me that housing prices have to correct; the government can't stop them from correcting, even to the extent that there will be some over-correcting; and that we have to act as if borrowers are responsible for the contracts they sign, no matter what the consequences, because the alternative consequences are worst. Damn, reality sucks crap.
I stand up for the small guy. The guy who looked at the market and said no way. Or the guy who is paying his bills, looking after his responsibility. The guy who left the bank to work somewhere he could look himself in the mirror.
The rest can go bankrupt.
Derek
Just another example of conservatives refusing to acknowledge the concept or causes of systemic risk.
A bit of statistical reality: Foreclosure rates don't reach levels like this unless there were systemic failures to create them. Any lender who believes that default rates should be zero or near zero, under all circumstances, needs to get out of banking and become a fast food worker, where he can do less damage.
And to reiterate a point that the politically inclined conveniently ignore: This is, first and foremost, a balance sheet crisis in which many of the "bad" loans are being paid. Loans that have not defaulted constitute much of the problem.
The meltdown that we are seeing is a matter of historical averages catching up with lenders who previously lowballed their default projections in order to justify woefully inadequate levels of security. The only reason for them to ignore the obvious was because they opted to pursue short-run profits at the expense of long-term prudence. That's what deregulation hath wrought, and you should take some pride in the result, as it is a direct result of your political dreams coming true.
I hate it when people ask questions that clearly is leading you to a conclusion that I think is obviously wrong. I don't understand why Megan would think that the individual has a better grasp on their situation than a bank. Megan even argues the point with her last statement that "people don't think." No kidding, that's why I would assign more blame to the bank. They should (but apparently did not) know better. People as individuals are overall irrational and overly optimistic/pessimistic and in general, do not have the same level of education as the bank. Banks are supposed to assess risk. That's their JOB. Insurance companies know how much to charge me based on my gender, miles driven, medical history, etc. . .because that's their JOB. Credit card companies who are pulling credit because you shop at certain stores know more than the individual because they have the data. That's their JOB. "Are bankers somehow more aware than ordinary Americans that recessions happen, companies fold, people lose their jobs?" Uh yeah, they ought to be.
I am not arguing that people shouldn't pay for what they signed for because then what's the point of the rule of law? Nor am I for playing the blame game. But Megan seems to almost argue that it's mainly the borrower's fault with what I believe to be faulty logic. Let's just leave it at a great number of people screwed up. What are we going to do now?
One last thing. I do not understand the arguments about how educated individuals should know better because they're educated. I am highly educated, but it doesn't mean I know squat about cars. As an example, I asked the people from Pep boys if they found something wrong with my carburator in my 1993 model car. I think that was a signal that they could sell me whatever they wanted before I wised up (I hate Pep Boys now). We don't even teach basic financial responsibility in primary or secondary education. Why would anyone think that education in a completely unrelated field makes you smarter in personal finance?
It's THEIR money. Their ultimately responsible. There is no equivalence between the person ASKING for money and the person MAKING THE DECISION TO GIVE IT TO THEM.
k1
ryanculver.blogspot.com
Megan,
I know you won't say it because you work for them, but The Economist was talking about housing bubbles all the way back in 2003-2004. And isn't the Media's responsibility a la Dewey-Lippman to educate the f**king public on political issues? If M.Y. isn't going to claim that mantle then what is his purpose? DID HE FAIL US? Jeez.
Freddie,
Megan does go a bit too far when she claims Yglesias wrote that they bear no responsibility, but she isn't too far off either since "a tiny fraction" really isn't a lot more than none.
Megan, this is just plain intellectually irresponsible. Seriously. Matt Y explicitly said that the borrowers share some blame; then you claim he doesn't. This deserves a retraction.
The outrage!
Actually, she reproduced exactly what he said, namely that borrowers deserved a "tiny fraction" of the blame. Even if Matt's is implied to be "one of the liberal blogs ... claiming borrowers don't bear any responsibility," there's hardly enough light between "tiny fraction" and "none" to warrant a retraction.
"It seems to me that this sort of acts like borrowers shouldn't have any obligation to repay money on an asset that has fallen in value--as if there were some sort of moral right to take highly leveraged bets on housing and pass off any losses to someone else."
Isn't this essentially what banks are asking the government and by extension, the tax-payers to do - basically take the bad debt they incurred off their hands and assume complete responsibility for it? Please correct me if I'm mistaken.
Further, areal estate value goes up and down all the time and every recession we have a wave of foreclosures. This is quite different. This is a recession caused by falling real estate prices and their devil's spawn, mortgage backed securities. Your point is valid that borrowers share responsibility for their bad investments. It escapes the larger issue though, that banks were peddling debt as an asset, paying themselves great wages to do so and now, as a result, our economy is in the toilet. I think its perfectly reasonable to want to lynch the nearest investment banker.
Confused, are you seriously arguing that it isn't your JOB to figure out whether you can afford the things you buy, or repay the money you borrow?
I don't understand why the liberals are opposing a fall in housing prices. Instead of giving home loans to people who can't afford them the housing prices are falling to an affordable level for working class Americans. The people who bought affordable houses with the intent of living in them benifet because the property taxes go down.
Bernie,
I agree with most of your comment except the last part. I will believe property taxes fall with property values when it actually happens.
This is some bull shit from Yglesias.
1. Anecdote: I lived in San Diego most of this decade. The Union-Tribune was writing "the real estate sky is falling" stories every month from 2003-08. Those of us in the market were silently praying they were wrong.
2. If Joe Sweatsock is as dumb as Matt thinks - can't read a mortgage disclosure statement or figure out what they can afford - should he even be allowed to vote? Populism based on a fundamental belief in the idiocy of the electorate is meaningless.
Spot on Megan and Michiganguy too. The implicit condescension is pretty breathtaking.
Also, Matt is using "calculus" when simple arithmetic will do. He and I may have been worried about bubbles and tons of other policy issues related to real estate, but it's in many respects irrelevant when buying a house. All that a buyer needs to know is:
1.) What are the payments?
2.) Can I afford them?
If you use a traditional mortgage, these questions have clear answers. It's only if you use ARMs and such that you need to become a real estate speculator. If you make that choice, then that's on you.
And to reiterate a point that the politically inclined conveniently ignore: This is, first and foremost, a balance sheet crisis in which many of the "bad" loans are being paid. Loans that have not defaulted constitute much of the problem.
You keep saying this, and I suspect it's worth understanding, so please do correct me where I'm wrong:
LTV ratio only impacts the pricing insofar as it raises or lowers the expectation of default. In other words, if a loan is being paid, and that expectation of payment remains, it's not "bad." On the flip side, its value could also decrease from prepayment (due to loss of interest profit) though not nearly as much as from non-payment.
The same thing holds true for MBSs. Their value is determined by default risk and interest rate exposure on the underlying loans, right? So one of two things must happen for it to lose value: the default risk increases, or the 'prepayment risk' increases.
You almost seem to recognize this in your next paragraph when you say lenders "lowballed their default projections." In other words, "loans that have not defaulted constitute much of the problem" only insofar as the market perceives them as likely to default. That doesn't seem to prove much.
Lenders underestimating default risk is obviously a mistake; borrowers overestimating ability to pay is as well. But neither, in my mind, legitimizes a taxpayer bailout.
Foreclosure is the solution. The borrower agreed to pay back the loan or forfeit the collateral. The lender agreed to lend the money but reserved the right to take the collateral if the borrower defaulted.
So the lender and the borrower both acted irresposibly. Make the bank take thier lumps by accepting a devalued asset in exchange for the defaulted debt, and make the borrower take a hit to their credit and pay income taxes on the debt forgiveness.
As it is the banks and the borrowers are getting enough handouts.
It must be understood that it was the policy of Greenspan's Fed to get every warm body in the world possible into a mortgage. The Fed did everything but go to banks and put guns to the heads of mortgage departments to write mortgages or else. Later they encouraged banks to fund every strip mall mortgage shop in every town in American to keep the game going. The Fed encouraged banks to load up on the MBS's thus produced and put them off their balance sheets.
There was nothing secret about this. It was not a case of slowly falling standards that just went too far unnoticed. It was policy starting in 91. The policy was a total success. The greatest credit and monetary expansion of all time which inflated only home and financial asset prices, not CPI inflation, till the very end.
When the hotel maids who bought 5 homes in 2 years with the encouragement of her bank got in too deep, obviously, she was doing what Greenspan and the financial world wanted. I don't blame them at all. Walk away. The entire system told them that they were making a can't miss leveraged 'investment'. When your some schmuck from Podunk and Greenspan pleads with you to buy a home and get rich you do it. After all, he was the Maestro.
I urge everyone to stop paying if they are 20% or so underwater on their home and then fight foreclosure. Don't listen to the scolds. They got their millions all locked up already and are now bankrupting the Treasury so their banks and financial corporations can continue to live. Screw them.
You don't have to think that subprime home-buyers are innocent little lambs to know that None of this would have happened without the Greenspan interest rate cuts.
There is a Youtube video that explains this plainly to the layman. quarter million hits so far!
it's called: The Crisis of Credit Visualized
http://www.youtube.com/watch?v=Q0zEXdDO5JU&feature=channel_page
LTV ratio only impacts the pricing insofar as it raises or lowers the expectation of default.
No, it also changes the outcome of a default. If an investor is holding an upside down mortgage with an inadequate counterparty, then by definition, there is no way for that investor to make himself whole from a foreclosure on the collateral.
The idea behind a mortgage is that the lender will be able to recoup his principal through a foreclosure if necessary. A loan that is being paid but lacks adequate collateral is not a "performing" loan, not because of the borrower's performance, who is paying as agreed, but because of the lack of adequate collateral.
In the real world, that loan cannot be sold for anything close to par, because a lender is exposed to the amount of the unsecured balance. If the market value of that loan is accurately reflected on a balance sheet, that would be a serious hit to the net worth of the holder.
Therein lies the balance sheet problem, and why it is important in the future to avoid high LTV loans or to depend upon the CDS market to provide collateral value that cannot be derived from the asset itself. A mortgage with inadequate collateral and a doubtful counterparty is not truly a mortgage, and will be valued at steep discounts that are sure to erode the values of the institutions that hold them. When those holders are major lenders, then the problem filters downward through the entire system.
Loans that are engineered to have no cushion are designed to fail. The lenders did this to themselves. Now, we have no choice but to bail them out, and a few homeowners get a bit lucky as a result, that's just how it goes.
My virus software is reporting that Megan's webpage is trying to download malicious software onto my computer. I tried accessing this page from two completely different machines with different virus software, and both reported similar things.
The executable is called NFRA.EXE, and it tries to send information out over the internet. On one machine, my system prevented it from being installed on my machine. On the other machine, it got installed, but my firewall prevented it from sending data out across the internet.
I googled the executable and only came up with a few hits, all dated today, so it might be a brand-new virus just starting to make its way across the internet. It manages to install itself just by visiting a webpage - that is scary.
Everyone took big risks, and now the whole system is going to hell. We all need to be rescued, to one degree or another.
When people start talking about who is to "blame" what they're really saying in code is "who doesn't get rescued?"
The conservatives here say "the individual home buyers don't get rescued!" The liberals are saying "the rich bankers don't get rescued!"
I'm saying "let's not rescue anybody." But that's not on the table. As long as we're deciding that SOMEONE is going to get rescued, for god's sake let's rescue the folks who don't give out financial advice for a living. And let the ones who give out financial advice for a living, and ended up turning the system into a pile of crap, die by the sword.
Unfortunately, the opposite is happening. Did you tell thousands of people that the housing market was a great investment, and that borrowing 100 percent of the value of a home meant you were "buying" something? Congratulations! You get bailed out. Are you the sucker who listened to that guy? To bad -- no bailout for you.
In other words, we are bailing out the people who told us this bubble was a good idea. And letting the idiots who believed them lose everything. We're rewarding shysters, and punishing their victims.
In the tough world of MM's libertarianism, that's the way the world works -- because if you're a shyster, and you're good at it, well, you're not really doing anything wrong, are you? It's the idiots the shyster fools who are the real screw-ups.
Shrug. Ygelsias makes the classic, and rather infantile, leftist "social justice" economic argument: it's not my fault, I can't think for myself, let the people who didn't screw up subsidize me.
Unfortunately, this mindset is pretty much what public schools now teach our children. The idea you should be held to some objective standard is increasingly foreign. The productive class will be asked to shoulder more and more of the inadequacies and delusions of the rest of society.
The only relevant question joe q. public should ask is: do we benefit more by supporting homeowners at risk of foreclosure or more by doing nothing.
What I really dislike is the fact that so many posting here and elsewhere refuse to deal with this question. Or, to put it another way, they think that watching borrowers and lenders get their comeuppance is a benefit. As if Americans should value their moral indignation rather than their own communities' material welfare.
Moral indignation isn't even a very satisfying psycho-emotional state. And that's all you'll likely get if we allow a housing-led deflationary spiral to proceed unchecked.
The liberals are saying "the rich bankers don't get rescued!"
This is a common misconception. While many of us believe that bailout was also a mistake, they are saving the banks, not the bankers. The "rich bankers," i.e. the stockholders who own the banks, are often losing their entire equity stake.
do we benefit more by supporting homeowners at risk of foreclosure or more by doing nothing
We benefit more by doing nothing. Subsidizing poor decision-making leads to more poor decision-making.
they think that watching borrowers and lenders get their comeuppance is a benefit.
It is. It's the free market at work. Markets must have winners and losers or they serve no purpose.
What. An. Idiot.
No. No, Megan, it's not. Unless you want to argue that you're earning a salary for this task, you really, really don't want to go there.
Loan officials - yes, really and truly - are paid to assess the amount of money they can loan out, what the risks are for default, what rates should be paid on these loans given the risk. And they (supposedly) have received a fair bit of training for this.
Because, you see, it's their JOB[1].
Sheesh. Would it hurt you to actually think before you post?
[1]Presumably Megan thinks that what loan officers do is just stand there with a sack full of money to dispense to applicants, and that the most intellectually demanding task is data entry to record the various transactions throughout the day.
It's just not realistic to expect home-buyers to be economically literate when our top Nobel Prize winning economist doesn't even understand opportunity costs. Krugman's derision of Austrian business cycle as "the hangover theory" shows his willful ignorance and/or dishonesty.
The great unwashed ARE stupid because they are products of the public schools for the most part and victims of mainstream media spin.
A home is not an investment. It is a depreciating consumer good. Anyone who was told otherwise was lied to. I'm not saying that to exonerate the people who lied on their loan applications. I am saying it to indict the banks.
No bail-outs are deserved by anyone. The moral hazard is already too high.
Hmmm. No one else seems to be complaining about the malicious executable that this webpage downloaded onto my machine. Don't know why I was the only one targeted - that kind of makes me sound like a loon to those of you unaffected.
Anyway, in case any of you get it, it is a new virus just starting to make the rounds today. It installs an executable in c:\windows called NFRA.EXE, it updates the registry to autorun the file and to redirect your web browser proxy to port 7070, and then it tries to send information to some other site over the internet (don't know where exactly, by firewall blocked it).
In case anyone else gets it, I was able to remove it by doing the following:
Delete this file:
%Windir%\nfra.exe
Delete these registry entries:
[HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows\CurrentVersion\Internet Settings]
ProxyServer = "http=localhost:7070"
ProxyEnable = 0x00000001
[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Internet Settings]
ProxyServer = "http=localhost:7070"
[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Run]
nfra = "%Windir%\nfra.exe"
Flip this regsitry entry to zero:
[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Internet Settings]
ProxyEnable = 0x00000001
Now back to your regularly scheduled partisan name-calling.
That is precisely right. It's been wearily pointed out time and again that in the normal course of affairs, if a bank went under, or if someone was being foreclosed on, it's best just to let the parties concerned fight it all out amongst themselves. But this is not a normal state of affairs, and those who made bad decisions are adversely affecting the rest of us. So what do we do about it?
Agreed. It's not as if moral indignation is a substitute for eating. Though some people give every indication of preferring the former to the latter.
No. No, Megan, it's not. Unless you want to argue that you're earning a salary for this task
Oh dear God. You expect to be paid a salary for figuring out what to buy and whether you can afford it?
The fact SoV teaches children is frankly disturbing. This person is clearly not qualified for any task involving thought, let alone teaching others how to think.
We can only hope and pray this is some kind of ironic spoof and not a real person.
"As if Americans should value their moral indignation rather than their own communities' material welfare. "
You seem to be suggesting that those two values are contradictory. They are not. The long term material welfare of a community is a product of that community's moral values.
The most general thinking errors of this crisis were a result of the lack of long-term and big picture outlook. Crisis management is no substitute for sound policy.
I'm so sick of the sympathy that is oozed for homeowners bought bigger houses than they could afford, then took out crazy mortgages with interest only payments or ARMs with low teaser rates, and are now crying because they can't afford the note or are underwater due to the lack of a downpayment or the failure to pay down any principal with their monthly payments. Whaa, whaa, whaa, who's going to pay my housenote for me? Boo, hoo, hoo, who's going make me whole again?
Even as our income increased, year after year, we have stayed in the house we purchased in 1989. We could have easily afforded a bigger house, but instead chose to invest in our childrens' college educations and save for retirement. In 2008, the kids' 529 funds lost about 30% and our Simple IRA retirment fund lost 35%. Those losses will severely limit the kids' choices for college (one goes in next fall and the other follows the next year) and our future retirement will either be later or will be a whole lot less comfortable. I don't see anyone in Washington talking about bailing me, or other responsible people like me, out with a subsidy. We made our choices and we have to live with them. It would be nice if everyone else did too.
No. Another edition of easy answers to stupid questions.
Off hand, it didn't occur to me that when I applied for a mortgage that I was purchasing the professional opinion of the lender about the wisdom of my purchase.
Off hand, it didn't occur to me that when I applied for a mortgage that I was purchasing the professional opinion of the lender about the wisdom of my purchase.
I see RW is still peddling the idiotic notion that the creation of a large market in home loans with high loan to value ratios was due to a deregulatory policy, and not the direct result of Congress deliberately implementing a policy designed to create entities which would in turn specifically act to create a large market in home loans with high loan to value ratios. C'mon RW; explain again how it is that since the GSEs were not like the Department of Motor Vehicles, and they sold stock, they were privte enterprises!
This is rather like asserting that the high consumption of hot dogs at a hot dog eating contest is due to the contest organizers implementing deregulation of hot dog consumption. Perhaps RW can explain again how his professional expertise provides him with such penetrating insights.
Hey, Will-
You wouldn't happen to be this guy, would you?
http://www.youtube.com/user/billyjoeallen
That guy is awesome!
That's the difference between us, I suppose. I thought when I signed on the dotted line that I was being loaned an amount that the bank figured I had a better than even chance of repaying.
But then, I also thought I was a pretty good risk for a bigger loan. This being 1998 and all, I didn't get it.
We also seem to have forgotten that a 20% downpayment serves two purposes. 1. It protects the banks from losses 2. It limits the pool of borrowers to those with the resources to save up 20% of the value of a home.
I think a great many people felt it was wrong to limit home ownership to only those with resoucesea and self control.
Will, this thread didn't even cover Fannie and Freddie. That you are unable to follow this discussion or understand the points being raised here does cast a few doubts on your literacy and internet skills.
Nonetheless, I sincerely apologize for your shock and amazement that a publicly traded company that paid federal income taxes and that was formally privatized in 1968 was not a government agency and was operated quite differently from the DMV. To a black-and-white mind of limited capability such as yours, that revelation must be quite a shock. But I suppose that not everybody can be blessed with the benefits of sitting on the right-hand side of the intellectual bell curve.
I'll take this brief moment to pity you, but as I'm not that fond of drool (well, not yours, anyway), I've deemed that you're worthy of nothing more beyond the punctuation mark that will conclude this sentence.
I don't see anyone in Washington talking about bailing me, or other responsible people like me, out with a subsidy. We made our choices and we have to live with them.
If the bank bailout and the efforts to reignite the housing market are successful, the value of those stocks should rise, and one would expect that the value of your IRA will rise with it.
You can whine as you like about the size of your house and the endless deprivations you've suffered (even while you deny that is what in fact what you are doing), but it's clear that the intent of the plan is to stimulate a housing and banking recovery that will, in turn, drive the stock market, consumption and, ultimately, business investment and employment for the broader economy (read: you), and not just a few mortgage holders who live in a nicer house than you do. Housing is intended to be a means to a greater end, and not just an end unto itself.
SOV appears to be too dumb to grasp that "job" is a reasonable synonym for "responsibility" in this context, since getting paid for an activity is not a prerequisite for an activity being a job. Most seven year olds know this when they are given the reponsibility of cleaning their rooms, but we really don't know SOV's bio, so slack should be cut. On the other hand, SOV really may be just too dumb to grasp that both borrowers and lenders have responsibility with regard to assessing whether paying a loan back will be too difficult or unlikely.
Mind you, I have little sympathy for either party when a loan goes bad, absent outright fraud or unforseeable tragedy, and, no, falling real estate values don't constitute unforseeable tragedy. We should adopt whatever policy makes us better off. However, the degree to which the very real cost of moral hazard is being dismissed is truly ridiculous. There are millions and millions of citizens in this country who have been prudently risk averse, and they are being asked to be willing to get hammered, to the primary benefit of those who have been very imprudent with regard to risk. This makes future prudently risk averse behavior rather less likely.
RW, you are too illiterate to even grasp the meaning your own posts, to say nothing of others'. You wrote, in reference to the real problem of a large number of loans with very high loan to valuye ratios in an environment of falling real estate values ....
"The only reason for them to ignore the obvious was because they opted to pursue short-run profits at the expense of long-term prudence. That's what deregulation hath wrought, and you should take some pride in the result, as it is a direct result of your political dreams coming true."
...which ignores the fact that it was acts of regulation by Congress, the creation of the FHA, and later the VA, Fannie Mae, and Freddie Mac, among others, which deliberately created that which had never existed previously in the private sector, a market of any size in residential real estate loans with very high loan to value ratios.
Of course, you are so dumb that it escapes your grasp that the sale of stock and distribution of money is not all that entails making an entity truly private. For instance, someone with an IQ above room temperature would grasp that an entity which benefiots from an implied taxpayer guarantee of it's liabilities is an extension of the state, as is an entity which has been excplicitly instructed by Congress as to what ends it should devote it's capital to.
Go ahead, really; tell us all again about your oh- so-impressive credentials! We may all swoon!
That ain't me, Spock.
I think a great many people felt it was wrong to limit home ownership to only those with resources and self control.
Sure, and lots of them were builders, mortgage brokers, loan originators, CDO packagers, etc. whose living depended on home ownership continuing to grow. Also the Bush Administration, who could see that the real estate market was the main thing keeping the economy out of recession. It's amazing how in the white heat of indignation against the poor schmucks stuck with houses they can't afford, people ignore the fact that a lot of money was made from creating this situation.
You are correct, of course, Mike, but you neglected to mention the Members of Congress, who unlike George W. Bush, are still in office, and who thought it was just swell to collect campaign contributions from people who were, in Congressman Franks' words, were "rolling the dice".
It seems like everyone wants to let off Greenspan too lightly. He spiked the punch when he was supposed to be taking it away. Everything can be traced back to dropping rates in the post 9-11 recession.
My anti-virus software noticed the nfra.exe, too.
You hold on to the job of central banker long enough, and you are guaranteed to be proven a fool eventually, which isn't the same thing as saying that we should do away with central banking; some problems ain't solvable.
Greenspan's biggest error was the same as the guy who doesn't walk away from the craps table after a nice run of luck. About 1998 or so he should have realized that 12 years of mostly good fortune was a pretty good run, and thus retired to widespread acclamation as an all around genius.
Central banking is central monetary planning. central planning doesn't work. A central bank simply doesn't have access to the info it needs to set interest rates correctly, nor could it ever process that information if it did. The mechanism for efficiently assimilating diverse and numerous data into a price (interest is the price of future money) is called a free market.
You are right that some problems are not solvable. There is no way to reap the benefits of central monetary planning without also suffering the harm of same.
Typically, Yglesias tries misdirection to hide the fact that people were irresponsible. While being under water is one reason that people have defaulted on loans, the primary reason is that many people purchased houses that they could only afford with an ARM or short term, interest only loan, etc. A second grader can understand that the rate will only last for the specified period and will then go up. Furthermore, you don't need to read Paul Krugman to understand that real estate prices could come down. I live in California. Any Californian over 25 years old can remember that residential real estate crashed in the early 90's. I don't buy into this idea that people are so stupid that they had no idea that the market might decline.
My friend was a mortgage broker in Los Angeles. His company had a study that said 25% of the mortgages issued in LA County in 2006 were issued to speculators. The market had already begunto soften at that point. Anyone in the market would know that prices had softened, yet there were still a significant number of speculators. There were also significant numbers of borrowers who lied on their "no doc" loans.
Mortgage originators didn't care about the cr@* they were originating becasue they sold them almost immediately but the borrowers knew they were taking a risk as well. They are both equally to blame.
People are contractually obligated under pain of foreclosure (ie losing the asset). When the asset devalues too greatly, the penalty becomes less fearsome and people start to walk away without worrying about their own loss, leaving people like Megan yammering about their moral responsibility to make payments with money they don't have. Beyond that, when the devaluation is broad enough you get yourself a foreclosure crisis, necessitating measures to stanch systemic risk, further diluting the downside to 'bad' homebuyers. But at that point, people have already begun to walk away in droves, so moral hazard is out the window. What are you going to do, Megan, put them in jail? Cuz if all you really want to do is just tut-tut, well that's okay with me, but it doesn't give me much reason to read you.
Seems to me the best way to avoid all this is to get lenders to take their fiduciary duty to avoid bad loans seriously via regulation with real teeth. That's just off the top of my head, though. I'm sure there's an official U of C B-school reason why regulation is not the right answer there either.
How many of the politicians who worried about Fannie and Freddie and the sub-prime situation complained about excessive home ownership? How many boasted about it?
It's just like the '80s and '90s: On Tuesday, everyone wrung their hands because consumer debt was too high. On Wednesday, they pushed for looser credit. And on Thursday, they pointed to strong consumer spending as proof that their economic plans were working.
Once everybody had a television and a home computer, they needed a topper. So they went for home ownership. And lo, they drove it up until they drove us into the drink.
The premise of Keynes, as I understand it, is that you put money into the economy when times are bad and take it out when times are bad. But what politician wants to put on the breaks when times are good? Ever since the Full Employment Act, there's been no way to know how our economy is really performing because no pol wants to be the one who presides over a .5% contraction where the economy regroups; they all want to have above average growth on their watch.
Who's to blame for the housing mess? The individual borrowers don't shine here, it's true. But a lot of people really do think that if you give the bank your data and the bank says they'll make the loan, that means they can afford a house. And between our crappy education system and politicians telling you how everybody's getting a home now that they're in charge, their stupidity is understandable if not entirely excusable.
How about the bankers? C'mon. The people gave the bankers their data. The bankers ought to have known they couldn't pay. Why did they give these loans? Were they greedy scum who wanted their bonus now and to let some sucker elsewhere deal with collection later? Or were they so out of touch that they seriously believed some of these people would somehow actually pay for a house? People are pooh-poohing, but in an age of data mining, your bankers and creditors really do now how you handle your money and where you spend it better than you do. That's why Amazon almost always recommends a book I'd like to buy and the credit card company calls if I fill up more than 100 miles from home.
So, bankers and borrowers are stupid. And the government pulls the wool over everyone's eyes about what they can and can't afford so that the illusion of prosperity will keep us voting for incumbents and trusting the government with a little more of the economy.
Who's responsible for the mess? We all are. We voted the jokers into office who made the rules that led to this mess. We nodded and smiled when we were told that the CEO deserved to be paid enough to have gold faucets because he was doing such a good job of running the company into the ground. And then we felt bad that Charlie the office boy wasn't making enough to live so we agreed first to looser credit and then to sub-prime mortgages. We put our savings into stocks because everyone said with inflation you were losing money keeping it in the bank at 1/2% interest. Ever since the Great Depression, we've told ourselves one lie after another about how the economy was different and the government was smarter and so we didn't have to worry about booms and busts any more because smarter people were taking care of things.
Oops.
Confused, are you seriously arguing that it isn't your JOB to figure out whether you can afford the things you buy, or repay the money you borrow?
Megan, are you seriously arguing that we should entrust the stability of our financial system to the assumption that it is primarily the prospective borrower's responsibility to determine her ability to repay, not the lender's? This notion that there was an unwritten responsibility on the part of borrowers (lay people) to second guess and reexamine the amount of credit extended to them by professionals out a sense of communal responsibility for the implied potential systemic risk to the financial system of their loan when considered in aggregate with all other comparable loans, factoring in any likely subsequent selling, bundling, securitizing, or leveraging strikes me as rather extraordinary.
The general thought was that the threat of foreclosure, combined with a legal structure compelling prudence on the part of lenders would be enough to get people not to bite off more than they could chew. The climate that justified purchases based on the notion that asset appreciation would be more than enough to pay for the mortgage was far more than a contagious delusion that ravaged consumers' self-regulating instincts. You know very well that this idea was pushed to the limit by both incompetent lenders and some who should have known better. Let's get real: it was conventional wisdom at all levels of the financial food chain. Why else would mortgage securities ever have been thought to be such solid investments? There were a few seers, yes, and they should have been listened to. But this attempt to shove off all or even a substantial portion of the blame onto borrowers is just simple revisionist history.
I tend to think the bank might know more about my financial and health future than I do. I tend to overestimate these things. But I'm probably a pretty average guy, and probably don't deviate too much from the actuarial tables.
That said, five years ago I took out an ARM because Alan Greenspan said it was the smart thing to do. (No joke.) So far, he's been right, since the rate was lower than I would have gotten on a 30-year, and then dropped this January when the 5 year mark was reached. It seems to me there was a lot of confusion about these things, and Greenspan's comments may not have helped much. (After all, there are ARMs and there are ARMs.)
Mike: Megan, are you seriously arguing that we should entrust the stability of our financial system to the assumption that it is primarily the prospective borrower's responsibility to determine her ability to repay, not the lender's?
I understood Megan to be arguing that both bore responsibility. Where did you get the idea that Megan was arguing about primary responsibility?
This notion that there was an unwritten responsibility on the part of borrowers (lay people) to second guess and reexamine the amount of credit extended to them by professionals out a sense of communal responsibility for the implied potential systemic risk to the financial system of their loan when considered in aggregate with all other comparable loans, factoring in any likely subsequent selling, bundling, securitizing, or leveraging strikes me as rather extraordinary.
Which is probably why no one is arguing it.
People are aruging that borrowers have a responsibility to consider if they themselves as individuals could afford to borrow the money they were being offered. Not out of a sense of communal responsibility, out of a sense of responsibility to the borrower themself as an individual.
The general thought was that the threat of foreclosure, combined with a legal structure compelling prudence on the part of lenders would be enough to get people not to bite off more than they could chew.
You don't say who had this general thought. But to my way of thinking, the threat of foreclosure works on the borrower, not the lender. So if this "general thought" was actually generally thought, then some responsibility was expected to lie with the borrower. In fact, your summary of what you claim was "general thought" implies no moral responsibility for lenders, who were only obliged to follow the legal structure, as opposed to worrying about the risk of default. Note for the hard-of-thinking, I am *not* arguing myself that lenders had no moral responsibility, I am merely pointing out that if we believe Mike's argument then the general climate of the time was that lenders had no moral responsibility.
The climate that justified purchases based on the notion that asset appreciation would be more than enough to pay for the mortgage was far more than a contagious delusion that ravaged consumers' self-regulating instincts.
Possibly. But that doesn't remove the responsibility of borrowers to consider if they could repay loans. A climate is created by every single one of us; if borrowers were neglecting their self-interest then they were responsible in part for creating that climate.
You know very well that this idea was pushed to the limit by both incompetent lenders and some who should have known better.
And of course those borrowers who fell for this idea bear the responsibility for falling for that. There are always people out there proposing profoundly stupid ideas (eg the breatharians.) People have to be able to think for themselves, there's no way that any government can protect us all from every stupid idea.
Let's get real: it was conventional wisdom at all levels of the financial food chain.
And some of the blame for this conventional wisdom can be attributed to those borrowers who fell for the idea that house prices would always rise.
Why else would mortgage securities ever have been thought to be such solid investments?
Well three hypotheses spring to mind - bad risk models, short-term incentives for lenders, availability bias. There are probably others.
But this attempt to shove off all or even a substantial portion of the blame onto borrowers is just simple revisionist history.
Firstly, no one is attempting to shove off all of the blame onto borrowers.
Secondly, what matters about an argument is whether it is right or not. If it's right, then it's right even if it is also simple revisionist history. And if it's right it's right even if it's complex revisionist history. And if it's right it's right even if it's complex revisionist morality. And if it's right it's right even if it's complex brand-new morality. Calling something "simple revisionist history" is irrelevant in this context.
Thirdly, I think we're a bit close to the time to have already established a conventional history that revisionists can then revise.
It all hinges on what "it" is. There are two issues:
1. Should homeowners be expected to know whether they can afford their mortgage?
2. Should homeowners be expected to know that they were in a bubble or where it would end?
The answer to one is clearly yes, the answer to two is clearly no. However, it shouldn't matter that homeowners didn't know the answer to 2 unless they abdicated their responsibility for number 1. In other words, if you can afford your mortgage, the bubble doesn't matter. If you couldn't afford your mortgage, then you care about the bubble because you were pumping your house as an equity ATM.
Greenspan's Fed, the entire financial world, the entire political class from president to Des Moines drain commissioner, every pundit worthy of a head shot and every public financial adviser down to the infomercial 'make a million in real estate' huckster cajoled, pleaded or practically ordered Americans to buy homes. Right up to the end.
Right up to the very last moment when the sub prime excesses were so absurd and the median price nation wide had risen 40% higher in terms of median income of any previous peak. When mortgage giants had art departments, still there wasn't enough volume so trillion in credit default swaps were created which was really all about creating artificial mortgages so the fees could keep coming.
That the honest but unwise and hopeful, the stupid and greedy, and the dishonest rushed in to grab essentially free money was not some flaw in the system. It was the aim of the system. The system being those listed in the first paragraph. The entirety of our elites, mamby pamby better suburb and university libertarians included. The housing bubble was not an accident it was a design that worked exactly like it was designed to.
Just stop paying your mortgage. Screw em all.
Homeowners are already obligated to pay mortgages. If they can not, the punishment is losing their home. There is nothing inequitable about this. If they can't afford to pay their mortgages, there probably isn't anything you could get beyond the house anyway.
Unless the loan applicants were lying, which is already illegal, the lenders are able to tell whether or not they can afford the house probably better than the applicants themselves. Financial literacy is poor in this country. Bankers are supposed to look out for their depositors and not make loans to people who can't afford them, regardless of how over-optimistic loan applicants are.
Now, I will say that I'm not supporting bailing out people who got in over their heads. I think the homes in questioned should be foreclosed and auctioned off to the highest bidder. This will clear the market and provide plenty of affordable housing.
I look at the empty houses and see a great opportunity for this country. The costs from speculation are "sunk costs" and may never be recoverable. But the houses themselves still provide utility. They keep occupants dry from the rain. They give them a place to sleep at night. They have areas that can be used to prepare food and eat. They have bathrooms. They provide a place to relax and watch TV. It's a sin that they're being held in limbo instead of just auctioned off like they should be.
What I don't get is why anyone wanted to take out an ARM when interest rates were at historic lows. The thing to do when rates are really, really low is to lock down a good interest rate that will stay the same when market rates go up. I did this with most of my debts, which are now completely predictable.
I understand why bankers wanted to sell the ARMs. That gives them the freedom to raise rates. But why would the customer agree to it?
Matthew in Austin:
"Hmmm. No one else seems to be complaining about the malicious executable that this webpage downloaded onto my machine. Don't know why I was the only one targeted - that kind of makes me sound like a loon to those of you unaffected."
It's not just you...
Megan is pointing out that although information is asymmetrical in most transactions, each party generally has information that the other does not. That applies to mortgages as well as to most dealing.
In the mortgages now at risk of foreclosure, the bankers appear to have had more information, much of which they failed to use. Many borrowers also failed to use information available to them. The market is working in that it is making bank shareholders take the losses for stupidities committed on their behalf, and making borrowers pay for their own stupidities. Where the market is not working, and most of us feel justice is not being done, is where the responsible bosses of the banks and the responsible regulators of the banks are not paying for their stupidities.
Write a hundred times on the blackboard:
"Mortgage lending is not a fiduciary activity."
A few things:
Just because you face foreclosure today doesn't mean you were irresponsible when you took out your loan. Other alternatives:
1. The value of your home had dropped below the value of the mortgage.
2. You lost your job.
3. You have had some other kind of financial crisis, such as a medical crisis or are victim of a frivolous law suit.
At this point, I'm thinking that the banking crisis isn't hasn't resolved yet because of the foreclosures that are about to happen over the next year, not because of the foreclosures already polluting the books. And many of those foreclosures will not be because Joe and Jane took out a bigger loan then they could afford, but because they both lost their jobs and can't find new jobs. And if Joe and Jane did play fair -- 20% down and all that, they're losing a lot more then a place to live. So all this shaming is just salt in the wound.
Maybe it's time to get over the blame game and start the process of mending our broken finances. Some creative ideas about a path forward instead of pointing fingers, please.
Otherwise, you just part of the problem, and a whiner to boot.
zic:
"Just because you face foreclosure today doesn't mean you were irresponsible when you took out your loan. Other alternatives:
1. The value of your home had dropped below the value of the mortgage. "
????
If I sign up for a mortgage at $1000/mo (or whatever), exactly *how* does that change if my house value increases or decreases?
If I sign up for a mortgage at $1000/mo (or whatever), exactly *how* does that change if my house value increases or decreases?
When it's in your mortgage contract - various option mortgages have a clause that allows their interest rate and monthly payment to skyrocket if the equity in the home drops below a certain value. That happens if you get behind payments, obviously; but it also happens if the bottom drops out of the national home market, which many home buyers were assured, by nearly everybody, was something that could never ever happen.
Ahh, I see the McArdle effort to spread the blame uniformly... so no one is to blame... continues apace. Keep it up Megan. By the time you're done, dear Alan will be free!!!!!! And we can get back to blaming the CRA and that poofter, Barney Frank.
And what makes you think that they know how much they can afford? Do you apply that same argument to people who should know whether or not their mechanic is deceiving them? Or do you think that they should listen to the advice of their mechanic, doctor, lawyer, et al? If so, why shouldn't they listen to the officials responsible for handling their loan? Don't you think that they believe that the mere fact that someone is willing to advance them that kind of money is - get this - a signal that they bank thinks they can repay those loans?
Now that's just stupid. Revisionist history is, by definition, wrong.
The real history is something like this: I got a loan from what I considered a rather conservative group of people, conservative in the sense that they erred on the side of caution when they evaluated the risk of loaning x amount of dollars to me. My parents felt the same way about all five properties they have bought; that they were good risks, they knew how to handle their money, and that the bank could have loaned them more money with no worries about repayment. And their parents felt the same way, buying properties in the 40's and 50's. And you know what? So did their parents. Iow, historically, the assumption has been that banks have erred on the side of caution, that they wouldn't lend unless their prospects of repayment were good to excellent - 'If I need a loan, they won't lend, if I don't, they will'. And you know what? Historically, that is, the nonrevisionist history, people didn't tend to buy 'more house than they could afford'. Why the sudden wave?
Well, it's not because those seeking loans have changed their behaviour. It's because the banks have. People a generation younger than me still walk into a bank thinking that they won't get loans unless the bank thinks they have the ability to pay it back. Obviously, all this changed around 2000 or so. But I don't think applicants should be responsible for that. Why should they?
Ah, yet another poster who gets it:
This bears repeating: Bankers are supposed to look out for their depositors.
That's what most people assume when getting a loan, no matter what level their financial savvy. They as a rule don't assume that the bank doesn't particularly care if they aren't able to repay the loan because the bank has passed that on to a third party.
Folks, please. Not all lenders are equal here, just as not all borrowers are equal.
Lenders that write a large portfolio of mortgages and then use the MBS market to expand their capacity in economic boom times are incented to manage the risk of their portfolio (i.e., it's their "JOB"). If the lender makes a loan with a high probability of default, and doesn't charge the appropriate interest rate to cover that risk, then the lender should (and does) absorb the consequences. Most of the large, traditional retail banks fall into this category.
Lenders that write loans with little or no capital on their balance sheets, with the express intent of selling said loan to the MBS market, don't care one whit about whether or not the mortgage can, or ever does, get paid off. They just want their commission for finding the borrower and feeding the MBS machine. They are incented to provide too-good-to-be-true loans with sub-prime rates, ridiculously high LTV's, and ticking-timebomb terms that they don't make clear to the unsuspeting borrowers. These are the predatory lenders that everyone's complaining about (and the brush that the current administration is using to paint all bankers with). Most of the boutique mortgage houses that popped up during the 90s and 00s fall into this category.
Similarly:
Borowwers that took loans based on a realistic assessment of their current and future income, who were then blindsided by changing financial circumstances (loss of job, injury/death of the breadwinner, etc.) cannot now be called irresponsible for the resulting crisis. This is not to say they are automatically owed assistance, but blaming them for what has happened is disingenuous at best.
On the other hand, borrowers who lived the life of luxury by borrowing way beyond their means, expecting that when the bill came due they would either borrow again or walk away are partially responsible for what has occurred here. This includes speculators who bought into the "make millions in real estate with no money down" infomercials of the 90s and 00s. To dole out money for these folks is to encourage that kind of behavior in future speculative markets (cf. oil futures in 2008, and now T-Bills in 2009).
Discussions like this one, which seek out only to find fault and not solutions, are not helpful. This crisis happened because of some people, but it happened to many, many others - banks and borrwers alike.
Harumph.
Megan's abstract notion of responsibility here is just misleading. Sure, borrowers should be realistic about what they can afford. But it's just a fact that regular lay people will make mistakes at that. I can't tell if Megan's notion of responsibility is the question of whether people who have gone underwater 'deserve' to have a governmentally encouraged renegotiation, or if it relates to the question of who is ultimately more responsible for the crisis. I think it's unambiguously clear that absent the systemic problem, people should be held to the contracts they signed. And they would be. But one option for them is, and always will be, to accept foreclosure. I am just not as interested in engaging in moral condemnation of those who take that option, because to my mind they're accepting the terms of their contract, end of story.
I thought, however, that Megan was addressing the question of culpability for the meltdown. And here is where the question of why it lenders whose practices are regulated becomes instructive. We can't base our hopes for stability on a regime of individual investigations of the at-asking financial condition of borrowers after a default has occurred. And we don't want the government to get involved on okaying every loan application before the prospective lender even gets a look at it. What we can do is impose standards on lenders for determining acceptable risks to repayment. So that's what we did. Absolutely, consumers shouldn't go in asking for more than they can repay, and if that is all Megan is looking to have conceded, she's got it. But we can be certain that there will always be some minimum number of people asking for too much house. We need to be certain that we have a way of ensuring those prospective borrowers are denied their wild fantasies. And that can only be done if the full legal and moral weight of ensuring those denials are borne by lenders, as laid out in lending practice regulations. Basically, I'll concede a lip-service nod to borrowers' responsibility, but the full functional responsibility for ensuring stability lies ultimately with the government in its capacity as regulator of lending.
Not a first-order comment, here, but a commentary on the commentary. First a few people who actually know what they are talking about in an objectively verifiable sense:
And now a comment from someone who presumably thinks that people should have been more 'financially responsible':
And the explanation, posted ad nausuem in many, many blogs, magazines, news shows etc:
And this promotes a certain behavior on the part of banks: 'When it's in your mortgage contract - various option mortgages have a clause that allows their interest rate and monthly payment to skyrocket if the equity in the home drops below a certain value.'
None of this is new info, and should already be well known by certain parties. But the reality is this: the people puffed up with outrage, clamoring for 'financial responsibility', are by and large the people who demonstrably don't have a lot of financial savvy, the expertise they demand in others. And if the ones screeching for some sort of rebalancing verifiably don't have even a minimal level of this expertise, the expertise they claim others should have, how can they in good conscience condemn others for poor decisions?
Sanctimonious SoV: "And what makes you think that they know how much they can afford?"
- Well, there are about 838,000 different "how much house can I afford" calculators online. One of those would be a good start. Simple arithmetic (earnings - payment - bills > 0?) is another.
Lynne: "I'm so sick of the sympathy that is oozed for homeowners . . .
In 2008, the kids' 529 funds lost about 30% and our Simple IRA retirment fund lost 35%."
- Your situation sucks, but why in the world were the 529 funds still invested in the stock market, if the kids were going to school in 2 years? Like the homeowners you deplore, you would've known about this particular risk if you'd done the most basic reading. (I get that Lynne is expressly NOT asking for a bailout, so the situation is different. But she engaged in the same fiscal wish-casting as her HELOC neighbors.)
Matthew:
Same problem here, my browsers have been freaking out all morning, thanks for the tip
This is something I encounter time and again, something that still bemuses me every time I see it: This isn't something that should be looked at through the prism of ideology or politics, from theories of human behaviour from from a left or right perspective.
This is something that should be looked at as a financial problem, nothing more. Yes, at the end of the day, housing prices have to come down. The question is: how do we best manage that, and who pays. And from that perspective, working to prevent foreclosures is certainly high on the list of policy prescriptions.
Not by disbursing more money to the banks, either directly or through subsidies to homeowners - that only, as you say, artificially props up prices. But by giving the courts the ability to do cramdowns. To give both lenders and homeowners an incentive to work things out.
And after all, doesn't the cramdown option assign responsibility for poor decisions to both the homeowner and to the lender? If you're looking for some moral accountability?
I have been reading your blog for a few weeks now and it seems to me that you are so self righteous. Yes people should be responsible but banks should also lend money to people that can pay it back. Also many lenders convinced people to get subprime loans even when they could qualify for a fixed rate loan. And if we let all the people default it will affect the people on the block that are still paying their mortgages. I suppose in your world you have never made a mistake or been snowed by someone. Must be nice to be you.
RW, are you even aware that your responses (almost invariably) begin with a non sequitur, and end with a clumsy restatement of your original, contested point?
I said: LTV ratio only impacts the pricing insofar as it raises or lowers the expectation of default.
No, it also changes the outcome of a default. If an investor is holding an upside down mortgage with an inadequate counterparty, then by definition, there is no way for that investor to make himself whole from a foreclosure on the collateral.
Fine, but we're still talking about default or risk of default, without which LTV matters not a lick to the valuation of the loan. Key words: "inadequate counterparty."
The idea behind a mortgage is that the lender will be able to recoup his principal through a foreclosure if necessary. A loan that is being paid but lacks adequate collateral is not a "performing" loan, not because of the borrower's performance, who is paying as agreed, but because of the lack of adequate collateral.
If it is being repaid, and repayment is expected to continue, it is performing by definition, Mr. Financial Wizard.
In the real world, that loan cannot be sold for anything close to par, because a lender is exposed to the amount of the unsecured balance.
Again, the lender is only exposed to said unsecured balance to the extent that default risk exists. Your point that this is a "balance sheet crisis in which many of the 'bad' loans are being paid" and "loans that have not defaulted constitute much of the problem" is effectively meaningless.
Clay? Weren't you claiming that FM wasn't privatized? And that detailed explanations had been offered up as to why that was?
So why should anyone listen to you?
Right. We should do this. And you know, we don't need no stinkin' doctors either. Not when there's online sources that tell us how to diagnose our symptoms. Just like we can all take online tests to figure out what our personality type really is.
You are correct, of course, Mike, but you neglected to mention the Members of Congress, who unlike George W. Bush, are still in office, and who thought it was just swell to collect campaign contributions from people who were, in Congressman Franks' words, were "rolling the dice".
You're right; I failed to mention something completely irrelevant to the point I was making.
If it is being repaid, and repayment is expected to continue, it is performing by definition
Not quite. A mortgage that isn't adequately secured is not on the same footing as one that is.
Again, the lender is only exposed to said unsecured balance to the extent that default risk exists.
Er, no. As shocking as this may be to you, the value of the underlying security is relevant when the loan is secured by that asset! (Why do you think that assets are appraised prior to the loan being granted, and why LTV matters in the underwriting process?) Nor are the regulators pleased when the collateral doesn't match the loan balance.
When we are discussing insolvent banks, what is it that you think that we are talking about? If these loans are valued properly, they will be devalued, and the value of that institution declines.
Maybe you live on an alternative universe, where mortgage buyers are indifferent to collateral and focus only on payments. Some risk of default is always assumed, even if payments are being made currently. Here on Planet Earth, though, lenders want to have access to collateral in the event of default, as do investors in those who hold the mortgage. A payment stream is not enough; if it was, we wouldn't bother with collateral in the first place.
Clay? Weren't you claiming that FM wasn't privatized? And that detailed explanations had been offered up as to why that was?
Indeed. And I admit, I'm still baffled as to how one can maintain that they are or have ever been private entities.
Thankfully, the left is full of the brainless like SoV, so we can know the national nightmare known as NotMyPresident can't last forever.
"And you know, we don't need no stinkin' doctors either."
I love when SoV compares planning to get a mortgage (which no one ever need do without their own consent) with how to get healthy after getting sick. After all, we all PLAN on the diseases we get, but it's not our fault. SoV planned on being this mentally retarded.
The looniness of the left is hilarious.
Wouldn't be great if there were a way to punish BOTH the greedy bankers and the greedy homeowners who got us into this mess? Like, if there were a way to make sure bad banks went bankrupt and bad buyers lost their homes they couldn't afford? And if in this process, the market were correct so that responsible buyers and responsible banks prospered?
Of course, that would have meant letting the free markets reign. Can't have that....
Umm, they get their paycheck?
Listen, yes. Believe unquestioningly, no. I've suffered enough pain from my doctor getting things wrong. And mechanics don't have your best interests in mind (and many mechanics are oddly incompetent at finding and debugging problems, even when they have a financial incentive to do so).
Probably they did believe that. It is entirely possible to have beliefs that are wrong. I've done so myself many times. I don't know what difference you think this argument makes.
Really? All revisionist history? So the first historian to jot down a history of something by definition got it right? It's not possisble for the first historian to have made any revision of the original writeup must be by definition wrong? To be blunt, this remarkable assertion rather takes any sting out of you using the word "stupid".
So you were quite happy to borrow an unstated sum of money, simply because you considered the group to be rather conservative, and your parents and grandparents had done so? You could sleep at night without having run the figures yourself? Weird, but, I am afraid, your responsibility. No one can make you do the hard work of thinking if you're determined not to do it.
Look, even people who have your best interests at heart still sometimes make foolish mistakes, because they're human. And not everyone has your best interest at heart. I don't know how you expect the world to protect you from this - many politicians don't have your best interest at heart and many politicians make foolish mistakes (even by the lights of their own best interest).
People a generation younger than me still walk into a bank thinking that they won't get loans unless the bank thinks they have the ability to pay it back. Obviously, all this changed around 2000 or so. But I don't think applicants should be responsible for that. Why should they?
Because they're the ones borrowing large sums of money. What's so hard for you to understand about this concept?
Rules of thumb like not borrowing more that 2.5x your income, or not letting your housing costs exceed 25% of your pay, worked quite well for a long time. Then they stopped working. Why? Well, for one thing, because some other group of fools was bidding up house prices to more than people could afford under the time-tested formulas.
Not a problem if your main goal is to have housing. If house prices are too high, you rent. Many of the people who post here chose that course during the bubble, including me.
What you don't get by renting is THE CHANCE TO MAKE A FORTUNE IN REAL ESTATE AND RETIRE BY 50!!!!! We all know that's what drove a lot of the speculation. And we all probably have a relative or two who didn't talk about anything else at Thanksgiving dinner for the past 7 years. These people may have lived in the houses they bought, but what got them jazzed was the paper profits they were making without doing any work.
That's over, and I don't see anyone who lived through this bubble doing the same thing again.
I suspect it isn't people in their dream homes walking away from mortgages, at least not unless something horrible happens to their incomes. Most people who truly want a house will take extra jobs and live on PBJ before they will pay the mortgate late. I suspect the problem is mostly people who would be just as happy living somewhere else, and who don't actually want some silly house unless it also comes with several hundred thousand dollars of paper profits.
Tracy W, explaining things like "personal responsibility" to a liberal is like explaining table manners to a pig.
To a liberal, the only people responsible for anything bad are white straight males who are not liberal, who conspire to hold down everyone else. Everyone else is just a hapless victim.
For a perfect example, see the video of the Take Back!NYU "protest" that just took place, where a group of left wing "activists" were shocked that security guards actually threw them out of a building they didn't own and "put their hands on them."
The sound of that lefty's voice---incredulous that anyone should stop them, or even enter their self-declared fort, and completely clueless as to someone else's property or even why he was there---speaks volumes for the immature children who mindlessly follow Obama.
Sigh. Tracy, if you have an argument or a rebuttal, make it. Snark only shows that you've run out of arguments and/or you are unable to effectively reply to criticisms of your own. For example, this is just idiotic, even if it was intended as snark:
I'm asking you again - how were they supposed to know that this paradigm had changed, given that it has held true for, well, at least four generations, if not more?
This isn't a hard question, and your refusal to answer it indicates that the obvious answer is the correct one: they weren't.
If you can't make even minimal attempts to substantively engage in the salient points, I will be forced to lump you with nonperforming 'assets', the likes of Clay, or BF or BS. The people who don't know basic financial definitions, let alone basic finance.
The call is entirely yours.
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.
This place is always good for a laugh, though not much else.
What I don't get is why anyone wanted to take out an ARM when interest rates were at historic lows.
About 5 1/2 years ago I got a 7/1 ARM.
4.75% for the first 7 years, then LIBOR + 2.25 (max 9.75) adjusted annually for the remaining 23 years vs. 5.9% fixed for 30.
So far it's saved me money on interest. I've been making extra payments in case the rate goes up. I've put enough principal into my house that the monthly payment won't increase at even the max rate. If it adjusted today, the rate would be even lower than the 4.75% I'm paying now.
A lot of people here don't understand the mortgage market. Unless things have changed in the last decade, here's how it goes.
Bank A lends money for mortgages, and keeps the mortgages as bank investments. Bank A doesn't make a lot of mortgages, because it has a limited amount of money, but those it makes are sound investments.
Bank B lends money for mortgages, keeps some as bank investments, and sells the others off. Those mortgages it keeps have to meet its own requirements, but those mortgages it knows it will sell off have only to meet the requirements of the mortgage buyer. The average homeowner doesn't even know which category his mortgage falls into, because Bank B continues to act as the servicer (receives the monthly payments and passes them on) for the entity that truly owns the mortgage.
Bank C lends money for mortgages, but sells off every mortgage it makes. Every mortgage has only to meet the requirements of the mortgage buyer.
A mortgage broker knows all about Banks A, B, and C, and knows how to arrange a mortgage for a client. Mortgage brokers are concerned only with the prospective homeowner meeting the requirements of the entity who will ultimately own the mortgage.
When I got an FHA loan many years ago, I had to meet the FHA requirements. The local bank ensured that I met those requirements, which at that time was that the monthly payments be no more than 24% of my income, and the monthly payments plus all my other debt (car payment, credit card payments, etc.) had to be no more than 36% of my income. The attraction of an FHA loan was that I could get it with only 10% down payment, unlike the local bank mortgage which required 20%. FreddieMac and FannyMae are quasi-governmental banks with lending programs similar to the FHA. In order to replenish their supply of money to make available for more loans, mortgage bonds were made up of a package of mortgages and resold to investors. These mortgage bonds were known as GinnyMays, Freddies, and Fannies after the institutions that owned the mortgages.
Let's fast forward a few years. It's now the 1980's, and Solomon Brothers has devised a way to take a package of mortgage bonds that all mature within a specified period, and by applying mathematical formulas and historical data on mortgages and mortgage bonds, including percentages of mortgages which fail as well as mortgages which get paid off early (usually by refinancing, but sometimes by people making extra principle payments), can predict with a measure of confidence exactly what the cash flow coming from the package of mortgages will be. This cash flow can be packaged into separate securities which are called CMO's (collateralized mortgage obligations) and sold to investors. All CMO's issued in the 1980's were secured by Ginnys, Freddies, or Fannies.
Merry times for investment banks for awhile, until FreddieMac and FannieMae were authorized by Congress to issue their own CMO's based on their own collateral.
So investment banks looked at other ways of packaging debt—credit cards, auto loans, etc.
So things wind their way through the 1990's. Clinton has Janet Reno threaten big banks to force them to make more loans of all types to poorer community members. Eventually, Congress changes the rules for FreddieMac and FannieMae so that they can buy mortgages that aren't quite so creditworthy. Remember above where I talked about the mortgage payment being no more than 24% of my income and payment plus current debt being no more than 36% of my income? Congress changed those rules so more people could qualify for home mortgages. Banks B and C went right along, because they were being pressured by Congress, the Clinton administration, and minority activists to make more loans to people on the bottom of the socioeconomic ladder, and besides, they were reselling the mortgages anyways.
So do we have a clear picture so far? Good, because now it's time to talk about subprime mortgages. Bank A has no subprime mortgages, just like my local bank. They're in good shape. Banks B and C are in good shape on their mortgage origination side, because they've resold all those subprime mortgages to FreddieMac or FannieMae. After all, those mortgages met their guidelines, didn't they? FreddieMac and FannieMae aren't in too bad of shape, either, because they've packaged their mortgage bonds into CMO's and sold them. Oh yeah, as part of the packaging into CMO process, the CMO's are frequently insured by a large insurance company such as AIG and rated by a rating agency such as Moody's or Standard & Poors.
Did you know that the bonds containing subprime mortgages were AAA rated? That's investment grade in anybody's book.
So where in this process are the current problems cropping up? Answer—on the investment side. If you're looking to purchase CDO's (collateralized debt obligations of which CMO's are a subset) to hold for investment, you usually look at the rating of the investment. These CDO's are triple-A rated, so they look pretty safe. Look a little deeper, and you see that they are also insured. Here's the key point--unless you know that FreddieMac and FAnnieMae have lowered their standards for mortgages, you think that these are perfectly safe investments. Which they are supposed to be—if the rating agencies do their jobs properly, and if the insurance companies actually stand behind their insurance.
So now we have a housing bubble that finally broke, as housing bubbles always do. CDO's are now not worth what they used to be. But how much are they worth? No one knows. Banks are required to maintain certain capital reserves, with the reserve requirement depending primarily on what the asset is worth. (Reserve requirements for deposits also take into consideration how quickly the bank might have make payment to a depositor. Banks don't have to pay out on a savings account for 10 days after the request is made—read the fine print—so they can have fewer reserves set aside for savings accounts than for checking accounts, and this difference explains the difference in interest rates between savings accounts and checking accounts.)
If banks don't know how much an asset is worth, it's hard to determine their reserve requirements, so they guess, and they usually guess conservatively. In order to build up their reserves, they don't lend as much money, which in addition to building up their reserves, lowers the amount they have to keep on reserve. This is why loans from large banks slowed way down, while loans from community banks haven't changed.
This is also where TARP I money went—into capital reserve requirements. It was enough to get banks lending again, but still not close to the amount of lending that was going on before. Banks still don't know how to price their toxic assets (those CDO's containing subprime mortgages), so they still don't know how much they need to place into capital reserves.
Looking at the whole shebang, why are bankers being blamed? Where in the above process did banks act because they were "greedy" or mean spirited? In hindsight, it's extraordinarily clear that we wouldn't be in this mess if FreddieMac and FannieMae hadn't lowered their mortgage origination requirements.
11:20=imposter. Another liberal coward. Probably SoV.
Speaking of which, more unintelligent filth spewing from his mouth:
"I'm asking you again - how were they supposed to know that this paradigm had changed, given that it has held true for, well, at least four generations, if not more?"
----"Hey ma?"
"Yeah?"
"The bank offered me this loan. It's just like yours, right?"
"Nope. We're fixed rate. This isn't. They required at least 20% down. This doesn't. This balloons. Ours doesn't."
"Thanks, Ma. "
Problem solved, kid. Simple 5 minute conversation. If they wanted to know if a "paradigm" shifted, they could have COMPARED IT TO A PARADIGM IN THE PAST.
Ignorance is not an excuse, liberals.
My brother worked as a mortgage underwriter through the boom; for a bank that used the old-world guides, 20% down, 2.5% of income, etc. Every day, he says he'd see starry-eyed hopefuls walk away dejected that he'd turned them down, knowing they'd go down the street to the private mortgage company and get the ARM with nothing down, no problem.
Funny thing happened. TWO years ago -- I repeat -- TWO YEARS AGO his bank closed down most of their underwriting dept. and laid nearly everyone off, and substantially shrank their home-lending operations. Not last September, two years ago. They knew then that the bubble was going to burst, is my guess.
I've been wondering what the difference was between the bank he worked for and other banks, say Citi or BofA and Wahcovia. Beyond the sensible lending practices, there was one other thing: it had recently been acquired by a Canadian company.
If that is the real Basic Fact, then that last comment of his should put this thread to bed. We are on opposite sides of an ideological gulf, but I would associate myself with 100% of what he said. These are hard-headed, self-interested rational (or rationality FAIL) transactions all the way around; adding a layer of moralizing on top is meaningless.
Oh. I see it was not the real Basic Fact, so rage on, all.
What I don't get is why anyone wanted to take out an ARM when interest rates were at historic lows.
Because ARM's typically carry lower interest rates than long-term fixed rate loans. That reduces the monthly payment for a given purchase price, obviously, although we know that many use them in practice to increase their spending capacity (read: buy more house with the same income.) They are marketed on the theory that property values will appreciate enough to allow for a refi before the rate resets, which presumably makes them a lovely deal.
Of course, turning the average grunt (who, judging by this thread, apparently doesn't understand that collateral matters, that underwriters are supposed to underwrite, and that privatized companies are private) into a high-stakes interest rate speculator who can also divine the rate of asset appreciation was never a great idea. But we did it, anyway.
How many of the politicians who worried about Fannie and Freddie and the sub-prime situation complained about excessive home ownership?
Ron Paul
Ignorance is a fact. You need to turn 'em away.
Mike, the bankers are to blame, but the homeowners are, too. They both deserve bankruptcy. It's the liberals in here and in NotMyPresident's government that seem to think the bad homeowners are "victims" instead of just greedy little snots who bought something they couldn't afford.
Simply because the bankers offered a bad deal doesn't mean the bad homeowners were forced to take it. Nobody put a gun to their head.
Ignorance is not an excuse. Even the other side's.
I am the real Basic Fact! The knuckle dragging, cartoonish, angry white man is the imposter.
Fake Basic Fact: "looky here ma, I done got me a liberal"
Ma Kettle: "son, you need to stop haning out with other men. People will talk"
Fake Basic Fact: "if I rant against liberals long enough, they might not notice my latent homosexuality that I'm surpressing right now"
Ma Kettle: "don't tell me that you inherited that from your deadbeat father too".
I am truly amazed to see so many people arguing that a borrower shouldn't be expected to know whether he or she can afford a loan?!
This is not difficult. You factor the loan payment into your existing monthly expenditures and voila, you will easily be able to see whether or not you can afford it. "The bank lent me the money so I must be able to pay it back" is beyond ridiculous. Fundamentally, the responsibility lies with the borrower because if the borrower defaults on the loan, the bank will always get the house, so it is the borrower who is taking the bulk of the risk.
This doesn't mean that the lenders weren't at fault on their end, if you loan someone hundreds of thousands of dollars with no money down and no income verification, then you should't be too surprised if they default.
But this growing sentiment that somehow the borrowers were innocent dupes who don't bear any blame and can't be expected to know whether they can afford their own loan is madness.
"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 to the bank."
This much I agree with. Let em all default. Enough with the moralizing. This is business, simply business.
I agree. The borrowers shouldn't be viewed as ignorant dupes. They should be viewed as businessmen making a business transaction. As everyone knows a huge percentage of small businesses fail. Do we excoriate them because they took large, perhaps even foolish risks? Couldn't it be argued that anyone starting a small business is taking a foolish risk given the chance of success? Home buyers are the same way. They entered into a business transaction with lenders. They bought homes financed by banks. When they can't pay, they pay the price. What does morality have anything to do with it?
I do not expect the average homebuyer to understand every jot and tittle of a mortgage contract - I can say with confidence that there are many attorneys who wouldn't. I do expect that any rational adult with a grade 10 education should be able to figure out how much their mortgage + taxes + condo fees + insurance will be per month. It was rather prominently displayed in the paperwork I saw when we bought our place - and if it isn't, the prospective buyer should ask. Once they have that aggregate figure, they need to decide whether it can fit within their monthly household budget - if not, they should not buy the house. That is the minimum intellectual qualification necessary to make a prudent home buying decision - lots of people with high school or less have been doing those calculations for decades and getting it right - why are current home buyers suddenly so retarded?
So what if your home is upside-down to your mortgage (as mine it, dammit) - as long as you can afford to make your payments, it is not a short-term problem. It is only a problem if you were speculating, flipping or counting on retracting equity later - and if that is the case, then f*ck you - it is speculators like you that drove up the price of homes, which caused a lot of folks to have to pay too much for otherwise fairly modest real estate. It is also a problem for folks who have lost their jobs and need to sell - I have some sympathy for those folks, but I don't know how the government can help them in a targeted, limited way - maybe by encouraging banks (via tax breaks) allow folks who have verifiably been laid off to essentially PIK or capitalize their monthly payments for up to one year?
What we seem to be doing is taking out the "risk" of the risk/reward equation that exists in almost every choice, business, personal or individual.
The people who took the fewest risks...a fixed rate mortgage, a loan that was 25% or 30% of their income and a truthful appraisal price are FINE. 90% of homeowners are fine. They chose less risk for less house and more stability. We are the chumps who are paying for everyone else's poor decisions.
The people who paid no downpayment are in effect renters anyway, because they lose no equity if they default on the mortgage. The idea of doing anything to keep these people in their houses is sickening.
The people who got adjustable and variable rate mortgages took a HIGHER RISK, believing that they could refinance or sell before the rate went up or that the rate was irrelevant because the price of their house would go up. They took a higher risk to get a bigger reward, more house. If the risks they took didn't pan out for them, tough luck.
The same goes for people who took huge home equity loans at the top of the market to buy second homes or cars or whatever. They took the risk, that the price of their house would not fall and/or continue to go up for the reward of having cash. Again, tough luck.
lots of people with high school or less have been doing those calculations for decades and getting it right - why are current home buyers suddenly so retarded?
I think this is the question those with a big load of blame to dump on borrowers need to answer to be convincing. What did change?
Is this some kind of a farce?
If a gust of wind topples a house of cards, it's not productive to discuss a poor weather forecast that failed to predict wind.
Fractional reserve banking is structurally unsound.
FDIC insurance and other schemes just ensure that there are more occupants and therefor more victims when the house finally collapses.
Fiat (paper) money is unsound. The house of cards was built on a foundation of wishful thinking. Plans to solidify confidence in the system are just mechanisms to produce a false sense of security.
Quit talking about meteorology. If it wasn't this particular gust of wind, it would have happened anyway. Easy money simply isn't invested or spent as wisely as real money that is earned.
Spock - do any good investment ideas besides Krugerrands, ammo and tinned food?
-I half-kid.
Mike, the bankers are to blame, but the homeowners are, too. They both deserve bankruptcy. It's the liberals in here and in NotMyPresident's government that seem to think the bad homeowners are "victims" instead of just greedy little snots who bought something they couldn't afford.
Simply because the bankers offered a bad deal doesn't mean the bad homeowners were forced to take it. Nobody put a gun to their head.
Ignorance is not an excuse. Even the other side's.
This has become a debate over gray areas. If Megan is just reacting to the victimology one hears from politicians who can't explain systemic risk or don't think it's sexy enough, I'm fine with that. I'm not saying anyone was a victim (though some likely were). But even 'vicitims' in a non-systemic situation would be responsible for their contracts or face foreclosure. There is assistance because the system requires it, not because individuals deserve it, regardless of what politicians say.
No one had a gun to their head, but they asked for the loans anyway. I'm not defending anyone who took ridiculous speculative risks and knew it. But even most of those who should have known better probably really didn't -- I never bought, but I remember feeling put-upon to justify that crazy decision (just didn't want the hassle) -- the groupthink in favor of home purchasing was incredibly strong, and the notion that things were affordable that a reasonable person might question was pushed by many many lenders.
I'd rather direct my rage (I don't really have any rage, but...) toward getting the regulatory scheme right than somehow depend on shaming the public out hopping on the next bubble. Cuz that ain't gonna happen.
Holdfast, here's what I recommended two weeks:
Posted note on Facebook from Feb 19:
Last week, I made some investment picks that I shared with my friends Jeff Fryer and Scott Schiefelbein. Following my recommendations would have made an annualized rate of return of of over 300% if profits were locked in at close of business today.
If you are friends with Scott, you can verify this by checking on his wall.
I don’t know anyone anywhere who did this well. These would be decent annual returns but I called them 1 WEEK ago.
Check Facebook to verify:
Feb 10, 9:35 pm: "A diversified portfolio should include Krugerrands, Maple Leafs and American Eagles. I'd even throw in some lead, preferably in .357 in. increments."
Feb 12th, 12:31 a.m.:
I'll go you one better: with 2 mil, I would advise 10% cash, 10% precious metals, 20% shorts on index funds (diamonds, spiders, etc), 10% WTI oil futures, 5% credit default swaps on Russian gov't debt, 5% Japanese Yen, and 40% would vary according to the clients goals and risk tolerance.
Feb 12. 12:36 a.m.
Oh, and I'd go short on the Mexican Peso as far as possible. if it doesn't lose another 20% this year, I'll eat my sombrero.
Feb 12, 10:44 a.m.:
If it was my money, I'd cherry pick bank stocks to short, based on their Texas ratios. I'd also short old media. Newspapers, magazines and the big four networks are going down no matter what the economy will do.
I'd put in a few bull hedges to guard against irrational exuberance; Something like Google or Wal-Mart.
WINNERS:
Shorting the S+P from 820.91 to 778.94 (5% profit)
Shorting the Dow 7817.43 to 7465.95 (+4%)
Gold went from $926/oz to $975/oz (+5%)
WTI crude went from $34/bbl to $39.48/bbl (+15%)
Wal-Mart went from $47.50/share to $50.40/share (+6%)
Mexican peso went from 13.9/dollar to 14.7/dollar (+6%)
Credit default swaps on Russian government debt gained in value to varying degrees
Banks and old media also went substantially lower as I predicted
Citigroup went from $3.46/share to $2.52/share (27%)
Bank of America went from $5.07/share to $3.93/share (22%)
New York Times Company $3.94/share to $3.51/share (12%)
Time Warner $8.23/share to $7.58/share (7%)
LOSERS:
Google went from $363.05/share to $342.64/share (-5%)
Japanese Yen went from 92/dollar to 94/dollar (-2%)
****
As you can see, my picks considerably outperformed the market. I would no longer recommend Japanese Yen, but everything else is doing very well.
Bearded Spock,
Whether you are good or lucky or good and lucky is no matter. What you are suggesting doesn't work over the long term. Wall Street profits were built on two pillars; 1. Rigged Games and 2. Fee Based income. Everyone else including yourself are just taking your chances.
This notion of fiduciary responsibility is so basic, so fundamental to running a business, that at this point anyone who professes to be unaware of it simply should be banned from commenting.
Posted by ScentOfViolets
Um, funny how it's so basic and so fundamental, and yet you don't even realize that lenders don't owe a fiduciary duty to borrowers. Nor do lenders owe fiduciary duties to depositors, creditors, or shareholders (in most states). They are counterparties with no agency relationship.
And, SoV, in light of your own rule, you should be banned from commenting for not knowing that. Since the Atlantic won't actually ban you (and thank goodness for that, for censorship is worst than your ignorance), you must ban yourself to avoid being a hypocrite.
Janice,
Actually lenders to have fiduciary duties to protect shareholder interests. Are you really that misinformed?
Rondo
Rigged games are the easiest games to predict. They all collapse in the long run.
Madoff's hedgefund was a rigged game.
The dollar is a rigged game.
T-bills are a rigged game.
Too big to fail banks are rigged games.
Housing was a rigged game.
The stock market is a rigged game because of 401k's, capital gains taxes, etc.
Higher Ed is a rigged game. There's ways to profit when that bubble bursts also.
Ok. keep it up. Just remember, though, if you shorted Yahoo back in April of '98 at $7 and change, you saw that overvalued piece of dogshit run up in your face up to $101 per share in a year and a half. Meanwhile, you hit the table stakes around 68. Picking losers isn't hard, but the timing can kill you and unless you are the beneficiary of the rigged game, you are just taking your chances like I said before. Having been a hedge fund manager for many years, believe me, there is no consistent sure fire way to make money int he market. None.
Spock, The market eats smartasses like you for breakfast.
To the imposter(s):
Clearly you're angry at the fact that I make good points and snarkily smack down both your president and your representative brain trust *shudder* SoV.
And clearly Megan doesn't care to stop you.
Now I am asking you to stop it. If you're angry that your snarkiness pales in comparison to mine own, just learn from SoV (assuming you're not him) and remain blissfully unaware of facts.
If you don't stop, and Megan doesn't stop you, I will turn these forums into free-for-alls wherein I impersonate *everyone* and make it impossible for anyone to respond.
Your choice. Do you want to ruin a place to display your left-wing talking points and Obama worship?
Mike, why is it relevant to your point that the Bush Administration pursued policies that encouraged high risk lending, but it is irrelevant to your point that Congress did the same?
As to RW and SOV, reasoning with people who maintain that entities, entities which benefit from an implied taxpayer guarantee of their liabilities, have been privatised, is akin to reasoning with people who maintain that the earth is 6000 years old because the Bible says so.
Also, anyone who undergoes an extensive medical procedure without first doing their own extensive independent investigation as to the wisdom of such a procedure is behaving foolishly, just like one is behaving foolishly when one takes on a significant financial obligation without doing their own extensive independent investiion as to whether the financial obligation is something that can be handled.
Of course, it goes without saying that lenders have behaved foolishly, and have failed their responsibilities to their shareholders, depositers, and other parties. I also agree that what policies should be adopted is not a matter of moral calculation, but what will provide the best result. However, ignoring the real, if hard to calculate, future costs of forcing the millions of people who have been prudedntly risk averse to bail out those who have been entirely imprudent, future costs in the form of making future prudently risk averse behavior less likely, is unwise. A lot of people in this thread seem to be dismissing those costs entirely.
Ruin away. I should note that I will continue to use my handle. This is the land of the free after all, n'est pas?
Jeez, gresham, you sound like someone who lost his ass. I know the market is dangerous, but I also know that over time the prices will track true value.
Some people I respect very much are predicting a bear market rally, but none of them are calling a bottom. That is because housing shows no signs of a bottom and there is still a risk that demand for U.S. treasuries will dry up and trigger a nuclear winter.
Snarks aside, gold, guns and food are a conservative way to park money right now. Stay liquid. This ride ain't over. Not by a long shot.
1:16: the die is cast. So be it.
I do not believe in that 3000 year old piece of garbage written by itinerant jewish shepherds. I would much more rather trust Betty Friedan, who clear backs her arguments up with facts.
"Ruin away. I should note that I will continue to use my handle. This is the land of the free after all, n'est pas?" -Imposter
Typical leftist thinking, it is a free country insofar as they are free to take what belongs to someone else. In this case, Basic Fact's nome de plume.
Thank you, Fraggle. But now you're probably setting yourself up to be impersonated by this little twerp.
Spock, I agree with some, or perhaps even a lot, of what you have to say, but your latest posts simply remind me, yet once again, that analysts who examine the performance of baseball players have a better or more honest grasp of empirical methods than analysts examine investment performance.
Of faux basic fact I quote Cioran:
"The passion he devotes to indefensible causes, his tenacity in legitimizing one injustice after another make of him that immoderate disputant who, not deigning to persuade the adversary, crushes him with an adjective straight off. His convictions have an appearance of great firmness; he manages to overpower the solicitations of scepticism by the arrogance of his prejudices, by the dogmatic vehemence of his contempt.
His thought is incontestibly alive today, but only to the degree that it repels or disconcerts; the more we frequent him the more we are reminded, a contrario, of the delights of scepticism or of the crying need for a vindication of heresy"
Betty Friedan (who was Jewish) compared being a woman in America to living in a concentration camp.
And SoV claims she backs up her arguments with "facts".
Explains a lot.
Perhaps the unrepentant Marxist should have compared being a woman to living in a gulag instead.
Janice,
Actually lenders to have fiduciary duties to protect shareholder interests. Are you really that misinformed?
Rondo
Generally speaking, you are incorrect. Directors/officers owe fiduciary duties to the corporation, not to the shareholders. That's why it's called a derivative action.
1:34pm another imposter. In his mom's basement. in his pjs.
Yglesias' argument rests on perhaps one of the most fundamental perversions of any concept of justice I've seen in the discussion of the mortgage crisis: blaming the victim for being the victim. At the end of the day, after all of the spin, excuses, and evasions, the mortgage borrowers made a commitment to the lenders to repay their loans. They are renegging on that commitment. By most accounts, the banks weren't defrauding anyone into taking loans. Instead, Yglesias' hypothetical electrician or teacher or secretary made that commitment in hopes that they'd get the better end of the deal (either a home that they might otherwise not have or a big profit from "flipping this house"). Well, things went against them. That isn't the fault of the person they made the commitment to. Trying to pass the blame onto them is roughly the equivalent of an embezzeler blaming his or her employer because they should have known that he or she couldn't be trusted.
Actually, Fraggle, that was me, regular Basic Fact. Making good on my threat. See how easy this would be, lefties?
BTw, I agree with your assessment 100% about her.
I am sorry if this post is repeating what others may have already may have said.
Loans have been typically taken out by borrowers for a deprciating asset - known as the automobile - and few borrowwers have historically defaulted on their car loan payments using depreciation as a reason for non-payment.
"Yglesias' argument rests on perhaps one of the most fundamental perversions of any concept of justice I've seen in the discussion of the mortgage crisis: blaming the victim for being the victim. At the end of the day, after all of the spin, excuses, and evasions, the mortgage borrowers made a commitment to the lenders to repay their loans. They are renegging on that commitment."
Actually, the mortgage provided an out clause; leave your keys and walk away. People who take the banks up on that are not breaking their contract, they are paying the breakup price, which includes loss of principle and interest and a place to live. Mortgages are a business transaction pure and simple, they are not a sacred oath. If they were, why would there be an out clause?
Will, I have to oversimplify due to time/space constraints. I'm not claiming that short term results validate my strategy, only that (so far) the results have not invalidated it.
These are long term plays, subject to change as new information becomes available.
I am putting my rep on the line by making calls. So far those calls have been remarkably prescient.
If you have superior methods to analyze investment performance that is relevant, please share. If you have predictions that differ than mine, please share. If you think that no analysis is possible that can make predictions with any probability of success, then you are even more Austrian than me.
Greg, that is because they would have to give up the car. Actually it happens all the time. People make their private business decisions based upon their circumstances. Corporations under U.S. Law are considered a "person" and they renegotiate deals all the time. Why don't real people have the same rights as corporations?
Spock, give me a sample size of a few thousand calls, and I will start to have high confidence in the analysis of investment performance. Until them, most commentary on the subject matter is on a level that is akin to an argument that Billy Martin was a better hitter than Ted Williams, based upon an examination of their performance in the World Series.
Basic Fact (the real one) =imposter.
Obviously, he's arguing the guvmint' should renegotiate a mortgage for the poor, poor greed-infested 2nd homeowners.
tool.
No....I'm arguing that the government should let the people who owe too much declare bankuptcy.
Spock is one of those typical I've got all the answers thing going on, but the reality is, if he could print money like he claims he can, why the hell is he wasting time blogging. He's either a liar or the dumbest person ever born.
2:26 and 2:18=imposters.
Stop it and grow up, SoV.
As a liberal, as you say, I have no need to grow up. Hence why I believe in free healthcare, jobs, and abortions for all.
"give me a sample size of a few thousand calls"
Will, you know I can't do that in this forum. I'm telling the truth as I see it. It's more important to me to be right than persuasive.
If you want to believe that fractional reserve banking and fiat money are not a recipe for disaster, then I can't convince you otherwise. Just don't come crying to me when TSHTF.
The whole damn system now rests on China continuing to buy treasuries paying out negative real interest. If that's you idea of stability, then I've got a bullet proof vest made out of cotton candy that you might want to buy.
I'm wasting time blogging because I have made a pile of cash and I don't have to work any more.
I've decided to change my name to Basic Impact from Basic Fact because I refuse to be associated with the other guy on this hifalutin' blog. He's got breath that could knock a buzzard off a shitwagaon.
Good boy, Impact. At least you've come around to discourse...or else Megan emailed you. Whatever, now there at least won't be confusion. If you're sincere.
Being a liberal, the chances are you're not.
Bearded,
How will short bets pay off in the inflationary environment you expect?
http://www.thetoque.com/images/stories/chiaspock.jpg
whoops I must've changed my mind. Basic, I'd love to point out that although you are definitely one of the lower species of human beings, don't feel bad about it, humans and chimps share 90% of their DNA.
This may have been said, but. . .
It's the elitism evidenced in MY's quote that really worries me. So, mortgage brokers with a BA (maybe) and a year long course in financial stuff are more qualified than *I* am to decide what *I* can afford to pay? Perhaps if we turned the whole economy over to a group of Harvard guys all of these problems would be solved?
It's absurd on its face. I know my income, I know my expenses, I know the mortage calculators and the rules of thumb, I understand the risks I take with my finances.
I pay the price for my financial mistakes, and I reap the rewards for my financial successes.
I have always thought that financial decisions were so important that they could not be left up to the goverment, but had to be made by the individual. May the day never come where we as a nation believe the converse.
I bought a home in 2005 with 85% LTV on a 30 year fixed rate which represented 29% of my gross monthly income. Worked out very well. The lender would have gone to 97% LTV without even a whisper of doubt; they pitched me on it repeatedly. Everybody knew the standards were too loose back in the day; everybody and their maid was getting into no-doc, 97% LTV mortgages.
Today, I'm doing a refi on the same property and the bank won't do any cash out with LTV higher than 80%. No problem for me; I'll save $200 pm on my mortgage payment since I'm in the home long-term.
Spock, I've written exactly nothjung with regard to how I view your predictions. I've simply noted that using a tiny sample size of investment calls (and even people who have been making investment calls for decades almost universally have such sample sizes) as "evidence" of investment acumen is a fatuous exercise, for the simple reason that it is statistically unsound.
"How will short bets pay off in the inflationary environment you expect?"
Obviously nothing can go down forever. Where to cover shorts depends on individual investment goals and risk tolerance. Personally, I'm cashing out of index fund short positions at Dow 7,000 or 50% of the high water mark.
Any 3 digit gold price is cheap and so is WTI crude below 40/bbl. I'm slowly moving my holdings to oil futures, physical cash and gold. It's the damn taxes that are preventing me from cashing out sooner. It's funny that I want out, but I can't get out without pushing myself into the top tax bracket. I don't need the money and I don't need the stress.
Will, I am not claiming any investment acumen. I am claiming that my understanding of economics is superior. That may or may not translate into good investment performance because the markets are distorted by government action. For example, Bernanke's performances before congress seem to reassure the markets but I just see another shorting opportunity for stocks and a buying opportunity for gold.
Posted by Basic Fact (the real one) | February 25, 2009 1:49 PM
A lovely spin, but a highly inaccurate one. Mortgage default is substantively NOT the same as a put option on the debt, but merely a mechanism to allow an aggreived party recompense for being wronged. That is why, pretty much universally, mortgage defualt identifies the borrower as a poor credit risk, and why, in many jurisdictions, the lender retains de juris recourse.
Spock, someone who notes that their investment calls "outperformed the market" is noting their investment acumen, and that's fine. For all I know, you will continue to do so. I was merely noting that extremely small sample sizes don't really inform us of much.
Scent of Violets, that was my argument.
I also note that you didn't bother trying to support your remarkable statement that all revisionist history is wrong, by definition, nor did you respond to my argument that doctors, politicians and mechanics often get things wrong.
I don't expect them to know that this changed. I just expected them to have run the figures for themselves as they were the ones borrowing large sums of money.
Hmmm, I will be regarded as a "nonperforming 'asset'" by someone who believes that revisionist history is wrong by definition, and who apparently can't be stuffed running some simple calculations as to whether they can afford a loan. Well, it's a tought threat you've put on the table, but, I think I will be able to endure your reprobation, with perhaps a little help from my teddy bear. :)
The bank knows far more. They have armies of lawyers to craft a contract. They have hordes of statisticians to figure out your likely future. They have scads of investigators to find out every detail of your life.
And seriously, we've spent the past few months basically creating moral hazards for the upper class of the financial sector, with nary a peep from the Randoids. This is no worse then that from an economic stand point, and might be a bit better.
What part of "You have to pay back money you borrow." was some sort of massive secret that bankers kept poor hapless borrowers in the dark about.
Ummm...what desert island have you been hiding out on. Conservatives very much opposed TARP.
1. Home mortgages are NONRECOURSE.
2. People need a place to live and house prices were rising quickly, so the idea of waiting to buy would lead to never being able to buy.
Hmmm . . . that would explain why people do tend to dismiss you- I notice that on other blogs like Crooked Timber they are doing the same thing these days. Well, it's your call.
I didn't bother because I'm not going trade snark for snark, or trade argument from snark.
The point, if you want to pretend you missed it is that, like banks in previous eras, doctors have an incentive not to be deliberately wrong. Treating someone for a liver problem when they have an infected gall bladder is not necessarily actionable; treating someone for a liver problem when the attending physician knows that the problem is an infected gall bladder is most definitely actionable.
The paradigm is, in short, one acting on the expectations of self-interest.
But since you claim you weren't being snarky, I doubt you'll have the acumen to get it this go-round either.
Gee, an off-point and wrong answer . . . but not a deliberate irritating obfuscation if Tray is to be believed. Setting aside the fact that 'running the numbers' is just a restatement and not an argument, I suspect that most people did indeed 'run the numbers', and that they were assured by the loan officer that it was doable and safe. And - going with the paradigm that's held for generations - the applicants figured that what they were being told was true; after all, it would be against the interests of the bank to issue a loan that they thought had a good chance of not being paid back.
This isn't hard to comprehend (yes, in most cases of this sort, it really does come down to stupidity or bad intent on the part of the person who can't seem to get it after multiple explanations.)
Sigh. More abuse of language. Though I suppose given the number of people who have dismissed you, it is a psychological defense against a deeper truth. This is as much a 'threat' as me telling one of my students that if they don't start showing up for quizzes and turning in homework they'll get a failing grade. Doubtless a few them - like you - think that the teacher 'has it in for them'.
In the face of such intransigence, saying you're giving up is hardly a threat. But, yes, I am giving up on any possibility of getting you to be serious.
Later.
Sigh, SoV; did the young communists meeting get out early again?
"I suspect that most people did indeed 'run the numbers', and that they were assured by the loan officer that it was doable and safe."
--well now that's a non sequitor, buddy boy. "running the numbers" and "assurances by a loan officer" are 2 different things, kiddo.
"Running the numbers" means doing your own calculations and figuring out *for yourself* if you can afford it.
"Assured by the loan officer" is letting the person selling you the loan *tell you that you can afford it.*
It's similar to buying any product. You can do the mental evaluations of how much you need the prduct and how much you can pay, and you can listen to the salesman pitch it. But the latter is not the former; the salesman's goals are not the same as your own, and if you trust in a salesman's calculations and not do them yourself, outside of illegality, caveat emptor.
"doctors have an incentive not to be deliberately wrong. "
---As do car salesman. The problem is, the car salesman's incentive is not the doctor's is not the home loan officers. You're comparing apples to oranges; a doctor who commits malpractice loses patients, and, potentially, his license and his job, if sued out of existence. Not so the loan officer or used car salesman.
"And - going with the paradigm that's held for generations - the applicants figured that what they were being told was true;"
---anybody dumb enough to believe a salesman completely deserves their losses.
"after all, it would be against the interests of the bank to issue a loan that they thought had a good chance of not being paid back."
---Happens all the time though; they repossess the car, put pressure on you to make payments, take legal action to garnish your wages, and eventually get you to sell the car at a loss and pay the difference.
In your magical world, no one would have shortsightedness; but they did. Both loan officers and the mortgage borrowers.
You expect a bank to hold your hand and big brother you? Now that's a loony lefty.
"This is as much a 'threat' as me telling one of my students that if they don't start showing up for quizzes and turning in homework they'll get a failing grade. Doubtless a few them - like you - think that the teacher 'has it in for them'."
--Well now we know SoV's midset: he is the teacher, dispensing his wisdom to the world, and we are his students. Anyone who argues with the "teacher" is merely ignoring salient points and will be "failed."
Doesn't sound like any real teacher I ever had. Politcally appointed professors of fake subjects like ethnic studies, however...yes, I think we know what "courses" SoV teaches. :)
The banks lent out money that they should not have. They did this because they got rich in doing so. They did this because the right wing (that's you!) was able to get most of banking regulations removed.
Blaming the victims is easy - blaming yourselves and your nutty, greedy, racist philosophy is hard.
What you don't get by renting is THE CHANCE TO MAKE A FORTUNE IN REAL ESTATE AND RETIRE BY 50!!!!! We all know that's what drove a lot of the speculation. And we all probably have a relative or two who didn't talk about anything else at Thanksgiving dinner for the past 7 years. These people may have lived in the houses they bought, but what got them jazzed was the paper profits they were making without doing any work.
That's over, and I don't see anyone who lived through this bubble doing the same thing again.
Why not? It looks like the government is going to do its best to keep housing prices up and spread the pain out to everyone. It looks like the lesson that will be learned is you might as well live large and hope because being prudent doesn’t spare you any risk.
It's similar to buying any product. You can do the mental evaluations of how much you need the prduct and how much you can pay, and you can listen to the salesman pitch it. But the latter is not the former; the salesman's goals are not the same as your own, and if you trust in a salesman's calculations and not do them yourself, outside of illegality, caveat emptor.
I'm glad someone finally said this. Reading through this thread is painful in a way with all of the whining about how people can't figure out how much money they can spend on housing. Its not tough. Never trust a salesman to tell you how much you can spend.
Tell you the truth the old rules of thumb still worked perfectly well. I know that in certain markets most people couldn't have purchased a house with a mortgage of
Both parties were speculating. It takes two to tango.
The people making 40 grand a year buying 300K homes were speculating that the home prices would only go up. (which is what their lenders, brokers, and the media were telling them). And Greenspan said that adjustable rate ARMs are good for folks (and the financial media said he's a saint, so why not trust him?)
And the banks were making the exact same speculation. Not only in giving out liar loans and the like, but with their CDOs and CDSs measured in risk formulas that didn't even allow prices to fall.
But the banks had a fiduciary duty to be careful with their depositors money when giving out loans, not to throw caution to the wind. People took out many terrible loans, but the banks gave terrible loans, and the banks were the experts. One party clearly had superior information, but choose to ignore it. So it makes sense to apportion more blame to the banks (especially when you read about the lending practices of folks like Countrywide).
Megan,
People who lent money to bad risks made their choice and have to live with the consequences of their actions.
People should try to pay back loans, but at a point it is the lenders problem not to lend money to people who obviously won't be able to pay them back. If I lent $1000 to a crack addict you wouldn't be crying over my losses so why cry over the losses of people who did something just as stupid.
Screw them. Let them die.
No, the natural thing to do when an asset you have bought on credit falls in value is to go cap in hand to the government and beg them to buy it from you at the value you wish it had. HTH.
Posted by Tony | February 26, 2009 9:03 AM
Putting part of an assertion in capital letters does not make it true. As I noted, in a great many jurisdictions, mortgages are with recourse. Approximately 12 states are nonrecourse. Six are so-called one action states. The remainder do legally allow the lender recourse. More information here:
http://www.loansafe.org/forum/foreclosure-laws/4130-recourse-v-non-recourse-states.html
So, what you're saying in short, is that dishonesty is alright if being honest is inconvenient. Interesting ethics you have there.
Trying to look at bad loans as a moral dilemma, and apportioning blame between lender and borrower, is just wrong.
A loan is a business transaction -- not a moral dilemma. A lender assumes the risk of non-payment when making the loan should the borrower's economics change, and that includes depreciation of the asset securing the loan. This is what businessmen do every day in commercial lending on both sides of the equation -- why are home buyers in a different class when it comes to making economic decisions about whether or not to repay a loan? No one ever talks about the moral obligation of business people to repay such loans -- it is silly to treat home buyers differently.
For a loan to a home buyer, the far more knowledgeable party in assessing risk is always the lender. Your assumption to the contrary is just wrong.
Also, you seem unaware of the extent to which the big lenders (Countrywide, WAMU, etc) were giving away loans based on nothing and on properties that they knew were grossly overvalued -- heck, they were involved in jacking up the appraisals themselves. The onus for writing so many bad loans falls almost exclusively on the lenders, who were the alleged pros in doing this right, and chose not to based on short term profits and the reselling of loans into the mortgage pools.
But that onus matters little since it is not a moral question. Everyone (home buyers, lenders, Wall Street, etc) was speculating on the bubble and got burned. The consequence is a lot of unpaid loans. That is just how the creditor/debtor relationship works. That is why rational lenders don't make stupid loans -- a lot of them are not going to be repaid.
Ever hear of a little thing called business ethics?
I'm sure Bernie Ebbers, Jeff Skilling, and Bernie Madoff will be delighted to hear that.
Hmmm . . . that would explain why people do tend to dismiss you- I notice that on other blogs like Crooked Timber they are doing the same thing these days. Well, it's your call.
Luckily for me I still have my teddy bear.
I didn't bother because I'm not going trade snark for snark, or trade argument from snark
Interesting. You have plenty of time to criticise me roundly, but you don't have time to support your statement about revisionist history being wrong by definition. I assume that this sudden dropping is because you can't actually support your argument.
The point, if you want to pretend you missed it is that, like banks in previous eras, doctors have an incentive not to be deliberately wrong. wrong. Treating someone for a liver problem when they have an infected gall bladder is not necessarily actionable; treating someone for a liver problem when the attending physician knows that the problem is an infected gall bladder is most definitely actionable.
Yet despite this lack of an incentive to be deliberately wrong, they often are. The doctor who misdiagnosed me had no incentive to be deliberately wrong, yet because of his misdiagnosis I suffered through a lot of pain anyway. I don't see how you think it's relevant whether my suffering was actionable or not; I still have a strong desire to avoid such suffering in the future.
The paradigm is, in short, one acting on the expectations of self-interest.
Well that may be your paradigm. Mine is that people make mistakes for all sorts of reasons, so when the stakes personally are high enough it makes sense to check yourself. I like the story of a boy who unfortunately had to have one leg amputated, and when the doctors got him into the operating theatre and removed the covering sheet they discovered he'd written on the good leg "Not this one!".
Setting aside the fact that 'running the numbers' is just a restatement and not an argument
Firstly, a restatement can also be an argument. Just because something is said multiple times doesn't mean that it's wrong. After all, you have on a number of occasions called my arguments stupid, I don't think you suddenly now believe that all my arguments are brillant just because you've been restating your opinion more than once.
Secondly, I restated this argument because you had asked me a question I thought was irrelevant, you asked me "how were they supposed to know...", my response was that I didn't expect them to know.
This isn't hard to comprehend ...
The debate is not over whether it's hard to comprehend, it's whether it's relevant.
But since you claim you weren't being snarky, I doubt you'll have the acumen to get it this go-round either.
I'm puzzled. When did I claim I wasn't being snarky?
Sigh. More abuse of language.
The typos are a continual problem for me, I agree.
Though I suppose given the number of people who have dismissed you, it is a psychological defense against a deeper truth.
Oh cool! Free psychoanalysis! Can you also interpret dreams? I had this really weird one about the entire universe being sucked down a grating in the street once, when the scenery went down it left just whiteness beyond, do you know what that dream meant?
This is as much a 'threat' as me telling one of my students that if they don't start showing up for quizzes and turning in homework they'll get a failing grade.
And that's a threat too by my definition of a threat. Just a rather more scary one. But hey, I seldom see much point in arguing about the meanings of words, if you want to call your earlier statement something other than a threat, pick whatever word you like, and please do me the kindess of telling me it.
In the face of such intransigence, saying you're giving up is hardly a threat. But, yes, I am giving up on any possibility of getting you to be serious.
I don't mind if you think I'm serious or foolish, just as long as you think I'm right.
(Just to be clear, I have at least tried to use snark in this comment.)
The mortagage companies systematically misrepresented the risk associated with their products to prospective buyers and deliberately took on consumers who they knew to be uncreditworthy.
Now you can argue that some loan buyers were duplicious too and should shoulder some of the blame, but you're not going to be able to get to a coherent fact based argument that concludes,lenders = blame free, borrowers = guilty. Too much contrary evidence. Sorry.
You're not going to get anything serious out of Tracy, NO. She has a habit of being like this when the facts are against her. She's also rather inconsistent about who should be expected to bear the brunt of being competent, cf her expostulations on behalf of the poor investors that got taken in by Bernhard Madoff, which starts here:
Going through the thread, it seems that when it's big-money investors, people who are supposedly 'financially savvy', and can afford to hire people with vast amounts of expertise, why, it was a completely natural mistake for these sorts to trust Madoff.
Otoh, people with only a high school education, or who have training in some field not involving finance, they're supposed to be able to figure out in spite of a massive media blitz that the bank loaning them the money is just gassing them, that the institution no longer particularly cares if they pay off their loan or not. And if they can't, well, too bad, the blame is on them.
Can't you just feel the love libertarians have for the little guy?
SOV,
Perhaps you could demonstrate the integrity of showing us one ad from the last five years that said that borrowers don't have to repay their mortgages. Just one.