It is hard to believe that anybody would accuse me of trying to airbrush a story in which I recount the cringe-inducing details of my calamitous plunge into junk mortgages.
But Megan McArdle, a blogger for the Atlantic, accuses me of omitting crucial information: namely, that my wife, Patty, was involved in two bankruptcies, one in 1998 with her former husband; and one in 2007, while she was married to me. McArdle says this is "material information that changes the tenor of the story," and then accuses Patty of "serial bankruptcy."
These bankruptcies did occur, but they had nothing to do with our mortgage woes. They were both tied to old debts from before we were married or bought a house. They had nothing to do with my ability to get a mortgage; nor did they have anything to do with our subsequent financial problems.
Since Patty had been so brave in letting me tell our own story so candidly, I wanted to spare her the public exposure on these older woes. But that is now impossible, so here is the story:
The first bankruptcy in 1998, five years before Patty and I got together. It occurred because Patty's former husband, a producer of TV commercials in Los Angeles, didn't file income tax returns for five years. Patty, who was a stay-at-home mom and wasn't earning money, was blindsided. She had been signing returns, but he hadn't actually been filing them. Because her husband's business income was reported on their personal tax returns, she had to join him in the bankruptcy filing.
All that happened in 1998, and it obviously had nothing to do with the story in Busted. It never even occurred to me to mention it.
Patty's second bankruptcy stemmed from a loan she received from her sister, while Patty was still living in Los Angeles. At the time, she was caring for four children, working for very modest pay, and receiving almost no child support from her ex-husband. (Despite multiple court orders, he remains chronically delinquent on untold thousands of dollars.)
When Patty couldn't repay, her sister followed her east and sued her. I offered to pay off the loan by withdrawing money out of my 401k, but I wasn't allowed to because the purpose didn't qualify as a "hardship." Without an alternative, Patty had no choice but to seek bankruptcy protection.
None of this has any connection to our story. It had nothing to do with Patty being a spendthrift. It had no bearing on my ability to take out a mortgage, and it had nothing to do with our financial problems.
Fortunately or unfortunately, BUSTED is a simple story: we took out a mortgage we couldn't afford, earned less than we hoped and couldn't bridge the gap.
I appreciate Mr. Andrews' candor, but I disagree that this had nothing to do with his story.
- I'm not "accusing" Ms. Barreiro of serial bankruptcy: she has filed bankruptcy basically back to back, which no one is disputing. That is serial bankruptcy.
- Patty Barreiro's first bankuptcy does not merely clear past tax debts--indeed, it's really very difficult to shed past tax debts in bankruptcy. They also discharged $47,655.37 in credit card debt, $4701.10 in past medical bills, $14,303 in tuition to Campbell Hall, a Los Angeles private school, and a few other miscellaneous bills. I don't have time right now to look up what the disposition of their debts to the IRS for the 1996-98 tax years was, but I suspect they ended up paying the $70,000 they owed. Frankly, given what Edmund Andrews' says, I'm surprised they got any of their tax debt discharged: as I understand it, it's nearly impossible to discharge tax debts due to fraud.
- Patty Barreiro's second bankruptcy does not merely clear a lawsuit. The value of the settlement was $29,000. The total vale of the unsecured claims discharged was $55,313, inclding almost $8,000 for legal services, almost $10,000 in medical bills, $1200 in phone bills, $1100 owed to Comcast, and $5400 in credit card debt. If the purpose of the bankruptcy was merely to clear the lawsuit settlement, she could have reaffirmed the other bills, though of course, in practice no one ever does that--if you're going to declare bankruptcy, you might as well get a really fresh start. It's hard to fault her for clearing the debts, but the fact remains that nearly half the obligations she discharged were not part of the settlement.
- Andrews is saying that the lawsuit was the driving factor behind the bankruptcy, and that the other unsecured debts are therefore somehow irrelevant. But neither the book nor the bankruptcy filing indicate the means to clear the other unsecured claims without Chapter 7; by her own worksheets, she had very little income and their joint income was exceeded by their allowable expenses. Plus, of course, they're awaiting foreclosure now. If she hadn't declared bankruptcy, where would they have gotten the $25,000 to pay off the medical, legal, credit card, and utility bills she discharged?
- Andrews is correct that many of the debts seem to have been incurred prior to the marriage. I'm not sure what this changes. My contention was not that she somehow illegally shed marital debts--the judge had every opportunity to force him into bankruptcy if he wished. My contention was, first, that the shedding of joint and prior debts along with the lawsuit settlement looks somewhat strategic, and second, that declaring bankruptcy twice is often a sign of deep problems with financial management, and thus should have been disclosed, if only to explain it away.
- People who declare bankruptcy really are not like other people. People who declare bankruptcy twice, even less so. They have very different financial profiles from the average American--less savings, more debt. When an adverse event occurs, they have no margin for error. And, of course, it's only worth declaring bankruptcy if you've run up some pretty substantial bills; one hears horror stories about naive people declaring bankruptcy to get rid of $2000 in credit card debt or some such, and their attorneys should be publicly shamed before being ridden out of town on a rail. But the average debt discharged in bankruptcy in a Chapter 7 filing seems to be in the tens of thousands.
- That kind of living up to the edge is, indeed, exactly what Andrews describes happening in his marriage. The bankruptcies suggest that this may be a symptom of a pre-existing problem, rather than the easy credit of the past five years.
- Andrews seems to now be arguing that the Chapter 7 filings are not relevant because they didn't affect his ability to get a mortgage. But of course the article and the book is not just about him--rightly, because unless your marriage is pretty dysfunctional, it's a financial partnership. The two bankruptcies seem to reveal that one partner has demonstrated a historic inability to live within their means. So though the bankruptcies don't tell us anything about their ability to get a mortgage on their house, they may tell us quite a bit about their willingness to take on a mortgage. This decision is at least as important as the bank's. I'm sure banks would have given me all kinds of stupid mortgage loans in 2004, but I didn't avail myself of the opportunity.
On a very broad note, I don't see this as a story about the goodness or badness of Andrews or Barreiro--and I've been dismayed by some of the nastiness about her in comments here and elsewhere. Rather, I think this matters because the story Andrews told was basically about the subprime crisis, and the book casts him as a sort of everyman, lured in by cheap credit and a likeable scoundrel of a mortgage broker. That may be what happened to many, or most people in the mortgage crisis--but the back to back bankruptcies strongly suggest that this is not what happened to Andrews. That said, I think the story told with the bankruptcies included would still be a story well worth telling.
I'm a bit surprised to see this type of a post/article. Doesn't seem like the Hostess's style. This is one of those where the proximity to the facts and people in question is really the best arbiter of personal judgment. Nice way of saying I have no idea. But for something I did find curious and completely off topic here you go
http://politicalticker.blogs.cnn.com/2009/05/22/liberty-university-bans-college-dems/
I was surprised at this, because usually the 1st Amendment is treated as a gimme even in the Liberal Bastions.
Wow, first comment! Where's my can of Threadjack-B-Gon?
BTW the link is dead. CNN pulled the story. Must not be true.
And are you calling Liberty U a liberal bastion? HA HA HA ha ha ha!!!!
Really? The 1st Amendment is treated as a gimme in the Liberal Bastions, where:
speakers like Ann Coulter and David Horowitz must have armed escort when they give a speech at one of these places?
where anyone expressing a conservative view is looked at not merely as wrong but as morally deficient?
Where right-leaning professors are damn near unknown?
Where student newspapers with conservative editorials are thrown into the trash?
I think the only thing that really "surprised" you is that for once the shoe is on the other foot.
I filed for bankruptcy several times and I am now a financial guru on creditboards. Just ask me a question and I will know the answer. If you don't ask I will tell you anyway. I am hardly ever wrong. Come to creditboards and say HI!
As someone who knows about these things... The new Mrs. Andrews statement that she signed five years of tax returns is a 100% total lie. Ask her this: Every month she saw her husband deposit a check for 10 or 15 grand and every month she spent 10 or 15 grand and at the end of the year he had her sign a return stating that he had paid 12 or 15k every 3 months in quarterly tax payments. Did she ever once see that quarterly tax payment leave the joint account? My money is no. She's either profoundly ignorant or a lier.
I vote liar. If it is as they're representing, she could have filed for relief under Innocent Spouse provisions and would not have been on the hook for it. Obviously there's something else going on there, if she was not deemed eligible to do this.
That's a pathetic response for a NYT economics reporter. He somehow missed the $47K in credit card bills in his explanation? And cheap shot at her ex husband. Megan, why haven't you emailed him?
Patty had no problem sticking it to her sister, her kid's private school and so many others, who does he think is next?
Maybe you could be a little more generous since you are just speculating here. Maybe the debts were incurred after the IRS had its audit? After all if you are already living large it is hard to put on the brake -- that is kind of different from incurring debt without intention to pay back in the first place, which borders on fraud.
I find it odd that a private school and a cable TV provider would have allowed such large debts to accumulate. Both had easy ways of enforcing payment long before the debts got so high: requiring the children to withdraw (private schools are under no obligations to keep students), or cut off service.
I don't get that either. There is no way Comcast would let someone rack up that much in past due balances unless they bill was $300/month. And if the bill was $300/month, it would show further how out of control his wife is.
I suspect that at least part of the Comcast charge is probably for equipment that wasn't returned after their service was cut off. It's not unusual for a cable box to be several hundred dollars, especially if it's digital/hi-def/PVR.
Private schools can charge very high tuition in NY and LA. If the tuition was ±30k per year, that 14k could be about one semester's worth. I could see them letting you accumulate one semester's worth of debt, particularly if it's supposed to be a lump sum payment. Now, paying 30k a year for private school is a problem if your income is in the low 6 figures. But, this is a story about bankruptcy after all.
Just another example of Patty wanting what she thought she was entitled to even though she had no way to afford it. Sure, private school costs a fortune, and maybe that's the best education available in New York City, but plenty of people live elsewhere so they can make their limited means go further. I can't even imagine spending the amounts of money on certain categories that are listed here. It wasn't tax liabilities which drove the first bankruptcy filing--you can't get rid of those in court. It was profligate spending.
I'm generally very angry when the woman is blamed for the lousy financial position of the family, and in this case, there is certainly blame to go around. But, Andrew seems to be admiring when he says that Patty won't compromise on things like Starbucks. I guess it is only lesser mortals who need to "compromise" and live within their means.
Seems like Henry Blodget is as skeptical as you are in his post at HuffPo. And both of you are right. It does show that his wife doesn't know how to live within her means. I wonder if he knew about the bankruptcies before and if not, why not. How many guys would marry a woman who has twice filed for bankruptcy(You can do it in the reverse as well). Not many I'd think.
Blodget posts the guy's defense of concealing Patty's BKs, without comment or criticism. However, there is some of that in the comment section. Of course, some mouthfoamers just think it's all the fault of the Eeeeeeebil Bankers.
I'm female, never filed for bankruptcy.
Never married, so had neither the additional cushion or the additional liability of a partner's income/debts.
I also never had four children. Or any children.
Those facts are linked in all sorts of ways, with the feedback running in both directions.
Does that make me more moral? I don't really think so.
I will say this, however. I have read through about as much of the readers' commentary on Mr. Andrews' second wife Patty Barreiros on Megan McArdle's earlier posts.
As profligate and irresponsible as Ms. Barreiros was and no doubt still is, I have the uneasy feeling that the readers condemning her mortal financial sins are no doubt -
- and here let me stress NO DOUBT, because in my many decades I have served both the very poor and the very rich and everyone in between "of all races and creeds"-
just as flawed as Ms. Barreiros in one, or another, or multiple ways.
Look, who would fail to be appalled at the profligacy of, say, Dmitri Karamazov? But I think the moral of the the Andrews story is, for me, somewhat dwarfed by my horror at reading how vicious some of the comments about this woman have been.
Ms. McArdle, having exposed this woman, I think you also had the moral obligation to call out some of your readers NOT for their judgment, which is fair, but for the viciousness with which that judgment has been dispensed.
I'd like to suggest (suggest!) that whatever your religion/ethical structure is, it would probably oblige you to fulfill the other responsibility of being a writer. I'd refer back to Dostoevsky, who had his own heinous shortcomings (as I recall, he was a profligate spender and WORSE, a GAMBLER, not to mention an anti-semite) but who managed to include forgiveness for many of his worst characters. Perhaps that other responsibility in this digital age is to responsibly temper your... I don't know how to say it... but your readers who apparently cannot restrain themselves from confusing finger-pointing with a rational judgment of the facts at hand.
Just a thought.
Surely if the two bankruptcies were as innocuous and unrelated as Mr Andrews described, why would he be afraid to include this information in the narrative? As a journalist, why take the risk of cherry picking which information to include (letting the reader judge the relevance) and if caught, jeopardizing his professional integrity? Of course it's uncomfortable, but potentially relevant conflicts of interest must be disclosed lest he risk his credibility, and reputation is his (and the NYT's) most valuable currency.
Yeah, I'd actually prefer that he's being disingenuous to him *actually* believing her bankruptcies don't matter. Because if he genuinely believe buying a house they can't afford bears no relation to the fact that they owed money to her *darn sister*, it means it never occurred to them that they had any obligation to scale back their consumer desires to repay family.
The two BKs were material facts. He's claiming to be a victim of the banking and mortgage industry sticking him with a subprime. The subprime is the result of the track record--the two BKs. We live in a cause and effect world. His protestations of innocence are disgusting.
Perhaps you miss the point of McArdle's postings on Busted.
Andrews held himself and his family as an example of what many other people are going through, but left out key information that was a matter of public record (as a reporter, he should have known better,) His family's financial problems weren't typical, they were outside the norm most people are facing.
McArdle went to great lengths to show that serial bankruptcy is rare, and serial bankrupts are typically lower-income. His story is full of holes, and had he plugged the holes and written honestly, instead of half-honest/half-hiding, she would have no concern. Frequently, journalism means telling one person's story to illuminate the stories of many. In this case, the story is misrepresented, and instead of illuminating, obscures.
The point is not to attack Andrews or his wife, but to question the credibility of his work; to suggest letting Andrews story stand as representative of what other families are going through would be no different than letting Newt Gingrich speak as an authority on the importance of maintaining a marriage without disclosing his marital history.
She does practice free speech in comments, only reprimanding/banning responders for the most egregious things. But that's a reflection on the responders, not on McArdle. For this, I'm grateful. One of the best things about her blog is the diverse opinion. Instead of being all "right" or "left," where never the twain shall meet, there seems to be some real discussion here. It's not always pretty, but it's typically refreshing.
Well said, zic, especially the last paragraph. I enjoy the varied opinions of the readers. It makes the comments much more interesting than what you find on so many blogs, including another one on this very site.
Ditto, Well said Zic. I look forward to many discussion with you:)
If someone screws up their own life, fine. But the wife was trying to screw the people around her and didn't even feel guilty about it.
Nelson, you have no way of knowing if she felt guilty or not.
Did you read the part where she just wanted to sleep when her husband was worrying about not being able to pay the bills?
But it's exactly the reference to Dimitri Karamazov that illustrates what's wrong with Andrew's story. If the point of Andrews' tale is that it's an everyman tale of the kind of debt our mortgage bubble allows us all to get into, the revelation of all the details wouldn't make anyone think of Karamazov. Of all the problems that Tsarist Russia had, too much easy mortgage credit really wasn't one of them. So if the full story makes you think of Dimitri Karamazov (and I can see why: I remember how much I cringed when he took money that he was supposed to give to his father, and used it not to pay off his own debts but just to go on another bender) then, well, it's not a tale about the sins of Alan Greenspan, it's just the tale of this particular family. And that's not how Andrews is packaging his story, is it?
I'll defend the vicious readers in the comment thread. Andrews' book makes an implicit political statement and rallies readers to political solutions by eliciting sympathy from readers. His omission of facts that obviously complicate that sympathy is deserving of far worse than he got. Assume that his little sob story swayed public opinion enough to do something, and that the something effectively made credit more expensive for people who pay their bills. There would be a special place in hell for him and his wife.
Making up stories to further political goals that necessarily hurt some or many is despicable behavior. Andrews is getting what he deserves. Hopefully, it will discourage others from pulling similar stupid stunts. Seriously, if you're a screw-up, don't claim to be a victim. People won't show mercy in pointing out that you are, in fact, a screw-up.
I agree, I think he deserves equal contempt as she does, because he ignored the whole crapulous financial situation at home. In fact, he bears a greater responsibility because he writes about economics and finance. He should know better. She's just a quadromom with a track record of idiocy. That should have cued him in to exercising greater diligence.
I like Ms. McArdle's work, a lot, but for gosh sake I just wish that she would please, please try to proof herself and avoid the silly, careless mistakes in grammar and diction that consistently mar her stuff. Very annoying, especially b/c she has a lot of interesting things to say. Megan: Please proof yourself? Please? Thanx.
I wish you'd proofed this comment. (Proof: Left to ferment. Proof read: scan for grammar/spelling errors.)
Thank you.
This commentary is becoming very Malkinesque. How long before you have readers looking through windows to see what type of countertops they have?
I don't see how any of this will change the outcome of the story. They got a mortgage that they had no chance in hell of ever being able to repay, no matter if they were reckless spenders or complete spendthrifts.
From the original NYTimes excerpt: "Patty discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, Md." I.e. she chose the house. The altered version might be, "Patty, who has a history of choosing things beyond her means, discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, MD." I initially read the excerpt and thought "Guy gets hot new wife, is willing to spend himself into oblivion to impress her, borrows too much from a system too willing to lend it." Not too impressive that way, is it?
I also thought, "And now he's trying to sell a book about his story to get rich off of it. I hope no one buys it." and "Come to think of it, this guy who's judgmentally challenged has been telling the public the story of our economic situation for years at the newspaper of record. No wonder so many people didn't see this coming."
Megan,
Thank you for using your stature as an Atlantic blogger to do some reporting for a change. The media attention your getting for your scoop is well-deserved. Your posts about the Andrews affair are compelling because they offer new and relevant information on a timely topic, as most good reportage does. More of this, please. It's much more compelling than a post where you opine about the latest idea Matt Yglesias has thrown against the wall.
I support this comment - as seductive as it is to edit a story to support our favorite narratives of history, we are all better served by knowing the whole truth.
Isn't one of the essential lessons here that Mr. Andrews was someone who had excellent credit going in, and as a result of "opportunities" provided by the deregulation of the lending market, now has no credit?
There's no doubt an moral caution aspect to his second marriage, and the flaws of his second wife. And yes, I think it's entirely relevant. I don't think the biggest bubble in the entire history of bubbles was in any way independent of the inanity of modern consumer culture. And yes, it's infuriating that a Times financial reporter would be so stupid.
(Then again, I've seen men in their midlife crises do far, far stupider things - just not on the financial level, specifically because at the time of those crises (the mid-1990's), the banks would never have provided so much rope for them to hang themselves with.)
That's not to make excuses for Mr. Andrews. On the other hand, God only knows what mistakes everyone here will make in the next few years. Fortunately, because people post anonymously, we'll never have to know.
plutarchos-
Isn't one of the essential lessons here that Mr. Andrews was someone who had excellent credit going in, and as a result of "opportunities" provided by the deregulation of the lending market, now has no credit?
I've also had five people offer me the opportunity to purchase heroin- Still not an addict.
Also, I had dealt with a "Countrywide" 'mortgage broker' in 2003- he was apparently quite willing to lie about both my assets and my income to procure my business...so, I would say that the "opportunities provided by the deregulation of the lending market" simply encouraged me to pay $143K "cash" for my condo in 2005. (the stocks I sold would currently be worth about $80K...)
Have you ever went to your bank and requested a cashier's check for $143K drawn from your personal checking account? It's kinda freaky! It took "Chase" 38 minutes to give me my own money... I can only assume they were conducting some kind of remote anal probe.
Hasn't the point of this whole series been not to cast moral judgment on Mr. Andrews or his wife for their financial decisions, but rather simply to demonstrate that the premise of his book --- come listen to a story 'bout how an otherwise ordinarily prudent couple came to financial ruin because of the excesses of the mortgage industry --- is false?
I think that's a point worth making, particularly in a culture with a disturbingly large number of people inclined to blame McDonald's for making them fat.
And something that is worthy of a moral judgment is Mr. Andrews' obtuseness in bending his facts to serve his desired premise; I can't for a moment believe he genuinely concluded that his wife's back-to-back bankruptcies were not germane.
Well said. That seems to be exactly her point to me.
Wouldn't a failure to file returns for five years result in a criminal record? Why didn't the ex-husband go to prison? Or does five years of tax fraud by rich people not even result in charges these days? Anyway, criminal proceedings are public record, Megan.
I read the excerpt from the book and found it both sad and telling of the mortgage era we are now leaving. Having myself not purchased a home and still continue to rent because of not having a sufficient down payment has been heartbreaking many times. In that sense, I could relate to Andrews wanting to go for the nice house. I was shocked that someone was as willing to loan them that kind of cheddar with such a small take home pay. This to me was the crutch of his story.
What I do find disingenuous is that Patty's motivation was never fully explained. In his climax of waking up in a cold sweat on her birthday and bugging her about the debt she told him and I am paraphrasing "You were going to give me one day without talking about this." Patty was never worried about the debt or not as much because she had already gone through this process before...that is important and relevant information to the story. Without that information, we think Patty is just ignoring the issue - with it we understand better her reasoning and why she could get a good night sleep, she had gone through this before. Heck, it might have even been more interesting to discuss the dynamic. Instead, Andrews tried to make them both out to be martyrs and ultimately led us to question his credibility.
Exactly. Andrews is a weak man. So what if the IRS wouldn't call his 401k withdrawal a hardship? You can still take out the money, all it means is that you're also paying the 10% early withdrawal penalty (in addition to income taxes). 10%. He didn't really WANT to use his 401k money to bail her out, he used the IRS excuse not to do it. He wanted to be off the hook the "easy" BK way just like she did.
Megan,
I'm not surprised to hear that someone like Mr. Andrews won't dispute your claims directly, but instead went to PBS. If the Village Voice were available I'm sure he would have gone to that even more left-leaning rag. If his mother had a blog, I'm sure he would have posted his reply there.
It's important to remember that your initial post used terms like "strength" in reference to him. Although you were dismayed by the responses you received, the research that resulted is excellent.
This is particularly true in this case, where you demonstrate beyond a reasonable doubt that Mr. Andrews is lying through omission. To call his "spin" to PBS anything short of lying would be a lie in itself.
You should be proud of what you have done here.
Mr. Andrews,
Inasmuch as I know that you have read some of these posts, I write this in the hope that you are reading it:
You, sir, are the poster child for the economic problem that has befallen us. No banker tricked you, and no broker led you astray. Because millions of other people acted just like you - products of the liberal mind-set that you *still* champion (NPR? Please...) - we are now collectively facing what could become an economic calamity instead of just a recession.
This does not make you brave, it makes you contemptible.
Your selfish actions have already been discussed at my dinner table with my own teenagers and, properly, you are not represented as anything but a Jack Ass.
Tonight when the story is revised we will add "lying" to that description.
What a complete fool...
Do you feel the need to frame everything as a Democrat/Republican(or left/right) issue? Because this isn't one of those. The whole Andrews saga has been one of McArdle's best pieces by far(and that isn't sarcastic!!).
First off, I agree that this is some of Megan's finest work, and I openly commend her in my initial post.
Secondly, I want to be really clear that I didn't frame this as Democrat or Republican. At this point in time I don't see much difference between the two. Both sides pander to a "you can have it all, even if you haven't earned it" demographic.
I framed it as liberal/conservative for a simple reason: it's accurate.
The very definition of fiscal conservatism is to live within your means. If you want more, you expand your means - you don't borrow what you don't have. There are a few exceptions (a mortgage, medical emergency, perhaps a car if you're surprised when your existing one fails, etc.) but they aren't for luxuries.
Do I need to frame everything this way? Not at all. If you'd like to discuss cooking, or fishing, or home repair, or sports cars, or gardening, or any of a wide range of things I'm happy to participate and will likely not even mention political viewpoints (unless regulations creep into the conversation...)
But since this site is primarily focused on Political Economics, most of the things here *will* fall along those lines.
Why is that surprising?
What I found most dismaying about his response is that he tries to paint the sister as evil for wanting her money back. She "followed you east and sued her" while poor Patty was "caring for four children"? Really, she should have been grateful to throw her money into the Barreiro J. Crew Financial Black Hole?
The argument that "her bankruptcies have nothing to do with me!" reminds me of people who go into tens of thousands of dollars of student loan debt for degrees of little economic value because student debt is "good debt". If those $1000/month student loan payments impact your ability to repay your "bad debt" along with your other bills, what's the difference?
Yeah, I knew someone (now working at a gas station) who got a MA in Appalachian Music History!!! May as well just have spent that on lapdances.
Failure to file is different from fraud - you will almost never face criminal penalties for failure to file.
As a side note - at the time of her 1998 bankruptcy her families income was 176,000 - that is 176,000 they were not paying taxes on. I would imagine one would need an income of 275,000(ish) to have an after tax income of 176,000. So... they had 10's of thousands in credit card debt despite spending at a level that would require more than a quarter million in pretax income.
Looming in the background is that old gray lady-the NY Times-that once again sees its reputation stained by an inaccurate, misleading and politically motivated and distorted article designed to move its political agenda. So much like the old Soviet Pravda. Is it time for the NY Times to change ownership? Of course it is.
The Old Grey Lady is showing herself to be an Old Grey Hoor. I think the Big O should give them a bailout and hand ownership over to the labor union. Then it will be all sweetness and life and the Pravda days will be behind them--once again a bullhorn for objective truth.
Lest any liquids are shooting through nostrils, yes, I'm being facetious.
And why in the world does Solman feel the need to discuss your political affiliation? Did he do the same when he interviewed Andrews?
Perhaps the reason, Mr. Andrews wrote to the Newshour, instead of you, is that after reading Meghan's reporting. I wrote strongly worded email to the Newshour's Paul Solman urging him to post an update to the story. To the Newshour's credit they did so and even mentioned it on the Friday's show.
I think Mattman is exactly right. The MSM narrative on the financial crisis is that evil, greedy bankers and mortgage brokers, tricked gullible people into borrowing money with deceptive loans and cause the whole system to collapse. That is the premise of his book and it is a lie.
Mr Andrews is neither gullible, nor was tricked into borrowing money with loan he didn't understand. It is clear from reading his NY Times articles that he understood sub-prime loans, Ninja loans, CDS and the whole range of financial weapons of mass destruction long before the rest of us.
Rather the story is of his and his wife's greed and refusal to live within their means. I suspect that even if a liar loan didn't existed and banks actually exercised some diligence before handing over $500,000 loans that Mr. Andrews and Patty would have figured out some way of cheating the system.
As Meghan points out serial bankruptcy are rare events, especially for people with high incomes and no serious medical conditions (e.g. cancer or such).
Where I disagree with Meghan is we should be allowed to judge Ed and Patty as bad people or at the very least people who have a history of doing bad things. The line between stealing a big screen TV from a store, and borrowing money to buy a big screen TV and not paying it back is very gray IMO.
I estimate by the time the house gets foreclosed, Ed and Patty will have reneged on $300,000-500,000 worth of debts over the last decade. There are some real victims here Patty's sister is one. (Imagine pissing off your sister so much that she is forced to sue you across the country and than rather than pay her back you declare bankruptcy wow.). However, we are all victimized, through increase bailouts, higher taxes, and costs that get passed on to us etc like credit card fees. I figure my share of their spending is about $.05. Frankly, I rather drop nickel into a hat to buy a bum a drink than give money to these people. I have a choice not give money to panhandler, we don't have the choice for Ed and Patty, and frankly if there are a million folks like them we are talking $5,000 a piece and if it is 10 million we are in serious serious trouble.
Most bums have a least some shame about their behavior, what pissing me most about Ed and Patty is they have no sense of shame. He never said, I feel bad about not paying my mortgage cause I know my readers will end up picking up the tab.
The media is also to blame Ed and Patty are being treated like victims, they are worthy of our collective wrath of the worst CEO, AIG financial product executives, and all of the other "bad guys" in this mess.
"Where I disagree with Meghan is we should be allowed to judge Ed and Patty as bad people or at the very least people who have a history of doing bad things. The line between stealing a big screen TV from a store, and borrowing money to buy a big screen TV and not paying it back is very gray IMO."
Where is Megan indicating that we should judge Edmund and Patty Andrews as (morally) bad people or persons with a history of doing (morally) bad things? Besides, if that's your position, then where did you obtain license or information on which to say this:
"Most bums have a least some shame about their behavior, what pissing me most about Ed and Patty is they have no sense of shame."
Good for you for standing your ground and standing by your story.
And, no, the commentary about Andrews and wife is not particularly ugly. He is an educated, reasonably well-paid quasi-public figure who puts him and his family out there as victims of the financial machine.
The reality of Andrew and wife, and their deadbeat behavior to society at large is far uglier.
If he ever gets a mortgage modification, which according to his own words he is angling for, I hope they make him sign some document giving the lender recourse to his personal assets, since I think he should use whatever he makes on this book to mitigate his debts. I do not care to foot the bill for his family's errant ways. I don't mind helping truly poor people or people who get bad breaks. He is none of those things, and is dishonest and smug to boot.
Actually, my hope would be that they limit mortgage mortification to people who have otherwise displayed good financial habits, and seeming intent to avoid bankruptcy/foreclosure.
A 40-year old laid from a job and defaulting on a mortgage she's paid for a number of years is not necessarily the same thing as Andrews. I don't know how this works legally, but one's financial history and the reasons for default ought to be considered.
"mortgage mortification"
Paging Dr. Freud?
Thank you. I'm dyslexic, and that one will go down in my collection of my favorites bloopers. (It's the problem with blogging -- no copy editors.)
m-o-d-i-f-i-c-a-t-i-o-n-s.
I just cannot get over being flabbergasted by this story. What kind of mind thinks "No, you don't understand -- the second BK was to get out of repaying her sister!" is a defense? (Even if it were the whole story, which Megan points out, it's not.)
Yes, that was the detail that really lost my sympathy. If your sister lent you that much money, you ought to be really quite grateful to her. I wouldn't be surprised if it were interest-free too. It's just appalling that you wouldn't pay that back, bankruptcy or no -- it's practically an affinity fraud.
According to a commenter on a previous post here, the sister co-signed a car loan.
If that is true, then she ruined her sister's credit. For such a large amount still owed on the car, I suspect the car was totaled but there was no insurance. She could've tried to save her sister's credit by paying some of this amount due back--but it sounds like Mrs Andrews did nothing and left her sister holding the debt.
I agree, KTL, it is flabbergasting that Andrews asserts that his wife's second BK is, somehow, understandable in light of the fact that Patty's sister wanted to be repaid, making it sound like the sister is wicked and wrong. What it actually demonstrates is that Patty has been willing to use anyone, including her sister, to get what she wants.
I can have a lot of empathy for Patty, I really can. Lots of smart, educated people get caught up in the delusion in the grass being greener just up ahead. And hope springs eternal. And we are all bombarded with messages that incomes will always rise and real estate values will always rise. Lots of people got caught as Patty has been caught. And as Andrews has been caught.
But Andrews is a putative expert. Omitting Patty's bankruptcies reveals that Andrews was willing to use his reputation as an expert and his position at the NYTimes to sell a story and he calculated that the story would sell a whole lot better if he omitted the bankruptcies.
I totally agree with Ms. McArdle's point that serial bankruptcy is extremely rare. I have complete empathy for Barreiro's first bankruptcy but not her second.
I used to have a small general law practice and I occasionally represented drunk drivers. Quickly in that work I realized that anyone who got a second drunk driving ticket had a serious drinking problem because anyone, just about anyone, who gets a ticket for drunk driving (which is very serious, people can get killed, yes? not to mention losoing your license) makes damned sure they never drink and drive again because the consequences become more severe.
I am sure that a similar dynamic is true in serial bankruptcy. Most people realize, after filing once, that they have to stop doing the things that put them in a position of filing bankruptcy and then they stop doing them.
Once I handled a bankruptcy for a client. Just once. I did not like the woman, she was a casual social acquaintance and I regarded her with some distaste but a mutual friend asked me to do her bankruptcy. The mutual friend was very important to me so I agreed.
The bankrupt did not have a lot of debt. Most of her debt, however, shocked me. She was being dunned for a few thousand dollars worth of dental work that she knew she could not pay for when she had the dentist do the work. I pointed out to her that when she accepted the work knowing that she had no way to pay the dentist, she was stealing form the dentist. She cried and said "but I needed to have the work done" and I said "if you keep thinking like that, you might as well not declare bankruptcy because you are going to keep doing stuff like this". Most of her debt, seriously, involved accepting services that she could not pay for because she had already lost credit cards. Nowadays, I don't think many dentists undertake expensive work without knowing they will be paid, knowing for sure.
Anyway, here is what I am leading up to. I drove the bankruptcy client to court for her hearing and drove her home (because I didn't want her to make me late, I insisted on driving her). On the way home from her bankruptcy hearing, she asked me to stop at a computer store where she bought a printer with a rubber check. As we stood in the check out line, as loudly as I could, I asked her if she realized that writing a check that she knew would bounce was stealing and she started crying and said 'but I need a printer, I can't live without one". She was utterly unable to see that she was doing something wrong.
Patty Barreiro has an addiction around money. Andrews fell in love and enabled her. Its called codependency.
I have empathy for her addiction but she seems to have no compunction about continuing to do the things she did to get to bankruptcy court twice already. In Andrews NYTimes article last week, he talks about her spendthrift habits as if they are a charming quirk, seeming to be oblivious to the fact that using credit that he cannot pay is stealing.
And he is an expert money guy for the NYTIMES?
But willful failure to file certainly is a crime and can be elevated to tax evasion. It is not prosecuted even in egregious cases like this?
They usually just want the money out of you. You have to piss someone off or be wanted for other stuff they can't get you for (see: Capone) to have jail time put on usually.
I do not know how the goodness or the badness of Andrews or Barreiro can be removed from this story. It seems rather fundamentally to involve such things. Both of them acted clearly irresponsibly, as did their mortgage lender. Because of this many now are paying a severe price.
The real question to me that this story brings up is whether a person in a position of respect should tell this story of his personal travails to the greater public. Does this increase or decrease the stigma on such behavior? My guess is that it decreases it. He should be ashamed, and not feel free to expose himself.
I want to tell Andrews:
"I can't hear what you're saying, because your actions are screaming so loud it's crowding out your words."
"Busted" is what you get when you mate an Argentinian and a NY Times reporter. Only then are the perps the victims and in the end we "marks" will buy their book such that they will move to a bigger house bought in a foreclosure paid for with cash--ours!
As for their current house, they have now lived on our dime for the last year.
On other comment boxes, bitter men advocate getting a foreign wife so you don't get stuck with a bitter, selfish, entitled feminist American woman. Brazilians and Argentinians are praised as truly appreciating the finer things in life. I just have to laugh. The mail order bride strategy doesn't guarantee a perfect marriage to a submissive wife. Sometimes she's too good at appreciating the finer things in life that she didn't get, growing up poor. Or she ends up being a bitter, selfish, entitled feminist American woman after a while living in America. I just have to laugh.
"Busted" is what you get when you mate an Argentinian and a NY Times reporter.
I sometimes wonder if you what's happening to your comments section is happening too slowly for you to notice....
I do not know how the goodness or the badness of Andrews or Barreiro can be removed from this story.
Have you read the book? I haven't, and if you haven't, either, then it is difficult for any of us to comment on what that story exactly is.
I did see this interview on PBS: http://www.pbs.org/newshour/businessdesk/2009/05/how-one-economics-reporter-exp.html
Based upon this, it seems clear to me that Andrews is indicting himself for taking on debt for stupid reasons. He fell in love with this woman and wanted to please her, so he borrowed his way into the American dream.
He also points out that the lenders for being dumb enough to give him a loan. Two-third's of his pay was going to alimony and child support, so he clearly couldn't afford the money, and an underwriter with half a working brain cell should have seen that this guy did not qualify.
Also note that his interviews aren't an appeal to pity. You can see from his responses that he knows that he screwed up.
His wife may be a high-maintenance harpy, but it sounds as if this guy would have defaulted, anyway. He was underwater from the start, and it didn't take much of a setback to push him over the edge.
Andrews may have a point about leaving her out of the picture. If his implosion was virtually pre-destined, then she was just icing on a cake of failure. Not to say that she didn't make it worse, but it sounds as if this was a time bomb from the day that he closed escrow.
This series of threads may be turning this whole thing into a straw man. You should consider whether some of you are arguing against stuff that he didn't quite say. He's seems to be saying that his debt burden was ridiculously high from the start, and that the underwriting process was woefully inadequate -- does anyone deny that?
Borrowed his way to the American Dream? He's not a welfare recipient who mistakenly thought that he could escape poverty through borrowing. He had a six-figure income. He just wanted to live even better than that. Given that he didn't have a medical emergency and wasn't the victim of Bernie Madoff, it's hard to find a less sympathetic figure than him.
Huh? He bought a house using stated income, knowing he could not obtain a mortgage with the truth--he gamed the system so why should he blame the underwriter for falling for his trick when the author knew he was buying a house by leaving out salient information--oh just like his book--he left out salient information in order to get it published.
Also, he was not underwater--he refinanced, taking money out of his home's equity to buy who knows what--but clearly not to pay back Patty's sister. Refinancing and taking equity out is what probably tipped him over the edge--otherwise he most likely could've sold his home for what hr originally bought it for and gotten out of his mortgage completely
He's seems to be saying that his debt burden was ridiculously high from the start, and that the underwriting process was woefully inadequate -- does anyone deny that?
Actually in all the threads onthis topic over several days, I have not read anyone deny that. The bankers obviusly were idiots. Who could argue otherwise?
But Andrews also obviously knew from the very first instant that "his debt burden was ridiculously high." He admits some fault but basically blames zeitgeist and the banksters.
Essentiually he wants to argue, while telling only part of the story, "mea culpa, mea culpa, mea very minimial culpa." It doesn't wash. I think Mattman above had it spot on. The notion that "he fell in love with this woman and wanted to please her" cuts about as much ice as justification as Woody Allen's "the heart wants what the heart wants." I'll always remember the minister's words as my father's funeral "There's nothing wrong about your feelings. It's what you do about them" that you are judged on.
Not to take away from McArdle's work, but a simple Lexis/Nexis search was all it took. I'm a tich surprised no one else did this. (Although Andrews, in his PBS answer, points out that McArdle is a BLOGGER, as if that should make a difference.)
And did either of Andrews' editors (book and NYT) know what he left out?
And there's a part of me that wonders what Andrews ex-wife thinks of all this.
And not to be piling on, but McArdle didn't break the story--there was a comment on another blog.
http://rortybomb.wordpress.com/2009/05/14/nytimes-magazine-my-personal-credit-crisis/
"His wife drove her last husband into bankruptcy and when she was ordered by the court to pay $30,000 she owed to her sister, she declared bankruptcy in her name so Edmund, her new husband, wouldn’t be liable. She has kited checks and owes money to several businesses in Los Angeles including a hairdresser to the “stars”. This guy is in way over his head — between the two of them, they have seven children who were affected adversely by the divorce of their parents when these two decided to fall in love with their “soulmates” while they were both still married. The wife in fact left her 16-year old behind in L.A. to live on the streets while she honeymooned with her new beau."
To repeat my comment on your first post on this, Megan:
Thinking with Johnson.
Your subsequent reporting has only reinforced this view.
Good job.
First, let me commend Ms McArdle for important, insightful reporting and a cool, rational, convincing follow up.
Second, I want to thank Plutarchos for reminding us all that these human beings are flawed (as are we all) but real, everyday people like us and deserving of empathy, even if we cannot respect the actions that brought them to this sad juncture in their lives.
Third, I'd like to suggest that there is nothing new in this essential story--men and women fall in love, fall in debt, fail morally and financially every day, as they have FOREVER. This seems like a smart crowd; I'll bet a lot of us have read Madame Bovary. Andrews' second wife should thank her lucky stars to have landed in contemporary LA and not the 19th century French sticks!
What IS different and new are the tools with which we have allowed and even encouraged (forgive my soapbox speech, but I can't think of a better word) immoral behavior. On the one hand, Andrews is saying "if it could happen to me, NYTimes economics reporter, it could've happened to ANYONE." Then, he "bravely" puts his story out there as a cautionary tale. I believe he meant for it to be such, and that he is a smart, probably decent guy.
He is a writer, so he is trying to write his way out of debt. He is a storyteller, so he is trying to explain his story in a way that is mostly true but also makes him, the protagaonist, a sympathetic character. His wife too. He wants to make money, he wants to explain, he wants to be a hero and not be ashamed of his actions. This is normal. But the price for all mere mortals who become "celebrities" in this culture is that they and their families are then fair game for public dissection and cross examination. I pity them. Really, I do. But it is all part of the Faustian bargain they made, and they will all suffer for it. I wish them well. I also want Megan to keep digging. It is nothing personal.
Here is the Greek tragedy part: without this controversy the book would not have sold very well; with the controversy and the private pain this must be causing everyone involved, the book will make them all a lot of money. Money is easier to find than happiness.
Megan,
You started with a reasoned premise, stuck to the facts, pursued information, did the legwork and had somebody answer for their claims.
From the range of comments on here, I think you're doing your job and doing it well.
Thank you.
While I agree with KelliK, I wonder if a year or two down the road, he's writing an essay about the perils of middle-aged lust and how he was hoodwinked by his high-school sweetie, and how he should have stayed with his wife of 20+ years.
I'd be a lot more impressed and sympathetic if he hadn't tried to gloss over the unattractive bits--David Denby's book was a lot uglier.
The lesson of this entire episode- the world is filled with colossally stupid people. Andrews comes out looking like a moron before and after his financial failure.
I have put her bankruptcy filings online: 1998 filing and 2007 filing. (The toggle full screen button at the top right-hand corner of the document viewing area is useful.)
The petition lists Edmunds' alimony and support as $5000 a month, while he has reported it in his article as $4000 a month. If the latter, then according to the worksheet they were only overspending by $138 a month, not the $1138 claimed in the petition. I hope they didn't lie in the bankruptcy petition because they'd be subject to penalties for perjury.
I hope you obscured private info like ssn/license numbers, etc.; you don't need to add to their problems by creating opportunity for identity theft. Even with public records, it's not a good idea to post that kind of personal information online. You wouldn't like it if someone went & found your old parking/traffic tickets and did it.
I just checked the documents again, and whoops, my bad. Apparently the 1998 forms have original SSNs listed (I only carefully checked the 2007 forms, which only asks for the last four digits, for this kind of information.) I have replaced the Scribd document with an updated version.
Thanks for prompting me to re-check the documents.
At least she listed the golden retriever as an asset - value "unknown."
In a comment to one of the previous posts, tita said that Barriero ran up plastic surgery fees. That seems to be true. One of Barriero's creditors in the second bankruptcy was Dr. Rhonda Rand, a specialist in Cosmetic Dermatology. Barriero also discharged debts to Cedars Sinai, where Dr. Rand practices.
The more I read abouth Mr Andrews and Ms Bareeiro, the more I am reminded of Daniel Moniyhan's comment about "defining deviancy down."
i doubt that she had plastic surgery. the first thing they teach you in a residency is: get your money in full before performing any cosmetic surgery.
If Cardinal Fang is correct, then Kelli K's reference to Madame Bovary is sadly relevant.
As the bubble was bursting two years ago, a friend of mine and I re-read that novel. Scarily similar to what we saw in the last 20 years. (And weirdly, modernly cinematic.)
I'm also thinking of Edward Chancellor's "Devil Take the Hindmost" which covers the history of financial bubbles. It was written during the dot.com bubble, and kept me convinced that housing was yet another bubble. Chancellor wrote for the FT and the Economist.
One of the take-aways from Chancellor's book is that there's nothing new about Edmund and Patty. He dates the history of speculative bubbles to the Roman era.
And plastic surgery, like silk waistcoats for the coachboys, is all part of the luxury market/consumer culture.
Which is why I think it's futile to attack Ms. Barreiro (or maybe let's just refer to her as M. Bovary) as an individual. This is a lot deeper and implicates a great deal more of us than you might think.
Let me give you an example. I don't drive, because I don't think the environment can afford another car, and because if I stopped compulsively cycling and walking everywhere, I might get heart disease or Type II diabetes, which would be a drain on the system.
But until we impose demands on citizenry (possibly by restricting health care for preventable illness or possibly - perhaps more effectively - through a massive educational effort in the schools) not to be fat jerks who waste fuel, I'm as complicit as the pork-bellied pigs who employ me.
Flaubert once insisted, "Madame Bovary, c'est moi!"
which in English is, "Patty Barreiros, c'est Megan McArdle!"
I'm kidding on the translation, but the implication is the same. We all sat back and LET people drive around in their absurd SUV's with their faces pumped up with Restylane, without demanding that government recognize that such debt-based consumption was killing our economy (not to mention the harm to the environment.) So IN A SENSE, we share a DEGREE of complicity.
So I guess I shouldn't be surprised by the anger vented at Barreiro - I think a lot of readers here are angry with themselves for not having taken an earlier, more proactive stance.
Well, don't let it happen again.
And by the way, if you think this economic crisis is bad, wait, just wait, until the health care crises (yes, plural) implodes, and you realize that you've stood by while the hospitals were overrun with cases of entirely preventable disease.
Just as we should have stepped in to stop the absurd lending practices, we need to step in ask ourselves why we pay more for health care than many other industrialized nations, and get worse results.
A few reasons;
1. People from Mexico can use US health services and avoid payment. Consumers who don't pay bills run up the tab pretty quickly. (I've heard firsthand of Mexican nationals avoiding payment for things like utility bills this way as well.)
2. The people who pay a lot for health care get a lot. The US heath care system caters to wealthy foreign nationals with the capacity to pay. There are other groups in the US who, due to their lifestyle, are unhealthy. They are also poorer and pay less in health care.
3. America enforces patents allowing for drug companies to make enough money to fund research. Countries like Canada use 'collective bargaining' and possibly threats to infringe patents to reduce the cost of drugs. They attribute the benefits to 'socialism' but they wouldn't have the drugs in the first place without the US market to help cover the cost.
4. Some countries are less honest with their statistics. For instance, in the US a baby delivered live who dies an hour after birth has an hour lifespan. In some European countries, a baby that dies 6 hours after birth is considered a 'stillbirth.' This difference in record keeping skews statistics.
5. Rationing done by a private company opens that company to lawsuits. It's harder to sue a government when they ration healthcare that someone thinks would be a good idea.
6. Some have suggested that tying healthcare to employment has increased costs.
There's some sort of dysfunction when family members sue each other over personal loans. If you loan money to a friend or relative, you gotta to always be willing to lose the money if the relationship means anything to you.
That is absolutely right. For most people, too, borrowing from family members or friends is a last resort, especially when someone wants a substantial amount -- and $30K, for most, is huge. When you "borrow" so much from a sibling and then stiff her, you are seriously disturbed.
You actually seem to be saying different things -- Kolohe is blaming the sister for not eating a $30,000 loss, and jds seems to be saying that Barreiro is disturbed for screwing over her sister to the tune of $30,000.
I'm with JDS. If you lend a couple hundred, or even a thousand, yes, I might agree you should be prepared to eat the loss. Like a gift. And if you lend tens of thousands as seed capital to start a business or something, then yes, I can see that as a loss you might be willing to take -- you understand it's being put into something risky, after all, since not every business succeeds.
But lending $30,000 for what appear to be ordinary expenses? That's a loan you would expect to be repaid as soon as the debtor gets back on her feet, unless you're extraordinarily rich -- much richer than I am, certainly.
I agree -- but, as I pointed out in the other thread, something doesn't add up. Even assuming the relationship had deteriorated to the point where the sister was willing to sue, why would the sister bother, if Patty was insolvent? What's the point? The sister must have suspected that Patty was hiding money or something.
Balfegor, I agree with you but think that even a few hundred is asking too much from a relative or friend as a "loan" that both think may never be repaid. 20 bucks for beer and pizza, sure; but maybe I just draw the line differently. An anecdote: A cousin once asked me for a loan to put a down payment on a house. I told her that I would be willing, but that I would need her to sign a note (and sent her one that I'd drafted). I also made crystal clear that it was a *loan* (interest free) and not a gift, and that I expected to be repaid and would do what it took to ensure that. She declined the offer.
David, you're probably right. And I wonder if the sister made Patty sign a note. People who "lend" to relatives but don't expect repayment usually don't bother with legal formalities because they're already writing it off. People who do lend, however reluctantly, usually protect themselves.
All in all, very sad.
Let me clarify. I do not agree that you should always be willing to lose money if you "lend" to a friend or a relative. It's disingenuous, at best, or dishonest, for a friend or relative to ask for a loan when she or he wants a gift instead. I have friends out of work, or in financial straits, whom I buy dinner, or otherwise treat, or to whom I've given small amounts to get through. But when someone asks me to *borrow* -- and that's been rare, thankfully -- I always make clear that it is to be a *loan* and that loans must be repaid. That sometimes chills a relationship. But you know? If it does, then that says enough about the "borrower."
Oy.
"Imposing demands" on individuals is a slippery slope. I don't want to go there; but I'm sure someone here will jump at the chance.
I'd much rather start by refusing to subsidize the industrial food chain. If junk food reflected it's real cost, including medical costs, food choices would be a lot more easy to make. If fuel costs reflected their real cost, people might drive less and drive more efficient vehicles. The problem is, real costs also drive the cost up.
And some people are overweight because of medical conditions -- their weight is a symptom. Some people can't walk/bike everywhere. Some people have heavy loads to carry in order to do their jobs. You were upset earlier because so many people were judging the Andrews harshly; and yet you're doing the same thing to fat people and people who drive.
Zic,
you say oy, I say feh. But we're really saying the same thing. Kind of.
I'd love to start by refusing to subsidize the industrial food chain as you suggest. As for fuel costs, how about a rational gas tax that would fund public transportation? Mostly, I want to see a VERY intensive physical training program in the schools at a very early age. This would provide tremendous health care savings. Physically active kids are less likely to become involved in drugs, and yes, will avoid the budget-busting T2 Diabetes, which leads to, you got it, heart disease. Yes, a real phys ed program is much more important than those dippy SAT's, which don't actually prove you know your physics - just that you know how to check the appropriate box.
As for judging people, that was part of my point, which may not have been very artfully explained.
My point in bringing up my own complicity is two-fold: we can all get on our high horse about something. I wanted to, however artlessly, provide a pin to the anonymous blowhards who are ganging up on a single individual (the easy target of Barreiro) but who don't have to post their own credit scores, or their own complicity in this financial crisis. I thought it was useful to turn that pointer around for a moment.
In some ways, I suspect that it's their insecurity about their own situations that encourages them to attack a pretty easy target like Barreiro - instead of asking - where do I stand in this mess, and what can I do?
Again, I think it's fair to judge Barreiro as many here have, but some of the commentary on this one individual in the multiple posts on Andrew have been out of control. (Not to mention somewhat beside the point, see the straw man argument.) I'm glad McArdle took exception to some of the viciousness in some of the comments. I do feel that she should have been more explicit earlier.
My second point in bringing that up and saying "don't let that happen again": I think a lot of energy is wasted on these boards - Atlantic readers are bright people, but are they actually following up on their good ideas with political action? And I don't mean just writing letters to congress. I mean getting down and organizing fellow citizens to demand action as a group. (More effective, in my naive opinion.)
Zic, how can you and I work toward "refusing to subsidize the industrial food chain"? This is more important than picking apart Barreiro, IMO.
In some ways, I suspect that it's their insecurity about their own situations that encourages them to attack a pretty easy target like Barreiro - instead of asking - where do I stand in this mess, and what can I do?
I suspect it's less insecurity about our own situations than the fact that her behaviour, in some respects, simply shocks the conscience. And we're envious too. After all, if we were willing to live that far beyond our means and leave anyone foolish enough to lend money to us -- including our own sisters -- holding the tab, well, we'd be living much better than most of us have lived.
That depends how you define living "much better."
To be frank, as long as your are talking about shocked consciences, it shocks my conscience that you would claim to envy such a lifestyle.
Am I misunderstanding your point?
I live a very modest existence, which is healthier for me, for you, and for the planet. My small pleasures are enjoyed immensely.
My legs and heart are stronger for not driving a car. Now in my 40's, I can still outdistance most 18-year-old males on foot or on the bike. It's admittedly a small reward for all the effort, but I've learned to relish what I have while I have it. Life's pretty simple.
And I wouldn't wish to owe my sister money.
But I understand that this is probably not how most people wish to live. They'd prefer, inexplicably, to live like Ms. Barreiro, whether they come by the money honestly or not. If they don't have the money, they prefer to ENVY her, as you put it. The envy part you're talking about - I just don't understand.
Maybe a lot of the envy you say you feel is because you have, IMO, a very curious idea of what the good life really is. Seneca: "Life is long - if you know how to USE it." I'd argue that it's also rich if you know how to live it.
Andrews also obviously knew from the very first instant that "his debt burden was ridiculously high." He admits some fault but basically blames zeitgeist and the banksters.
I don't see how those points are contradictory. The larger issue here is that much of the country got caught up in this wave of excess leverage, and we won't be able to diagnose and fix it if we won't concede the sources of it.
The right-wing populists and libertarians want to attach this to some sort of spectre of evil, the next wave of Willie Horton-like figures and shady welfare queens. In reality, the sources of the bubble were rather banal. These are middle class folks with nice cars and kids in private school who want to feel like they're living the dream, being fully powered by sloppy lenders who wanted to profit from it and were very much like their borrowers.
The good vs. evil shtick is best left to TV dramas. A good economic analysis would try to create mechanisms that prevent the American dreamers and their bankers from getting out of control, because if you give them enough of a chance, they will.
The smart thing would have been to not loan this guy money in the first place. The more that we fixate on him and his various issues (I should resist the temptation to play pop psychologist, but I get the distinct feeling that this guy felt pressured to do what he did because he was marrying up and owed it to his wife, a gift from the beta male to the alpha female), the more that we avoid dealing with the systemic issues that allowed so many of these scenarios to play out as they did.
The good vs. evil shtick is best left to TV dramas. A good economic analysis would try to create mechanisms that prevent the American dreamers and their bankers from getting out of control, because if you give them enough of a chance, they will. - RW
Amen.
RW, do you have a blog? Because I'm quite sure I'd prefer to read yours...
And at the risk of inciting Ms. McArdle's sometimes rabid fans, I think BennieJetz makes two good points, the first is that this information was not so difficult to access, and second, that Ms. McArdle did not actually break this story, she simply had the pedestal of The Atlantic.com to push it out to a larger audience.
Is the story thus irrelevant? No. But as RW pointed out, it's easy to get lost in the TV drama aspect of it, instead of looking at the policies that made this possible.
RW, somehow I suspect that the left-wing cultural critics would be singing a different tune if Edmund Andrews had written a book saying that income taxes were too high and claiming that he couldn't afford to live a decent lifestyle without a tax cut, and that taxes forced him into the desperate straits in which he found himself. You'd mock someone with a six-figure income who whined that he needed a tax cut in order to live a middle-class life, pointing out that somehow the vast majority of the country makes do with much less.
And yet, because he's blaming the financial industry, you want to concede that he has a point.
I don't see any harm in blaming both.
...and the book casts him as a sort of everyman, lured in by cheap credit and a likeable scoundrel of a mortgage broker.
The mortgage broker was indeed likable in a quintessentially American way. But I don't view him a scoundrel in the least. He got paid to secure loans for real estate deals that required creativity, and a expert's knowledge of the various available lending programs. Seems to me he did his job extremely well. All the Andrews needed to do was tighten their spending a bit, and increase their income a bit (via the acquisition of a job by Mrs. Barreiro) and they would have pulled it off. Hell, as far as I know they still have the house, and Mr. Andrews's book may let them keep the house. So I wouldn't bet against their pulling it off even at this juncture. Three cheers for the mortgage broker.
Think about it. She borrowed $30,000 from her sister -- and declared bankruptcy to avoid paying back *her own sister*. Unreal. Normal people do not behave that way. Shame on them.
Yes, I agree with you, for shame! SHAME! Sinners in the face of an angry God!
Let me get the scarlet letter. I got a real desire to stitch one of those felt letter A's (or B's, in this case) up on someone's breastplate. It would make me feel better about myself.
But - more seriously - what does that have to do with the policies that allowed this to happen in the first place?
"When Patty couldn't repay, her sister followed her east and sued her." Gee, maybe that was because her own sister Patty stiffed her for $30K (and has stiffed her children's teachers, etc.). The point, which others have made, is that policies aside, Andrews's wife is disturbed -- hardly part of the "normal" story that Andrews piously portrays. I would love to hear the story of how "normal" people got caught up in the easy-credit storm. Andrews, and especially his wife, do not qualify.
"policies aside"?
"policies aside"?
You're kidding, right?
oh, that little matter of "policies"!
Too thorny to think about - let's just continue trashing the easy target individuals.
JDS, there are plenty of stories of "normal" people caught up in the easy-credit storm. There are even more stories of people crashing who never got caught up in the easy credit storm but who are paying the price- in fact, the majority of the population is now the collateral damage from those "policies" which are apparently beside the point to you.
That's the real story. This is The National Enquirer version of it.
There are no people who got "caught up in the easy credit storm." Taking out a loan is not an act of god. It isn't something that happens to people. There are only people who individually chose to take out loans they shouldn't have taken out. That is purely their individual responsibility. Not that of society, culture, or "policies."
Yes, lenders could have been more prudent; to the extent they made these loans, they were irresponsible too. We should condemn them. But that is not an excuse. Not even a partial excuse. Not mitigating in the slightest. It doesn't detract from the blame which attaches to the borrowers, and the shame they should feel.
I think everyone who wants to blame the Andrews and let the banks off are missing a critical point. There are always people who will try to get loans that they can not pay off. Some of this is fraud, some of this is individual financial incompentance. It is the fiduciary duty of the banks officers to protect shareholders value. As such, a bank must have a system for evaluating people to determine if they are worth the risk of getting a loan. This is the duty of the bank officers, it is required, it is not optional. Clearly it failed spectacularly in this case. That the Andrews were deadbeats that should never have got a loan makes this worse for the bank from a shareholders perspective. That this was not a isolated incident but wide spread across many bank indicates a systemic failure that opens at least the possibility that the entire system needs to be reworked.
The shareholders of the banks in question should be outrage that the banks made loans to people like the Andrews. Given the current state of the banks in question, the shareholders include all US citizens. I make no excuse for the Andrews but I am not a shareholder in the Andrews household. I am in the banks in question. And I want the people responsible for this fired.
As such, a bank must have a system for evaluating people to determine if they are worth the risk of getting a loan.
Well, the heart of such a "system" is called "looking at at credit report." Sure, lenders ought to look at income, too. But Andrews claims that he had a very high Fico score when he first borrowed the money. It would be interesting to get some credit-scored data on the foreclosure crisis. My guess is the incidence of default by folks in the upper percentiles of creditworthiness (say the top 10%) is pretty low. As far as I can tell there's no hint whatsoever of fraud in the Andrews story: he got an exotic mortgage because he had excellent credit, and he was subsequently able to refi because rising property values meant he had equity. It also looks pretty proper to my eyes. Even now, I suspect the potential losses his lenders will suffer if the house is ultimately repossessed will be pretty modest -- at least compared to most such occurrences -- because the property is an an area where high demand and low unemployment have helped prop up property prices.
Again, I keep coming back to the thought that, by the standards of what was apparently becoming typical in places like Riverside County, California, the structure of the Andrews mortgage loans was pretty non-crazy, non-risky stuff. I view this far more as a commentary about the foolhardiness of one particular man than I view it as a commentary about the unsustainability of America's housing binge.
That simply is not true. He never had enough cash flow to cover payments. To give him a mortgage is crazy, it is crazy risky. That he and many like him got mortgages is evidence that the whole real estate debt binge had entered a stage three Minsky cycle.
That his FICO score said he was eligible to receive a mortgage is clear evidence that FICO scores are a massive fail. FICO scores were adapted because it allowed people to OK loans without really doing the due diligence they should do. There are part of the systemic failure that needs to be redone. It is not just FICO scores, financial 'innovation' relies on the assumption that financial risk follows a normal distribution. This has been adapted wholesale even though Mandelbrot proved in the early 60's that financial risk does not follow a normal distribution. But Mandelbrot and due diligence makes finance hard, FICO scores and normal distribution of risk makes it easier. If we had allowed finance to be hard, then finance would never have been as big has it was the last 30 years. We could not have that now could we.
Well, the banks *were* making good loans (albeit ridiculous ones) to awful borrowers, and thus serving their shareholders, if home prices always rose and the banks were able to foreclose and sell the property. So you could even make money in a foreclosure or short sale.
Why would anybody firmly believe that home prices would never fall? Just ask any mortgage or finance professional. A core belief is/was that the entire US political system is stacked to prop up home pricing. The government would do absolutely anything (for starters, cut rates) to stem any slide and keep the bubble going. It's doubly compelling -- political gold (helping homeowners, increase homeownership, are all core sound bites) and delaying any painful day of reckoning. Which politician would bite the bullet and pop the bubble? This construct is not dissimilar from another key assumption everybody takes for granted -- US treasuries are always going to be the AAA-rated, gold-plated riskless asset.
So while the lending banks were irresponsible, they were acting rationally right up until the point where nothing could stop the bubble from bursting. The moral hazard created by our political system, Dems and Repubs alike, was fundamentally underpinning the actions of *all* real estate market players. You have to kill the notion that the government will bail out soured risks for people to abandon these types of risk-taking behavior. Yet Bush and Obama both perpetuate this bailout assumption. On the other hand, by putting the solvency of the Treasury at risk, Obama is laying the foundation to pop the decades-long bubble in US Treasury risk.
Boy, reading McCardle's site is really visiting an alternative universe. First, this thing with Andrews wife and two bankruptcies is a huge non sequiter to the point that Andrews book makes, which is that yes, he and she made some big mistakes and certainly in his own case he should have known a lot better. But the fact that she had two bankruptcies in her past probably meant that if the financial system had been sane in 2005, Andrews and Barriero, and probably millions of others, including most of the people in the states of California, Arizona, Florida, and Neveda should not have gotten a mortgages but for the fact that the persons handing out the money ceased for moment to care about whether it was repaid. The mortgage broker may have been a fine fellow and knew what was doing, but he certainly had no interest in whether Andrews and Barriero paid off the mortgage. The bank/lender issuing it and then packaging it up and selling it off through securitization no longer had an interest in whether it was paid. Only poor saps in some Norwegian village or in a Hong Kong apartment who were sold Mortgage Back Securities as "safe" as Treasuries, but with slightly higher interest had an interest in that repayment, but they were suckers. It is loans like this that Minsky pointed out as evidence of the last phase of the credit bubble, the "Ponzi Finance" stage, since it depends on the price of tulip bulbs or houses going up indefinitely since there is not enough income to pay off the interest, little lone the principa. But for you free market ideologues, the idea that the markets are inherently unstable and at times irrational (which is to be expected since, like Soylent Green, markets are ultimately people (their collective decisions), who can be irrational individually and even more irrational in a crowd)is a heresy against the true faith.
Free markets are to blame? Excuse me? When for decades the Fed just kept the printing presses going, making money appear out of thin air with no production and sweat behind it, playing fast and loose with the money supply, partly to aid bankers meet their legal obligations in being forced to lend to uncreditworthy borrowers...the FED is NOT the free market! That is government intervention as its deepest level and hardly anyone is discussing that. It is corrupt as all get out. The Fed allows the gummint profligates to direct the new money to their high-influence cronies who get more bang for the buck on the front end. Inflation happens when the money supply is increased. Prices rise later as the excess money starts circulating in the economy and demand goes up. The whole UNFREE market house of cards is falling down and not a minute too soon.
@RW May 23, 2009 3:16 PM
"I don't see how those points are contradictory."
I agree, I don't think they're contradictory either. The real estate-construction-mortgage banking--securitization industrial complex is reposnsible for launching the weapons fo financial desrcution onthis country, nor Andrews.
But Andrews and Barreiro are 100% rsponsible for Andrews and Barreiro. He's trying to pass the buck. It might work out financialy (after all, he's lived 8 months without making a mortgage payment), but in the court of public opinion, not so much.
RW I suspect my political preferences are similar to your's but I think you are creating a strawman here. It's not a policy discussion. The usual suspects who rave about the liberals have largely been ignored. Relatively few people on this board are trying to draw conclusions from this one case about TARP or lending regulation, nor absolving the lenders from almost criminal complicity, cupidity and stupidity.
If you recall, McCardle's original post was not about the broader policy issues, it concerned how socio-educational upper middle class folks in some professions (e.g. journalism) often don't have incomes that match those of their socio-educational peers who havbe chosen more lucrative careers. I think most of us have taken the string of posts in that spirit. Andrews tried to sell a story of his foolishness and victimhood ante the enablers and pushers of financial self-destruction. It might not be a bad story -- though again I'd be leery of making policy on that basis -- but Andrews and Barreiro are not just anyone, he hasn't been fully hoest and forthcoming about the story (because to do so would make the couple less sympathetic and probably hurt book sales), and their irresponsibility and lack of self-control would seem to extend beyond the financial realm. Lots of people have car accidents, sometimes those are at least partly caused by the cars' mechanical deficiencies. It's a lot harder to blame the latter when the driver was a chronic drunk who was speedin while headed in the wrong direction on the highway.
He's trying to pass the buck.
How do you know that? (And that's not a rhetorical question -- if you have a source that shows him doing this, feel free to provide it. I haven't followed this guy's saga very closely, so you may be right.)
Based upon his interview on the PBS News Hour, I didn't see that. What I saw was a guy who was basically saying, "Can you believe that someone like me did this to myself? Can you believe that these bankers let me get away with it?"
I'm frankly incredulous myself. I know many people who took out mortgages who had no business getting them. Many of those who haven't failed have basically gotten lucky; they are not far from failure, and a prolonged downturn will push many of the lucky ones over the edge.
My background is in finance, and it doesn't cease to amaze me how many basic rules were rewritten by the financial system. Basic common sense stuff was just thrown out the window. Absolutely mindblowing, it's as if decades of institutional memory was erased.
And if the Wall Street devotees would be honest with themselves, they would know that the core motivation to lower the standards was the false belief that they could be hedged through outsourcing. Eventually, when the outsourced parties didn't fail, they got greedy and stupid and actually kept this badly structured product for their own portfolios.
This guy is a symptom of the problem. His story may be tainted, but it still exposes the nasty underpinnings of a flawed underwriting model. At this point, the details of his drama are becoming a distraction.
Guan-- go back and cross out the kids' names! And the account numbers. Have some sense.
I'd be happy to, and i'll get to it very soon. But keep in mind that these documents are available to anyone with a credit card. And the ability to navigate the horrible user interface of PACER. Hm, okay, I guess they were pretty safe before I came along ;-)
And she stiffed the LA Public Library for $83.00. That's it! I'm disgusted, and I have nothing good to say, so I'm done.
Okay, I have one more comment. Remember www.savekaryn.com? The TV producer chick who set up a website to solicit donations to help her pay off her 20K AmEx bill? She did it, wrote a book, donated the same amount to charity, got the book optioned as a movie, wrote a novel, lather/rinse/repeat.
I find her more honorable than Patty B. and Edmunds. She blamed no one but herself for her debt, and she got herself out of it (admittedly with the help of total strangers). I don't see that happening here.
Might be pointed out that the TV producer "chick" (if we're thinking of the same person?) didn't have multiple children to provide for.
I'm not excusing the Andrews/Barreiro household in any way.
But if you "don't see that happening here", there are probably reasons.
1) with seven children (am I right on the number?), they're not yet out of harm's way
2) the time it took for that "producer chick" to do all that was over the course of a few years
Lastly, Barreiro, for all her noteworthy faults, never asked to be dragged into this. Is she honorable? No, but seeing what Guan has done in posting information related to the family, I think McArdle has a responsibility to rein in her followers.
Has Guan created a liability for the vaunted "Atlantic" through his actions?
Plu,
How can publishing publicly available documents create a liability?
And how can I have created a liability for The Atlantic or anyone else?
I chose to redact some of the information, after this was suggested by zic and BennieJetz, to raise the bar for anyone who might want to abuse the information. But it's publicly available online to anyone with $5.44 in fees that I paid to get these records. You don't even have to visit a courthouse. And it's well established that you can publish court records like these.
Mine wasn't a rhetorical question, it was an actual question.
Has Guan created a liability for the vaunted "Atlantic" through his actions?
No. 47 USC 230 is wonderful. (And, of course, everything he posted is true.)
As for not asking to be dragged into this, one presumes that Andrews didn't come home on release date and say, "Honey, you'll never guess what I published today!" (Though the family is dysfunctional enough that, who knows?) One assumes that he told her what he was doing and she didn't object.
Does it apply to minors? I could not tell from reading it; but their names are generally shielded without their parents permission.
True, Karyn didn't have any kids, but wouldn't their well-being be more of an impetus to get a job, or at least find a way to pay their school fees? Lots of mommies work, you know.
And as Barreiro has been sitting in on these book tour interviews, I'd say she's in it up to her eyeballs. Public documents are well, public.
Since Patty had been so brave in letting me tell our own story so candidly, I wanted to spare her the public exposure on these older woes. But that is now impossible, so here is the story:
Dude: you wrote a book about your pesonal finances. This reminds me of how Joe Wilson was shocked when a journalist found out his wife worked at the CIA after he went all over the national media talking about the trip to Niger she sent him on. Great job keeping things quiet and "covert" there, buddy.
The first bankruptcy in 1998, five years before Patty and I got together. It occurred because Patty's former husband, a producer of TV commercials in Los Angeles, didn't file income tax returns for five years. Patty, who was a stay-at-home mom and wasn't earning money, was blindsided. She had been signing returns, but he hadn't actually been filing them. Because her husband's business income was reported on their personal tax returns, she had to join him in the bankruptcy filing.
This is confusing. If he hadn't filed them, her name being on the return seems like a moot point. Plus, I'm fairly certain she has legal recourse against him here. Bankruptcy sounds more like a convenient option due to her other problems.
If her past bankruptices had nothing to do with their recent problems then OJ beating up Nicole Brown had nothing to do with him eventually cutting her throat.
Bennie,
Of course it should be more of an impetus to get a job - I absolutely agree.
But I thought that the question you were asking was why weren't these people giving the money to charity. My answer was simply: because there isn't any money yet, and they have much greater liabilities (children are one huge expense, private school or not) than did Karyn(?)
But yes, by all means, Barreiro should absolutely be working.
In the long run, perhaps Barreiro could serve a useful educational purpose, as did Karyn, through an open discussion and facing of her faults. And maybe that will be done through the book tour. Good luck to them.
I am just grateful not to be in their shoes. Yes, people here will say I didn't make their bad decisions, and that's why I'm not in their shoes, but you hit a certain age and you take the sum total of the stupid things you've seen men and women do, ESPECIALLY the people who claim not to ever do stupid things, and you realize that people are not exactly rational.
And the fact that people are not exactly rational is why, as Adam Smith argued, there needs to be a reasonable level of regulation in the markets. In the case of the lending markets, I think it's pretty clear that all sorts of gates were left open, which led to some ruinous results - not just for these people - but for all of us who are vulnerable to either inflation or deflation post-bubble.
Along similar lines, there's a reason Richard Posner changed his tune and wrote "A Failure of Capitalism."
Oh that's not what I meant. I meant why didn't Andrews and his wife look for another way out of her dilemma rather than file a 2nd time? Stiffing a sibling seems extreme. Karyn donated to charity the same amount as people donated to her, after she paid off her debts.
"Oh that's not what I meant. I meant why didn't Andrews and his wife look for another way out of her dilemma rather than file a 2nd time?"
Totally agreed.
"Stiffing a sibling seems extreme."
Fully agreed. It's beyond extreme.
"Karyn donated to charity the same amount as people donated to her, after she paid off her debts."
Right, the operative expression there would be: after she paid off her debts.
These people aren't even close to that stage, right? I don't know if they'll ever reach that stage, but it sounds like they're trying to dig out.
In the MEANTIME, there's the issue of the brady bunch plus one. So, I wouldn't hold your breath. Seven is a lot - even if you're just giving them top ramen and second-hand sneakers, you've still got to sneak in some vegetables, etc.
My point, and I do have one, was that Karyn dreamed up a scheme to pay off the debt, rather than declare bankruptcy. Patty B. didn't bother. (The first time may have been out of her control or under protest, but the 2nd time--she's been there, done that, and bought the J Crew t-shirt.)
His 3 kids live with his ex, her older 3 don't live with her, so there's not a lot of day-to-day soup making.
In his recent statement, Andrews said that "Despite multiple court orders, [Barreiro's ex-husband] remains chronically delinquent on untold thousands of dollars."
The numbers certainly may be higher now, but according to the 1997 bankruptcy filing, the amount of child support the ex-husband owed was $14,000. That's a fair amount of money, but it's less than the amount Barreiro borrowed from her sister -- money Barreiro herself was "chronically delinquent" in repaying, despite a court order. By now at least two of the kids are over 21, so there probably isn't additional support owed for them.
This really does boil down to people living way beyond their means, and buying a house they had no business buying. Maybe Andrews squarely acknowledges the non-mortgage overspending in the book, but he quickly brushed it aside in the Times magazine excerpt in the section about J. Crew and gourmet cheeses.
The bank should not have loaned him the money, but he had more information about his and his wife's situation than the bank did, and he should have stuck to renting.
Here's another reason why the bankruptcies matter, particularly the second one:
It speaks to his wife’s earning power. Here’s how he describes the chain of events leading up to it:
"At the time, she was caring for four children, working for very modest pay, and receiving almost no child support from her ex-husband. (Despite multiple court orders, he remains chronically delinquent on untold thousands of dollars.)"
And yet, he had dreams of Patty making enough money to bridge this $3,000 monthly budget gap—in other words, earning a $100,000 salary and taking home $5,400 a month.
http://monogamoney.wordpress.com/2009/05/22/edmund-andrews-the-missing-information/
Unfortunately, I was caught up in the housing bubble when buying my second house circa 2004. I purchased the house with a 5 yr ARM and it finally sold in 2008 at $10k below my mortgage. Along with realtor fees ($7500), property taxes (about $4,500)and paying a mortgage for 6 months--I paid a hefty stupid tax. However, I didn't blame Quicken loans (see post: www.gijanefinances.wordpress.com)for arranging the loan. Being in the military with a security clearance, was enough motivation. I also like to pay my debts (credit score: 775). Never filed for bankruptcy. But, frankly I was pretty distrubed over the first article w/o knowing about the bankruptcies. The bankruptcies help but in context why Patty was not concerned. Now, I can further understand what dynamic led to the situation they are in.
edit: "put" in context why Patty was not concerned.
I too have been bothered by some of the seemingly mean-spirited jabs at Andrews and his wife. My first, second and third instincts were to be grateful for his candor, because we damn well need it. But that's just because I'm a bit slow, and hate when others judge me too quickly.
Then I saw how Mr. Andrews claimed that Ms. McArdle's phone was busy (presumably along with her email). Then I saw the obfuscation about his wife's bankruptcies (great job, Megan). Then I read his claim that his wife's two bankruptcies didn't cross his mind when writing a book about their financial unraveling. Really? Never, Mr. Andrews?
If the Andrews Family had just been a sob-story interview in some newspaper or in Money Magazine or wherever I would say that McArdle et al had gone too far. Let's not pull any more Joe Wurzelbachers.
I've had financial troubles in the past that I'd care not to talk completely about, even though it's nothing particularly embarrassing. But it's my right to do so: I'm not asking for your money. But if you want to make your living as a lap dancer then you can't do it in a body suit. Mr. Andrews isn't telling us his story, he's selling us his story, and that comes with a certain obligation to reveal all of the relevant details. In his case not just a moral obligation but a professional one.
And regarding the mention of politics, I think it's perfectly relevant to wonder why he has chosen mostly left-wing venues to air his story in. The accepted storyline of the left is that this financial mess was caused by greedy, predatory lenders and their Republican lapdogs in Congress, with no mention of CRA or mass immigration or illegal immigration or boosting minority homeownership rates, and Mr. Andrews seems to have tried to fit his narrative right into that groove.
Well said.
". But if you want to make your living as a lap dancer then you can't do it in a body suit."
That's a great line.
And regarding the mention of politics, I think it's perfectly relevant to wonder why he has chosen mostly left-wing venues to air his story in. The accepted storyline of the left is that this financial mess was caused by greedy, predatory lenders and their Republican lapdogs in Congress, with no mention of CRA or mass immigration or illegal immigration or boosting minority homeownership rates, and Mr. Andrews seems to have tried to fit his narrative right into that groove.
Is this in response to me? I don't necessarily have a problem with news articles or opinion pieces being prefaced by a political disclosure; what annoyed me about PBS is that they did it for Megan but not Andrews.
You'd mock someone with a six-figure income who whined that he needed a tax cut in order to live a middle-class life, pointing out that somehow the vast majority of the country makes do with much less.
Funny, I had thought that voicing my suspicions that Mr. Andrews may have a massive inferiority complex that motivated him to pursue his relationship wasn't exactly kind. But hey, what do I know?
Nonetheless, your outrage sort of misses the point, namely that while it's entertaining for you, it does absolutely nothing to remedy the system and how it failed for the rest of us.
Default rates are never 0%. Some level of failure is normal. Lenders have to accept that some people won't pay, for whatever reason, and budget and price accordingly.
When defaults lead to systemic collapse, then you know that the problem was ultimately caused by the **system**. A bank that implodes when a few percent of its borrowing pool can't pay as agreed just wasn't much of a bank.
From an economic standpoint, I am indifferent about this one couple. This sort of household will always exist in some way, shape or form in a society with millions of people, and pretending that you can prevent financial crises by eliminating is naivete to the n'th degree. You can stuff them to the gills with morality lessons, Bible study and morning prayer, and they will still exist. That's just how it is.
I can't fix these two people or others like them. But I can push our overlords to prevent the banks from making too many loans like these in the future. Since the banks can't regulate their own behavior, we'll just have to do it for them, whether or not they like it.
This is just the Serenity Prayer in action. Change what you can, accept what you can't change, and have the wisdom to know the difference.
Stiffing a sibling seems extreme.
A few months ago when my deadbeat brother paid a visit I "lent" him $60 for gas to get home. He hasn't paid me back. I didn't expect him to. But there are very, very few people in this world who could lend their siblings over $20k and not expect to get it back, and I doubt many of them are reading this thread. Ms. Barreiro's sister has no need to explain why she wanted her money back. None at all.
But I can push our overlords to prevent the banks from making too many loans like these in the future. Since the banks can't regulate their own behavior, we'll just have to do it for them, whether or not they like it.
No, what we need to do is eliminate their ability to offload risk onto institutions (like FNMA, etc). A lender that approves a loan needs to be required to keep that loan on its books, unless the lender itself is bought out.
The banks have to come to the realization (or us for them) that there is, more or less, a fixed amount they can earn from consumers in the form of interest. That amount, in the US, isn't going to grow much faster than the economy. At the height of the bubble 41% of profits were being earned by financial institutions as opposed to companies who actually, you know, make stuff.
I'll bet Patty has put Eddie on P*ssy Probation for dragging her name through the mud.
How utterly relevant. And what that has to do with the policies that allowed this type of lending to take place is obviously a lot less interesting to you.
Welcome to Megan McArdle's blog. Sigh.
RW you make some good points. I haven't seen any comments that disagree that there was a systemic failure with all involve in lending that allowed Ed Andrews to so easily over extend himself.
However, I think you and others are deluding yourself if you think regulation and better overseers alone are going to stop the problem.
There are also needs to a shift in the media in particular and society in general view on people Ed and Patty. They are contributors to this mess and also responsible like mortgage brokers, Wall St. lazy regulators etc.
If Ed interviews started out with I did a really stupid foolish thing, and I am truly sorry that I contributed to financial crisis that I more than most people understood and reported on, I'd have a small measure of sympathy. Instead, the only remorse I get from him, is that he is sorry his gamble (his words) didn't pay off. In the absence of his confession I expect the media to point out the problems with his tale, much like Meghan did. They didn't, instead he was a portrayed as victim, admittedly not a purely innocent victim but the underlying theme is somebody should have prevented him from getting in over his head. IMO the primary responsibility for doing that is Ed and Patty, especially considering his job.
More ever none of the interviews have even bothered to point the harm Ed and wife have cause society as whole 300-500,000 in unpaid debts.
Clearly the way he obtained loans is outrageous. However, a guy making a $120,000 with good credit can generally afford a $500,000 house with 5 or 6% mortgage. Even if the much stronger lending standard in place today were in place several years ago, I think Ed could probably have gotten a loan. All he would have had to do is simply lie about his alimony/child support. I think it is naive to expect that every bank would spotted that he omitted his child support. Now I don't know for a fact that Ed would have have lied on a mortgage application, I do know millions of people have and nothing in Ed and Patty's past behavior suggest they are above such actions.
In order for our society function, there needs to be basic understanding that when you borrow money you pay it back. Not doing so should earn you more than just a lower FICO score. It should also earn you society's scorn, much like Ed and Patty are getting on this forum. Now obviously there are extenuating circumstance, lay offs, deaths, medical emergency, none of which apply in the case of Ed Andrews.
Instead of scorn, all too often what we see is when people to bad things they are rewarded with fame, and book or movie deals.I think this is outrageous, and harmfully to society in the long run. This is pretty good article on the subject. http://www.csmonitor.com/2003/0529/p14s01-lire.html. I am not going to be buying Ed's book, and urge other not to.
Good point. And far more successfully argued than the McArdle fan who wrote about Ed's being on "pussy probation."
I suspect that folks at Chase read at least the original article, and probably (by now) have heard what James Frey -- I mean Ed Andrews -- left out. Eight months in arrears. What a deadbeat. Andrews should probably expect a call quite soon.
I didn't see much of this sort of thing prior to 2000, and I would imagine that if someone had tried to sell a book like this one in, say, 1990, sales wouldn't have been much - if any - above double digits. So what changed?
You seem to think it was the character of the people taking out these loans. I disagree. I don't think such a sea change in the character of my fellow Americans in just ten years is even possible in the context of the events leading up to the housing bust. But given if you suppose that there has been a change in the way people behave, what do you suppose caused it? I can't think of a plausible candidate here either.
I don't know that character changed. What did change was incentives to commit fraud or to take on more debt than people could handle. In the 90's, home prices were fairly stable, so there wasn't much reason to lie on a mortgage app or take on a $2000 mortgage payment on a $2500/month salary.
When home prices started going up 25% a year or so, that changed - there was a huge financial incentive to buy as much house as possible, so you could sell it for a profit a year or two later. And because prices kept going up, if you wanted to buy a decent house, you had to stretch things. Incentives matter.
The other thing if people did lie or stretch themselves financially in the 90's, it would have gone unnoticed - they could sell their house for about what they paid for it and move on, because prices were stable. Only after housing prices crashed did people realize how far people were stretched.
They are contributors to this mess and also responsible like mortgage brokers, Wall St. lazy regulators etc.
Here's the issue. You believe that the crisis that we face is that some people don't make their payments.
That isn't it. Non-payment is to be expected. Banks are in the business of dealing with defaults, just as insurers are supposed to be able to manage their claims. Failure is a cost of doing business.
The real problem is much worse that that: The banking budgets that are supposed to exist to cope with non-payment were inadequate. Woefully, wretchedly inadequate. The cushions that are supposed to be there to deal with rainy days were not.
Americans may live from paycheck to paycheck. Guess what -- the banks have been, too.
The banks resemble their borrowers in many ways. They have been woefully undercapitalized, sloppy in how they used their (which apparently was actually my) money, reckless in how they conducted their businesses. They set themselves up to fail because they lowballed the risk.
Unlike Mr. Andrews, the banks are supposed to be regulated. They are, in effect, an extension of the Federal Reserve because most of our money supply is really produced by them in the form of debt. We need to deal with them.
There will always be an Andrews family out there somewhere. It is our job to have a banking system that can handle the likes of the Andrews family.
If you don't believe that's possible and that the banks are too weak to tackle a middle-class, white collar stiff and his suburban wifey, then we should terrified of having these bankers anywhere near the controls of the economy.
We should then take that revelation to its logical conclusion by accepting the bankers' gross ineptitude and nationalizing the lot of them, turning them into a government utility staffed by low-wage workers whose greatest ambition is leaving the office on time. If the state of lending as you think it is, then banking should become something more similar to the DMV than to a trading desk.
Now, personally, I would prefer to regulate them. But if this is to be a two-option universe of either letting them run amuck or else seizing them, I would go for the latter in a heartbeat, because they can inflict far too much dmanage to let them have that kind of license if they are incapable of dealing with something as predictable as a defaulted loan.
They clearly aren't capable of self-regulation without a lot of guidance. We should have learned from the 19th century that when banks are allowed to screw up, they will take full advantage of the latitude. Of all the parties in this, I know which one worries me most.
"Here's the issue. You believe that the crisis that we face is that some people don't make their payments."
I am quite sure if the number of people paying their mortgage had remained at the historical levels (roughly 98-99%) we seen over the last 25 years, we wouldn't have much of crisis. Banks profits would have remained at high levels, no need to bail out various banks, and AIG wouldn't have had to pay off on all of CDS insurance policies. Do you disagree that people not making mortgage payments are at the heart of the problem?
Now if you want to argue that reason we have all these mortgage foreclosures, is because banks, and shadow banks, Wall St. executives were greedy, stupid, incompetent and were regulated by outdated rules, which weren't enforce, you will get no argument from me.
I'd even concede that financially institutes are the primary bad guys.
My point is that better oversight of financial institutes is a necessary but NOT SUFFICIENT condition to avoid a future meltdown.
If people walk away from this crisis, with the attitude that hey not paying my debts isn't such a bad thing we are in trouble. When society starts accepting that you have no moral obligation to repay debts, then those of us who are position to lend money are going to stop doing so, and/or demand every higher premiums. It is the same reason, I want to live in society where people don't steal or drive 120 MPH on the freeway, not just because they are afraid of the consequence if they get caught, because it is harmful to a society as a whole.
Now quite frankly there isn't much we can do to stop this. But the one thing we can do is shout BS,when some guy claims he is victim, when clearly is not.
I wonder if Ms. Barreiro's sister sued because she knew Patty was going to file bankruptcy anyway, and wanted to get a claim on some of the payments to 'keep it in the family'? Did the sister get any money back at all?
I believe Mr Andrews wanted to come off as someone intelligent who was naive and got caught up in things that went over his head, but honestly, his wife's bankruptcies make the couple look like they were deliberately gaming the system to try and take advantage of it--the fact they can't pay their mortgage now means they have free rent--the fact they were able to obtain a mortgage meant they could refinance, take money out and spend--money they could've never received without obtaining a mortgage using false information. Was that really naivety or was it calculated from a woman who would deny paying a library $83 or stiff her own sibling of a considerable amount of money? I find it unrealistic her sister wouldn't have asked for payments vs only a lump sum. This couple could rent a beach house for $1600/month but not afford to give that money to his wife's sibling to help pay her back something when she helped out his wife when probably nobody else would?
I hate to say it as I don't know this couple but it makes them look pretty bad. I don't want to judge all who file bankruptcy as many do because of a change in circumstances, but I would guess that not many actually stiff libraries or their own flesh and blood in their bankruptcy filings. At best, that is just tacky--at worst, it goes to show a mentality of not having to pay anyone back regardless--in one case it's just the bank that services the mortgage which some might laud, but on the other hand, they view their bank the same as they view a public library and a sibling--as creditors? It's hard not to pass judgment and be critical of someone who withheld vital background information that is relevant to shaping the perception of the characters in his non-fiction book.
This is all typical of the all too frequent incompetence and unreliabilty of the NYTimes. They hire incompetents from top (Robinson) to buttom (Andrews.) I am afraid they will not survive another two years as an independent newspaper.
How do you know that? (And that's not a rhetorical question -- if you have a source that shows him doing this, feel free to provide it. I haven't followed this guy's saga very closely, so you may be right.)
Based upon his interview on the PBS News Hour, I didn't see that. What I saw was a guy who was basically saying, "Can you believe that someone like me did this to myself? Can you believe that these bankers let me get away with it?"
"Bob's solution was...", "Bob came to the rescue," said with a sneer, etc. These didn't strike you as him trying to pass the buck? I felt the entire News Hour piece was him trying to lay the blame at the feet of his mortgage broker.
I would guess that not many actually stiff libraries or their own flesh and blood in their bankruptcy filings.
Please understand that bankruptcy law requires you to list ALL your debts, because all creditors must be treated the same in bankruptcy.
You can choose to reaffirm and pay debts after discharge if you want.
Please understand that bankruptcy law requires you to list ALL your debts, because all creditors must be treated the same in bankruptcy.
Not according to the Obama administration.
I can understanding listing all of your debts but you can select which debts you do not want to have discharged--I'd be curious to know whether or not they ever paid back the library or made any attempt to pay back the sibling. Someone else noted the $63 vet bill that was discharged--which was probably just shots. That vet bill did not have to been included in a bankruptcy filing--the petitioner had to give that information to his/her attorney to include those as debts.
If I'm filing for bankruptcy and submit all my debt information--oh, and I receive a $63 veterinary bill, I can choose to just pay it (and not have it mentioned in my bankruptcy) or I can choose to include it.
I want to add that I have a library card with the LA Public Library. When I lost a couple of books--they offered to let me replace the books with any 2 books I might already own, rather than pay for replacements or fines. The public library will work with you if you are willing.
I guess. Why not just pay the library fines?
Hi--I went to let them know the books were lost and to pay and was told hey, do this instead. I was a college student and had unread books that I could easily donate to the library.
I did not inform the library the books were lost because my sister and I would borrow a bunch of library books each week and take them to a homeless shelter for a group reading hour and then return them to the library--one week we noticed we were two books short of what we brought. It was the only time we ever had a problem with borrowing a bunch of books for the homeless shelter from the library.
Apparently some municipalities will jail you for non-payment of library fines (yes I read drudge). So they were wise to kill the claim through the bankruptcy process.
Also the other creditors would be upset if she selectively paid off some debts but not theirs. That's called a preference and the law prevents that.
I can understand that but her fines were to the LA Public library which I have had first hand experience with and they do not jail you for non-payment. If you lose a book, you can replace it with another book in good/new condition--it does not have to be the same book. Many libraries also have a program to have kids/teens read off fines rather than pay them. I'm assuming though because of the high fines these were lost books because they have a cap on the late fines.
I point this out because if Ms. Barreiro had just asked the LA Public library about these fines, let them know she couldn't pay them, they would've worked with her. She could've mailed them books (I know, I mailed books to return the LA library when I was out of town). This is one of the most lenient and nicest libraries out there and I find it hard to conceive that they would not assist her--not unless she didn't ask them in the first place.
I am quite sure if the number of people paying their mortgage had remained at the historical levels (roughly 98-99%) we seen over the last 25 years, we wouldn't have much of crisis.
This mindset is exactly the problem. The banks aren't supposed to just reserve for the average or the peak, they are supposed to manage for the big dip that occurs at the bottom of cycles. They are supposed to adjust that forecast for all of the massive mistakes that the lenders were making with leverage, which were sure to make this worse when it inevitably imploded. When you violate basic rules of finance in your approach to your business, then you must expect that the cyclical decline will be worse than what would occur in a normal recession.
Managing for the average is the corporate equivalent of living paycheck to paycheck. The world of business is not a static trendline, but a bumpy road with strong highs and nasty lows. If you aren't prepared for the bumps, then you aren't prepared at all.
My point is that better oversight of financial institutes is a necessary but NOT SUFFICIENT condition to avoid a future meltdown.
If that's true, then we need to nationalize the banks and keep them that way. What you have made is not an argument for free markets, but for the failure of free markets.
Banks should be able to manage through declines. Declines happen, they are a normal part of the business cycle. If they can't handle them, then they really aren't banks.
"Bob's solution was...", "Bob came to the rescue," said with a sneer, etc. These didn't strike you as him trying to pass the buck?
No, it's just illustrating how poorly the lending system dealt with these issues. The system was all about sales people and fee generators, and not about gatekeeping.
The banks are supposed to be more sophisticated than the norm. As stewards of the economy, they should know better. Obviously, they don't know better. This just illustrates how critical regulation and imposed standards will be if we are to create any real reform.
RW,
What, if anything, do you think Andrews' book adds to our knowledge of irresponsible banking? We knew they were idiots before he published it (that's why they needed trillions in bailouts), and their idiocy in lending him money seems less severe due to his high FICO and high income.
After reading this whole tale, my sympathy is with the kids. I imagine they must be mortified. I feel bad for these teenagers growing up without an adult in the house. Sure, lots of kids have flakes for parents, but seldom do they have their affairs aired out publicly.
RW,
Since it's all so obvious, what regulations and imposed standards are necessary for real reform?
There's a pretty enlightening comment at Steve Sailer's which suggests that Andrews is both smarter and more Alpha than he seems. I agree with it, okay maybe not the last sentence, but the rest of it:
Perhaps the "nebbishy" Mr. Beta Male knew exactly what he was doing by writing this book and leaving out all the wifey details. Perhaps he knew (Joe Wurzelbacher, anyone?) well that some people would dig deeper and ask the pressing questions. He's a reporter, for goodness sake. So, for ruining his life, he pays Wife #2 back by writing this book, telling her that baring some of their souls will re-establish their financial future together, then watching as the media turns into a pack of wolves - going after her.
If that was his motive then it's absolutely brilliant. Better than an angry, tearful "you ruined my life" any day of the week.
Beta male my ass. This man's our new Iago. He's got cojones. Hell, I'd sleep with him, and I'm not gay.
Well, here is Clark Hoyt's response to Andrews' omissions.
Also included in the above opinion piece is a discussion of something that should rile up every single taxpayer in California. No wonder the damned state is bankrupt.
As for the omissions themselves, consider this- Barreiro was refusing to pay the debts to her sibling while she and Andrews were spending freely. There can be no real doubt that this was the real reason it was omitted from the story- it made them look very, very bad. As a result, Andrews is now telling us that he offered to pay the debts from his 401K, but I don't really believe him any longer since he apparently made no effort to pay with any other funds that he and Barreiro were spending.
And Hoyt buries the lede! He never says if Andrews' editors knew about the bankruptcies and agreed with the omission. McArdle didn't "attack" Andrews, at least to my way of thinking. She investigated his story, and added some pertinent facts. Why am I not surprised that Dean Baquet signed off on the story?
I agree--he left it out cause it makes them look less like naive schmucks and more like greedy heartless folks. To spend money on a summer rental or clothes at J Crew while not paying back a sister something is pretty bad.
Aside from burying the lede, I thought it was revealing that even the Times acknowledges Andrews was "burning" to write the book to make gobs of money. Shouldn't the editors have flagged that as an obvious conflict of interest? If this was Wall Street, Eliot Spitzer would have the gulag ready for them.
And it was revealing how hoyt characterizes mcardle as having "attacked" andrews, trying to smear her as another right wing blogger (ie the nutjobs) instead of acknowledging her thorough, reasoned, researched, and balanced perspectives on the andrews issue. Perhaps it would be easier than acknowledging the Times' own defective quality control.
Ombudsman is a tough job but this fellow hoyt is just whitewashing for his buddies in the newsroom.
Then how do you explain the fact that for many, many years, this was the case. I would say that, historically speaking, the facts do not support your assertion.
How many years? Historically speaking, financial systems melt down; and yet, we always place our faith that this time we will fix it once and for good. And it hasn't actually been that long since the last failure- only about 20 years.
I would argue simply that the rot starts right at the very beginning of the restructure because we assume we have now fixed the problem, and that no one need worry about their financial assets because good regulation is on the job. That is the flaw- people blindly believe that their risk is zero.
Unless we want to do maturity matching in investments, and make fraudulent any deviations from such matching, the system is going to catastrophically fail from time to time- it is built into the very foundation of the system. Of course, we don't want to do this because it is so much easier to believe in good-regulation fairies, assets that never decline in value, government insurance against all losses, and lenders of last resort.
This comes back to another point that doesn't seem to be made often enough - if banks don't have any special expertise with assessing risk, what are they being paid to do? Why don't people just make their own decisions about where to place their money, under the mattress, or in the Kroenke Group for real estate development, or in Bob's Big Burgers hamburger stand?
Perhaps I'm mistaken, but I'm under the distinct impression that people put money in banks because they think their money won't get frittered away, in fact, might even have a modest(extremely modest) return. But if banks can't be trusted to do that, or don't have any sort of special expertise in these matters, why are they even allowed to remain in business?
Maybe they should be allowed to stay in business because the VAST MAJORITY are well run. Only a small minority got in trouble over bad mortgage practices. Even some TARP recipients, like Chase, only took money because they were pressured to do so and did not need the money.
With a few exceptions, the leaders in crappy mortgages were mortgage banking companies that simply borrow money, make mortgages and sell the mortgages into the secondary market through the likes of Fannie Mae and Freddy Mac.
By the way, using your logic, why have we allowed Fannie Mae and Freddy Mac to stay in business, while we're still shoveling millions and millions into to them to keep them afloat ? They make badly run banks look like a bunch of absolute geniuses.
What really strikes me about this article and the following comments is that everyone wants to blame someone. Blame the bank, blame the spouse, blame the government, blame anyone but themselves.
My husband and I were living on one income and supporting 3 children. We were looking at houses in early 2003 and looking for a mortgage at the same time. We had offers for 0 down mortgages, various ARM's, conventional...you name it!
I am a housewife with a GED. My husband is a truck driver with a high school diploma and a year of college. We sat down with our regular monthly expenses and realized we would be screwed if we ever had anything happen to raise our payments or lower our income. We realized we couldn't afford a few of the houses we really liked because making the monthly payments would be difficult with other expenses. We could do it, but one weeks overtime lost would doom us. So, we bought a small home with a 30 year fixed rate. If we could figure this out, don't tell me educated, or even uneducated,people had no idea what they were getting into when they became "victims" of "predatory lending".
Bottom line is that if you signed your name on a loan document without some serious forethought and caution, you have no one to blame but yourself.
MelBel,
That's all well and good that neither you nor I took out absurd loans.
But you're missing a very important point.
The fact that deregulation allowed such absurd lending to take place now puts the rest of us - our savings, our incomes - at risk.
Human stupidity will never go away - I'm sure even though you claim only to have a GED, you might have picked that up in your working years before you became a housewife, as you put it.
Defense against the general lack of reason is why, as Adam Smith argued, every economy needs a certain amount of regulation.
Remember the Gramm-Leach-Bliley Act of 1999? Or the Commodities Futures Modernization Act of 2000?
Those ellminated important safeguards against the nutty behavior of people who weren't as smart as you. And sadly, most of America is made up of irrational people.
If you don't believe me, try this: For decades we've understood the link between inactivity, obesity, and heart disease. And yet have you looked at the general population lately?
Similarly, we've known for decades of the link between global warming and carbon emissions. And yet look at what Americans choose to drive.
Think about it. A healthy regulation is essential to keep all of our savings safe. And that was taken away.
Yes, and for regulator-in-chief, let's appoint the bureaucrat who presciently saw the housing crunch coming and was willing to both fight Wall Street fat cats and the mom and pop homeowners to put an end to the great evil of rising home prices (which drove the irresponsible lending). What's his or her name? The person who wanted to pop the bubble. I can't recall, I must be going dotty.
No, human stupidity never will go away. Regulation won't change that. We look to the government to supervise us and then we complain we have no freedom. So, we were given deregulation and the fredom to make mistakes. Politicians made mistakes, banks and other lenders made mistakes and along came the average American to join the fray.
The mistakes made by all brought down our economy and rippled out quickly to the rest of the world. What do we do instead of overhaul our system? We start throwing good money after bad and play the blame game.
I think this collapse is a good thing and was necessary if we, as a society, are to ever learn. And if we refuse to learn and continue to play the blame game, we deserve what we get.
I do believe you,Plutarchos, but I also believe in "tough love". The only way we will learn and evolve as a culture and as individuals is if we are allowed to make massive mistakes and have to suffer the consequences. All regulation will teach us is that the government will look after us like little children and that we have no acountability.
What, if anything, do you think Andrews' book adds to our knowledge of irresponsible banking?
In part, it illustrates that the problem was not confined to swarthy dark skinned people in bad neighborhoods, as many on the right would like to contend.
The banks were very quick early on to blame the poor. That was a distraction meant to deflect the view away from the core issues of rotten underwriting and inadequate capital that occurred with respect to all income and class levels.
Since it's all so obvious, what regulations and imposed standards are necessary for real reform?
Given the excessive leverage and inadequate capital, it's fairly clear that over the long run, we need less leverage and more capital, along with more checks and balances that are meant to reduce systemic exposure to people such as Mr. Andrews and his wife. There will always be some Andrews families out there, and others will be transformed into them, but we can have enough capital to deal with it.
This comes back to another point that doesn't seem to be made often enough - if banks don't have any special expertise with assessing risk, what are they being paid to do?
They have the expertise, but they chose not to use it. Here's the thing that the right doesn't want to admit -- they lowered the bar and overextended their capital because it was profitable in the short run to do so. The banks weren't forced into it, they chose to do it.
Regulations are needed to restrain the impulse to chase short-term profits at the expense of long-term stability. A bank doesn't fail in a vacuum, as does your local sandwich shop. They are part of the monetary system, so they require more oversight.
I wonder if Ms. Barreiro's sister sued because she knew Patty was going to file bankruptcy anyway, and wanted to get a claim on some of the payments to 'keep it in the family'?
If you really want to think badly of her, then you might consider the worst case scenario that the whole thing could have been a scam.
When filing bankruptcy, it helps to have as many creditors as possible and to owe as much money as possible in order to get a good cramdown on the debt.
I can't speak to their individual circumstances, but one might consider the possibility that the loan was actually a plug put on the books in order to shrink the payoff amounts of the other debts that were owed to "real" creditors.
The fact that something that wasn't an arms-length transaction was part of the filing should have you wondering about what was going on. It may have been a genuine effort by a family member to help, but it may also have been a dodge meant to simply pay the other creditors less money. A forensic accountant would always be suspicious of obligations incurred and monies paid to family, because it's hard to verify how legitimate they are.
Perhaps the "nebbishy" Mr. Beta Male knew exactly what he was doing by writing this book and leaving out all the wifey details. Perhaps he knew (Joe Wurzelbacher, anyone?) well that some people would dig deeper and ask the pressing questions. He's a reporter, for goodness sake. So, for ruining his life, he pays Wife #2 back by writing this book, telling her that baring some of their souls will re-establish their financial future together, then watching as the media turns into a pack of wolves - going after her.
I could be missing it, but I honestly don't see him as a particularly sympathetic character, and I can't see how his story puts him in a particularly positive light. To be blunt, he came off as what some would impolitely described as "whipped," and pretty dim for a guy of his background and position. He's not scoring points with the guys down at the bar or with the ladies with this one.
This looks like a Hail Mary meant to produce some much needed cash. He exposed himself to all of this attention because he had no choice, short of filing BK.
"This looks like a Hail Mary meant to produce some much needed cash. He exposed himself to all of this attention because he had no choice, short of filing BK."
So, by BennieJetz's reasoning, Andrews is actually taking the virtuous path by trying to do something - anything - no matter how desperate - in order to avoid bankruptcy.
Just like Karyn, the TV producer chick.
Maybe Benniejetz is right in applauding Karyn? And in that case, maybe the people condemning Andrews should be applauding his resourcefulness. It would be par for the course for the weirdness level of the entire story.
As for Peter's bringing up the Iago aspect, I have to admit that, although off-point, it's novel. And if you've watched a certain number of actual divorces, it is kind of frighteningly possible. (The literary divorce that comes to mind is "A Disorder Peculiar to the Country" wherein a husband and wife in the process of a divorce each believe in the hours after 9.11 that the other has been killed in the WTC - and each is absolutely elated.)
And that's always possible. The PBS commenters aren't buying it, nor are the NYT readers.
I just read the transcript, and wondered how all the fuss might impact his big plan:
EDMUND ANDREWS: We are now seven months behind on both the primary mortgage and the second piggyback loan that we've got on the house. And I am in discussions with the primary lender, JPMorgan Chase. You know, I'm trying to see if they'll see their way clear to a loan modification.
It strikes me that we have yet to hear from the sister or the wife. Given their situations they will probably only speak for money. Which means this will continue to play out over several cycles, making one really bad reality show.
Anyone want to take bets that the "stress" will lead to divorce, with half of the book income going to the wife?
Like many a bitter man I've known in the throes of divorce, there's always a point where they bark, moan or gargle: "LET HER TAKE HALF - I just want OUT."
Which is probably one of the healthier things I've heard anyone say in the throes of divorce.
I would suggest that the social lie that everyone needs to marry and reproduce is as dangerous as the social lie that everyone needs to buy a house.
Now you folks are just piling on. Andrews's response, along with his original piece, make clear that they are the victims. Shame on their persecutors. Shame on her sister for lending a lifeline, then expecting Patty to keep her word and pay her back, then pursuing legal options when she got stiffed. Shame on the State of Maryland for enforcing its traffic laws, expecting people to show up in court, and enhancing fines for scofflaws. Shame on Patty's lawyers for expecting to be paid for the work they did in defending her when she stiffed her own sister. Shame on Starbucks and Whole Foods for gouging well-meaning plain folks who just want to eat. Shame.
jds,
Your point is well taken, and we all recognize that these people made ludicrously poor decisions that impacted others.
I think we all get that.
But is the solution then, to continue to castigate Andrews and Barreiro, which would seem to accomplish nothing except the puffing up of MelBel and others (who, for their good decisions, should have reward enough, or so they would lead us to believe) or is the solution to restrict such outrageous lending practices - which put us all at risk, even the majority of us who didn't take out such loans?
I'm stumped by the apparent inability of many of the readers here to connect the larger problem of deregulation within the lending market to the suffering of people who DID make good decisions.
The information about Patty Barreiro's bankruptcy filings should have been mentioned, but it seems to me that the lack of this info is being used in a way that is designed to obscure/discredit the larger point. And what is that point? It is simply that at the height of the housing bubble, brokers/lenders were more than happy to cast underwriting standards aside and make loans that -- absent a continuing inflation of the bubble which would allow for serial refinances -- buyers could never reasonably expect to be able to repay.
Was Patty Barreiro someone who liked to spend money on things beyond her actual means? It seems clear that she was, and that there was a good deal of friction (disclosed by Andrew Edmund) over this issue. But suppose Patty Barreiro never spent a single cent at J Crew, or that Andrew Edmund had disconnected his home cable/internet/phone service. Would they then have been able to pay their mortgage, put food on the table, keep the lights on and pay their water bill, property taxes and meet other basic needs? I can't see how. Regardless of Patty Barreiro's habits, the question of getting into trouble with the mortgage they were allowed to take out when they never should have been able to qualify in the first place was a question not of "if" but "when". And that's the bottom line. As I said above, the only way this was going to work was if the value of real estate continued its climb and Edmund/Barreiro and untold thousands of others had been able to serially refinance at favorable rates, drawing money out of their ATM/house each time.
We had mortgage products that never should have been offered. Low doc. No doc. Stated income. As long as your FICO score was above 640 (which is a low score really), you were golden. Fog a mirror? Get a loan!
Don't let the Patty Barreiro bankruptcy issue obscure the larger point. We had a toxic culture of debt and it was the poison that allowed many families to live a lifestyle beyond their means. This toxic culture of debt is what was used by both financial interests and the government to mask the fact that the expenses of living have far outpaced the wages and salaries of the vast majority. And this toxic culture of debt is the status quo that our government (through the bailout of banks and Wall Street) is pushing us to return to.
It was a mess. It is a mess. Don't get distracted from that point.
Pluto, your point is well taken too. I don't disagree that the real debate needs to be about whether, and to what extent, regulation is the answer to preventing in the future what happened. I'm just saying that Andrews -- and his wife, who's been appearing on tv and is hardly "unwilling" -- has done the debate a real disservice. (He's also done himself a disservice, given that his lies of omission seem to have led loads of folks to say they won't buy the book. Check the Amazon reviews.) In any event, it's difficult, maybe impossible, to find defenders of Andrews and Barreiro at this point, so I'll move on.
Historically speaking, financial systems melt down
That's really inaccurate. Between the time that we began active management of the financial system after WWII and the Reagan era, we hadn't seen the sort of massive banking and financial failures that were common to the pre-New Deal depressions of the 19th and early 20th centuries, and that we have seen and are about to see recently. (Stay tuned, though, the bank failures are going to be happening as soon as the FDIC has the staffing and has had a chance to broker sell-offs of the failed institutions.)
The more that we deregulate the banking system, the more problems that causes for us. The Reaganauts pushed the deregulation of the industry in the 80s, which soon led to the S&L crisis. We then went on to deregulate securities and failed to regulate aggressive loan products, which led to this current mess.
There is a real reluctance on the right to own up to what they've done. Blaming the borrowers is really a shell game meant to keep the plebeians from seeing the big picture, but that tact has about as much credibility as does blaming the dog for eating your homework.
To think that the likes of Citicorp could be felled by a housewife with clothes horse tendencies is either preposterous or frightening; neither position should make us warm and fuzzy about empowering the financial companies any more than we have. If the banks are truly that weak and forlorn, then we may as well just transfer our financial system over to the post office.
So, by BennieJetz's reasoning, Andrews is actually taking the virtuous path by trying to do something - anything - no matter how desperate - in order to avoid bankruptcy.
I don't know the specific rules that may be unique to Mr. Andrews' jurisdiction, but in most locations, a personal bankruptcy will only stall a foreclosure, not prevent it. Other debt can be discharged or restructured, but the home is going to be lost.
He doesn't want to lose the house. If he is behind in his payments as he claims, then he's going to need money to avoid losing it. In the meantime, he will probably try to use the promise of book royalties as an inducement to negotiate a modification.
(Oh, by the way, in answer to your earlier question, no blog just yet. But thanks.)
Sorry, did I read something wrong? You implicate Reagan's policies in the S and L crisis (fair enough) but you don't name Clinton in this crisis?
With all due respect, and I say this as a born-and-bred Democrat, I think this crisis is rooted in two acts that Bill Clinton signed into law, specifically:
1) Autumn of 1999: The Gramm-Leach-Bliley Act, which repealed essential provisions of Glass-Steagall, specifically the provision that had separated commercial from investment banking.
(Please note that the consolidations made legal by Gramm-L-Bliley had actually been occurring throughout the Clinton Administration.)
2) December 2000: The Commodities Futures Modernization Act. Not housing related, but housing linked, as it helped to inflate the overall bubble.
A quick addendum to my previous comment...
It was not my intention to excuse a financial reporter from "the newspaper of record" or his wife from any responsibility in this particular instance. Andrew Edmund and his wife were beyond all doubt living right on the edge of the possible where absolutely everything from an income for the wife which was beyond the median household income for the United States to the continued inflation of the real estate bubble to the ability to serially refinance/draw out cash at favorable rates had to go exactly right in order to prevent their house of cards from collapsing. Edmund surely should have known better (and he likely did) but when you're in the midst of the madness, the madness is often hard to see.
The culture of toxic debt reminds me of nothing so much as addiction. Yes, the addicts have personal responsibility. But they also have dealers encouraging them to try that first hit, and thereafter offering them more and more up to the point that they are bled dry. Alcohol, heroin, cocaine...and creative finance. Not so different. The big guys make the bucks, the dealers get a cut, and the users are left to pick up the pieces.
So you recommend more capital plus undefined "checks and balances". That's somewhat like prescribing bed rest and lots of fluids regardless of the illness. Was the problem with risk weighting of assets? With loan loss reserve methodology? Accounting of trading assets compared to available for sale compared to held to maturity? Too much reliance on exotic capital instruments? Were the requirements too procyclical? Simply too low, and if so, what would be high enough and why? What "checks and balances"? Balanced against what? Checked by whom? Details matter. Unless you have a clear and specific idea of what worked and what didn't, you can't hope to fix anything. "Regulation" is not an on-off switch.
The "Reaganauts" pushed disinflation in 1979? They pushed the Depository Institutions Deregulation and Monetary Control Act of 1980? How did these affect the banking and thrift industries? Were they more or less significant than Garn-St. Germain in 1982? Did you support the CEBA in 1987? Weren't FIRREA and FDICIA sufficient to ensure that another S&L crisis wouldn't happen? Should we go back to the way things were before Riegle-Neal? I'm sure you're against Gramm-Leach-Bliley. How did this contribute to the current crisis? Which securities were deregulated and how? How would you have regulated "aggressive loan products"? What is an "aggressive loan product"? How would this have affected the availability of credit for households? How is it that banks around the world have managed to fail in the current crisis without having "aggressive loan products"?
I have been wondering why this latest piece of info bugs me. Sure, sure, the dishonesty of it all, and the barely-veiled testiness of Andrews's reply. But then it dawned on me as I was walking Synvester, the family dog. Even though the couple was a "unit" by the time of her second bankruptcy, even though that baggage was fully part of their joint life together, they kept it all separate so that . . . now HE could declare bankruptcy! I think they're going for a record -- three family bankruptcies within ten years! Yippee! Spend! Vacations! Pricey cheeses and bottled juices! Plastic surgery! J Crew! And then . . . pass the bill to the rest of the suckers in America, who pay through higher prices or difficult loan terms or higher taxes! The joke's on us all, not to mention the people who turn to the Times expecting integrity.
And now, his absolute imperviousness to having a learning curve. He seems entirely unreflective about causes and effects. As long as he keeps blaming "Others" there will never be a solution for them. They need a good Dave Ramsey Great Awakening.
What is an "aggressive loan product"?
If you have to ask, then we are in serious trouble.
A high LTV loan is, by its nature, aggressive. It leaves no cushion for a decline in asset value, while simultaneously lowering the bar that has to be hurdled for borrowers to take on debt. Low down loans also don't encourage the discipline that is gained in the process of saving for a reasonable down payment. A no-down loan is clearly more aggressive than a 20% down loan, Finance 101 tells us this.
Variable rate debt is also by nature more aggressive. It produces an unpredictable payment stream for unsophisticated borrowers, effectively turning Everyman into an interest-rate speculator. Not only that, but the lower rates that are inherent to variable rate loans most of the time ensures that more people qualify for these than comparable fixed rate loans. Another obvious issue; the fixed rate loans that were the norm for decades in the US fell out of favor because fewer people qualify for them by design.
Negative am and interest-only loans are even more aggressive. That should be fairly easy to understand.
This situation is begging for Occam's Razor. The more leverage, the higher the likelihood of default. The more unpredictable the payment, the higher the likelihood of default. The less hazard borne by the originator, the more product that the originator will originate, because he becomes driven by fee income instead of portfolio risk, which results in more of these financial time bombs being assembled for public consumption.
This is stuff that I learned in my first several months working. There is no magic or mystery here, just basic finance that was the cornerstone of banking for decades before the ideologues decided that they could reinvent basic algebra. And for those to whom there is a mystery, they don't belong in the profession, because something this simple shouldn't be difficult to fathom.
I think this crisis is rooted in two acts that Bill Clinton signed into law
You can blame both parties, but philosophically, these changes were made thanks to the rise of conservatism. Some of those changes were sound, but on the whole, they took it too far.
About the question of partisan blame:
I'd suggest, and I think Will Bunch has already argued in "Tear Down This Myth", that Reagan was not nearly the conservative bogeyman that liberals have tried to present him as. But Bunch's real point is that Reagan was not nearly the conservative die-hard that conservatives have tried to portray him as.
Agreed on all your other points, thanks for presenting them so well.
Yes, these evil Republican subprime products, this dastardly riding the edge of traditional lending practices, ought to be outlawed and the lenders gibbetted.
Let there never again be a mortgage extended in America to a waitress/waiter (little reported income), a cash retail business operator (your neighborhood bodega), or retirees no longer drawing a regular paycheck.
These products were risky. There exists no riskless transaction. These types of mortgages were created to serve a purpose. A knee-jerk, know-it-all shut-em-down response ignores the real beneficiaries of, yes, looser lending practices.
The system went out of control, and the taxpayers have ELECTED officials who have opted to foot the bill, so perhaps your outrage should also extend those damn voters.
In part, it illustrates that the problem was not confined to swarthy dark skinned people in bad neighborhoods, as many on the right would like to contend. The banks were very quick early on to blame the poor. That was a distraction meant to deflect the view away from the core issues of rotten underwriting and inadequate capital that occurred with respect to all income and class levels.
I don't think many people (if any) were trying to blame the whole mess on "swarthy dark skinned people." They're just arguing that a key ingredient in this meltdown was pressure by both most of the left and some on the right (including George W Bush and HUD Secretary/Now-Retiring-Senator Mel Martinez) to boost minority homeownership rates. We've been hearing it for years - decades even - that blacks were less likely to get loans than equally qualified whites (and presumably Asians), even though default rates were already higher for blacks than for whites.
For the 'swarthy, orange-skinned' Angelo Mozilo of Countrywide, the politically correct line that minorities aren't treated fairly by lenders was a way to boost his mortgage business. So we debased our lending policies in order to make homeownership accessible to everyone, and that led to the housing bubble and the resultant mess.
The current mess isn't all the fault of minorities, but political pressure to boost their rates of homeownership (and to win that "growing Latino vote") were a necessary ingredient. The ethnic rent-seekers are sand in the gears of the American economy.
"The ethnic rent-seekers are sand in the gears of the American economy."
I'm sorry, I read the rest of what you wrote with interest, but didn't understand in the least what you meant by that last sentence.
"The ethnic rent-seekers are sand in the gears of the American economy."
Did you mean the white ethnics rent-seekers running Goldman Sachs? Like Lloyd Blankfein, who got 10 billion from TARP and 12.9 billion from us through AIG?
Or "swarthy" ethnics like Vikram Pandit at Citigroup?
Or WASP-y ethnics like Andrews?
Or, or.... let's face it. There just aren't enough black and hispanic people to blame this mess on.
I'm sorry, I read the rest of what you wrote with interest, but didn't understand in the least what you meant by that last sentence.
I meant, quite simply, that life is not fair; that disparity is real; that it is not caused by injustice except of the incorrectable, cosmic sort. Ethnic lobbyists like La Raza, the NAACP, MALDEF, etc. are going to continue claiming that this disparity is the result, is de facto proof of, de jure or de facto racial discrimination.
Sand in the gears is micromanaging an employer's hiring and firing policies based on some perceived notion of ethnic or gender balance - "too many men, not enough blacks."
Sand in the gears is telling a bank that their lending policies have to result in 13% of their loans (or loan dollars) going to blacks if blacks happen to be 13% of the population.
Life isn't fair, disparity is real, and it doesn't always favor the supposed majority. Jews are overrepresented in almost every well-paid profession, even though they're a religious minority. Asians are only 12% of California's population but comprise 37% of UC students, including 43% of UCLA. We're going to have to learn to accept this and live with this disparity or else deal with the messes caused by misguided efforts at correcting the incorrectable.
wjalden,
What I find interesting (coming myself from the non-white ethnic group you referred to that is part of the new majority at UCLA), is that I only hear your type of complaints from white people, and only in reference to "rent-seeking" done by blacks and hispanics...
(You also seem to ignore that the numbers for "whites" has been slipping at some of the UC departments - POST elimination of affirmative action. How's THAT working out for you?)
... and all the while you seem to conveniently ignore that rent-seeking is not restricted to the definition you provided.
and in fact the greatest rent-seeking currently ongoing is through TARP, TALF, PPIP.
But since the people receiving that aid are white, except in very few cases (see Mr. Pandit) it doesn't seem to disturb you. It apparently doesn't even get included in your definition of "rent-seeking."
Not mentioning TARP, etc doesn't mean denying their existence. You're really just being absurd.
And the stockholders benefitting from that aid may or may not be ethnically representative of the overall population. We really don't have any way of determining that.
Just because I did not mention rent-seeking by economic classes rather than ethnic-classes neither means that I deny their existence, nor accept them, nor endorse them. I do not. My post also did not decry global warming, Somali piracy, or the excessively high cost of quality porn. Forgive me.
Allow me to also say how reassuring it is to know that if I ever lose all physical ability to communicate that have you to read my mind and share my thoughts with the world.
RW,
The banks are supposed to be more sophisticated than the norm.
Granted. But aren't financial reporters for the NYT "supposed to be more sophisticated than the norm"? This is the guy who was the paper's go-to reporter on covering this exact stuff, and he couldn't see that his own mortgage involved liberal application of magic pixie dust? It's unclear from the NYT Magazine article how he imagined it to be even possible to come out of this thing unscathed, let alone likely. Maybe the book is clearer -- but I am no more buying this book than I would OJ's.
plutarchos, wjalden1,
Do either of you have stats to hand on "minority" (Black/Hispanic; as with college admissions, Asians in this discussion always turn out to be honorary whites) vs. white default rates? This bit from wjalden1 --
-- seems the nub of that matter to me. If there is racial discrimination in lending -- that is, if a white (or Asian-American, or whatever) candidate gets a loan where a Black or Hispanic (or whatever) candidate who presented a similar actual risk of default, so far as the lender could tell, didn't -- then the members of the first group who qualified, having been held to a lower standard than the members of the second group who qualified, ought to have defaulted at a higher rate. Has anyone actually shown that?
Megan did a post last week on the disproportionate burden of foreclosure on women and minorities.
Michelle,
I don't, and that's why I didn't bring up the issue of race, I made the mistake of responding to what I see as a straw man argument. These loans, whether to someone as pale as Andrews or to "Joe non-white guy" should never have been made IN THE FIRST PLACE. And I think that has far less to do with "minority home-ownership" than the deregulation that made this possible.
I think we all know plenty of white people who are over-extended/underwater thanks to bad lending practices. I would probably know as many black and hispanic people who are over-extended if I had more friends and contacts within those communities.
My question is why is so much fierce resentment aimed in the direction of financially unsophisticated people in minority communities, while Lloyd Blankfein and Vikram Pandit, et cetera, seem to have totally avoided the wrath of people like wjalden?
My question is why is so much fierce resentment aimed in the direction of financially unsophisticated people in minority communities, while Lloyd Blankfein and Vikram Pandit, et cetera, seem to have totally avoided the wrath of people like wjalden?
If I read your mind the way you read mind I'd suspect you have it in for all those Jew and Desi bastards in the finance industry. I'm right here with you, P. Off with their heads!
as with college admissions, Asians in this discussion always turn out to be honorary whites
Actually Asians aren't really honorary whites at all. They're generally left unmentioned because, like Patty Barrero's two bankruptcies, their overrepresentation undermines the desired narrative, which is "white racism."
But aren't financial reporters for the NYT "supposed to be more sophisticated than the norm"?
I am ultimately indifferent as to whether Mr. Andrews is a financial genius par excellence, or whether he is a pox on the house of lending.
What concerns me is that people like this were given the opportunity to take on that kind of debt in the first place, by institutions that were allegedly regulated. I can't fix Mr. Andrews, but I might have a shot at fixing the lending system that allowed him to do what he did.
Be pragmatic. Fix the institutions that you can, instead of rallying against the inevitable population of people like Andrews whom you can't. Engineer the system so that the mistakes of the Andrews types are kept to a minimum. Don't sell him the rope to hang himself; if he wants a noose, let him work for it.
They're just arguing that a key ingredient in this meltdown was pressure by both most of the left and some on the right (including George W Bush and HUD Secretary/Now-Retiring-Senator Mel Martinez) to boost minority homeownership rates.
And it's a poor argument, because it misses the real motivations for expanding the borrowing pool.
It's fairly simple -- to increase banking profits, it was necessary to expand the customer base. Since real incomes aren't growing in this country at anything more than a mature rate before inflation and we don't have massive population growth, the only ways to kick up earnings were to dial in more customers and expand their reach. The only way to do that was to increase the number of exotic products and to lower the bar, not just to the subprimes but also among the primes and non-primes.
The government had similar motivations. To get economic growth in a low-growth economy and to create feelings of prosperity, you need to put assets in the hands of the people. The easiest way to accomplish that is to get them into a house. To increase the proportion of the population in a house, you had to lower standards.
This has basically been a feel-good economy. When we ran out of real growth drivers, we turned to credit because that was all we had left. Of course, once we start something, it's easy to take things too far, because nobody wants to be the guy who was caught turning off the tap.
The alternative to this would have been lower growth and higher unemployment. I'm sure that the conservatives would have been eager to blame anyone to their left had such constraints been imposed, but it would have taken the edge off of this and we would have had our customary minor cyclical downturn instead of a nuclear bomb of a recession.
"They're just arguing that a key ingredient in this meltdown was pressure by both most of the left and some on the right (including George W Bush and HUD Secretary/Now-Retiring-Senator Mel Martinez) to boost minority homeownership rates.
And it's a poor argument, because it misses the real motivations for expanding the borrowing pool.
It's fairly simple -- to increase banking profits, it was necessary to expand the customer base. Since real incomes aren't growing in this country at anything more than a mature rate before inflation and we don't have massive population growth, the only ways to kick up earnings were to dial in more customers and expand their reach. The only way to do that was to increase the number of exotic products and to lower the bar, not just to the subprimes but also among the primes and non-primes."
Yes, but it apparently feels better for some people to blame blacks and hispanics as "rent-seeking" "sand in the gears" than to look at the larger picture.
Spot on. What we had was basically a Potemkin economy. It looked good from the outside, but if people looked closely, they'd see there was not much behind it. Like Paul Krugman said several years ago, we had basically gotten into the business of building, buying, selling and financing houses from one another, using money borrowed from other nations (via our huge account deficit which they financed) in order to do it.
Systemic change is upon us. I think people need to understand that when this all finishes shaking out (which will take years), things will not be the same. I don't know what the future holds, but the days of "fog a mirror, get a loan" are over.
One thing I suggest that people take a look at is the Chris Martenson Crash Course. (Google will get you there.) It certainly helped bring the issues we face into focus for me.
It's fairly simple -- to increase banking profits, it was necessary to expand the customer base...Yes, but it apparently feels better for some people to blame blacks and hispanics as "rent-seeking" "sand in the gears" than to look at the larger picture.
I actually already mentioned that in my 8:55 post last night. But you'd have to be willfully blind to not see that ethnic activists were a key ingredient in causing the crisis.
But you'd have to be willfully blind to not see that ethnic activists were a key ingredient in causing the crisis.
You're assuming that "ethnic activists" actually have influence or take precedence over a firm's desire to pursue profits.
If you look at the stats on lending in CRA areas, you will see that the market share of non-CRA lenders was expanding during the boom. In other words, lenders who had no mandate to make the loans were making them in ever increasing numbers, outpacing those who did.
Why the motivation by those who had no obligation? Because they were profitable. It appeared based upon the default data at the time that they were more lucrative; they paid a premium, but didn't default at appreciably higher rates, so the risk premium collected carried no risk. Seemed like free money, so why not do it?
The banking industry has some of the most powerful lobbyists on the Hill. For the most part, they get what they want. It's hard to argue that they are victims of legislation when they write most of it.
RW,
Well, I'm not, for reasons many people have laid out above. Obviously you do not get a systemic collapse out of a few financially irresponsible nutcases borrowing money they knew perfectly well they couldn't pay back. Which is why the Andrews narrative (to thrash the dead horse some more) is so irresponsible. He may gain from writing this book -- in fact, if matters are as they appear to be he'd damn well better -- but it does no good to anyone else. The actual systemic ills involve people dangling candy before babies. The systemic ills as they show up in Andrews' narrative (in the NYT piece at least) involve people dangling candy before an unusually well-informed and savvy adult.
That he took the bait might make for a gripping psychological study. That the less-informed and unwary took the bait is the actual problem. And that he was (um) less than forthcoming about the true financial situation of his household makes him a yet more inappropriate stand-in for Everyman Foreclosed.
Someone could do a genuine service by collecting stories of how most of this collapse has actually happened. The Addie Polk story (forget whether it was in the Atlantic or Harper's), multiplied by thousands, variants of it (less extreme) everywhere.
People who knowingly allow their agents to omit large financial obligations like alimony and child support from their loan applications aren't the cause of the crisis. It's not just that not every banker would do this; it's that most people applying for loans wouldn't do it. On purpose. Knowing perfectly well that actually paying the mortgage would involve huge lifestyle changes that the Andrewses didn't seem especially eager to make.
Why the motivation [to lend to minorties] by those who had no obligation? Because they were profitable.
Because those lenders, such as Countrywide, had a convenient toilet down which to flush their risky loans - Freddie Mac, Fannie Mae, etc. These were institutions highly vulnerable to political pressure.
But let us backtrack here, shall we? Some say ethnic pressure groups and political (his)pandering played an important role in the meltdown. Others say they did not. Let's just all get together and instead say that any pressure to loosen lending criteria, whether to juice the economy it equalize homeownership rates is unacceptable. Angelo Mozilo and others may have had their own nefarious reasons for using minority homeownership to encourage poorer lending standards. To them it may just have been a tool to drive profits. Nevertheless, it was an effective tool, and there's a reason why.
Obviously you do not get a systemic collapse out of a few financially irresponsible nutcases borrowing money they knew perfectly well they couldn't pay back.
No. You get a systemic collapse when a large proportion of the lenders and their borrowers are overleveraged.
What is missing in this discussion is that the banks are undercapitalized. If you want to talk about who was living on the edge, just look at the banks.
There is a relationship between leverage and profit/loss. The higher the debt load, the more prosperous that one will be in good times and the more one will lose when times are bad -- this is the reason that we call it leverage in the first place.
The whole system is overleveraged. It isn't just the Andrews, but the banks in their neighborhood who are acting just like they are.
A well-managed system can easily handle the Andrews. Between the implementation of the New Deal and the deregulation by the fundamentalists on the right, we did quite a good job of it. Of course, banking was boring and a low profit business, but at least the banks weren't imploding at the sign of a first breeze.
If a flotilla of ships is sinking, you blame those who designed the ships, not the ocean. Some losses are inevitable, but when the loss rates are excessively high for an extended period, then there is something wrong with the hardware.
Fix that, and you'll get somewhere. Go after Andrews, and you're just blowing off steam and wasting time. He's a guppy in the ocean, and just not worthy of the angst. If he becomes a justification to avoid fixing this system, then the right will have won the battle, but lost the war.
Because those lenders, such as Countrywide, had a convenient toilet down which to flush their risky loans - Freddie Mac, Fannie Mae, etc.
Not only were a majority of subprime loans not purchased by Fannie and Freddie, but their market share declined over the boom period of 2004-6. Most of the market had nothing to do with Fannie or Freddie.
Instead of citing right-wing talking points, take a look at the data from the Fed. You'll see that much of this stuff being stated is simply factually wrong. The market for subprime loans was largely outside of the GSE's, and the non-GSE subprime loans have higher default rates. It is not what you believe it to be.
Go after Andrews, and you're just blowing off steam and wasting time. He's a guppy in the ocean, and just not worthy of the angst. If he becomes a justification to avoid fixing this system, then the right will have won the battle, but lost the war.
Spare us.
The behavior of Mr. Andrews is worthy of discussion because, even absent the current crisis, the overspending of Americans is a serious matter that needs to be addressed. And, to add again, he made himself a target. He sold us his story and presented it as the truth, when it was something less than.
And I can't speak for business whores like Grover Norquist or the Chamber of Commerce, but I don't think there are too many movement conservatives who are trying to prevent necessary industry reform.
RW,
No, he will have personally lost the war for you, because if the actual situation -- an enormous number of people borrowing money they shouldn't have been lent -- is obscured by the well-publicized tale of one couple who made about twice the median US household income and included a top financial reporter, fer Chrissakes, and still couldn't stop running up $700 bills at J. Crew, and stiffing everyone from the "cosmetic dermatologist" to the public library to the people who handle Maryland traffic tickets, and borrowing tens of thousands of dollars from siblings and filing bankruptcy to avoid paying it back -- if that becomes the story we all know, then everyone who is in financial hot water for more, shall we say, creditable reasons is screwed.
This couple has done more damage to the case of people seriously bamboozled by unscrupulous lenders than the needle-toothed monsters of the Right could have dreamed of doing. Because Andrews' job was understanding this stuff.
Well said, except that given Andrews's demonstrated dishonesty, I wonder whether -- actually, I doubt -- that he understood anything. He appears to be just another two-bit fraudster who happened to get caught. Glib, yes; smart, no; honest -- gosh no. A fraud. As is his wife, in spades. Here's hoping that he remains "desperate," as Clark Hoyt said. Do NOT buy his book.
The behavior of Mr. Andrews is worthy of discussion because, even absent the current crisis, the overspending of Americans is a serious matter that needs to be addressed.
Right. And how, pray tell, did he get the money?
Anyway, slightly off topic, but just keep in mind - whether you believe it was the fault of Republicans or Democrats, conservatives or liberals - that these people - not one of whom has accepted any blame for the current mess - now want to run our health care industry.
I can't wait.
"Let's just all get together and instead say that any pressure to loosen lending criteria, whether to juice the economy it equalize homeownership rates is unacceptable"
Wjalden, right on, I can agree with you on that.
I'd also like to know why home ownership is sold as the entree to good citizenship, as opposed to, say, being a good citizen through public service, military service, etc.
As for health care, let me spare you some trouble, having worked in the industry.
Don't. Get. Sick.
Because if the health care system gets any worse than it already is, which is frankly difficult to imagine, you are going to be out of luck.
Most of the illness we treat in this country is preventable. Type II Diabetes and its companion illness heart disease being among the costliest.
Both are entirely preventable. There are even a few physicians and researchers (e.g., Dean Ornish, UCSF) who have proved through clinical trials that you can achieve BETTER results for treating existing heart disease through non-invasive measures such as exercise and diet as opposed to invasive measures such as stents.
The problem is: you can't bill insurance companies for diet and exercise. And pharmaceutical companies can't make money off of healthy patients. And you can't build a reputation as a hot-shot cardiologist by telling people that, actually, their own best doctor is... themselves.
You say you can't wait? Don't wait. If you have any existing conditions, find out what you can do to ameliorate those conditions on your own FIRST. Why? Because.The Hospital. Is Not. Your Friend.
You're saying that large numbers of people were buying to flip their properties? Enough to cause the problems we see now?
What sort of evidence do you have for this? This was certainly not the case here, with Anderson in particular. Further, how were these hordes of flippers able to get away with the necessary lying? Things like bankruptcies, income, child support and alimony, etc, aren't hard to check out, you know. And I do know that when I bought in 1998 it was most certainly the case that the lending institution did take some pains to verify my debt levels as well as my income.
Not only are large numbers of people flipping houses, according to you, but they are also successfully lying where they weren't able to before. How is this possible?
To be fair, it's less about racism(though there's plenty of that, it's easy to see) with a certain set of 'conservatives', and more about trying to push the idea that it was 'government interference' that caused the crash.
Crude and wrong of course. But it's not the racism associated with the South's Gonna Rise Again sort.
The solution would implicitly acknowledge that certain models of human behaviour were, er, wrong.
Whereas I'm not stumped at all.
Sadly enough . . . and predictably enough.
To the extent in his participation in the legislation you describe, you're darn tootin' I blame him. I have no problem with people pointing out that there appear to be a good many Democrats - and prominent ones at that - implicated in this mess.
However . . . I also have no problem in noting that the economic theories and philosophy guiding this Very Bad Legislation is 100% conservative and libertarian. Twist and squirm, duck and dodge, there's no way around that one.
BINGO!
NOW do you get it? The story is that if even people like this fellow are tripped up by the lending practices of the financial industry, imagine how much easier it was for the Man on the Street to get sucked in as well.
I've mentioned before that a check on bad lending was for many, many years the banks unwillingness to loan. People quite rightly relied on the fact that if banks lent you money, they thought you were a pretty good risk to pay it off. That changed somewhere around the turn of the millenium, but the joker in the deck was that no one let Joe Sixpack in on the new deal.
I think you're onto something here Megan. I put up a post on my blog:
http://www.topgunfp.com/controversy-regarding-ny-times-reporter-edmund-andrews-article-and-book/
This is somewhat speculation, but I just wonder if Andrews didn't see writing the book this way as having much more popular appeal and therefore potentially lucrative financially.
I guess we'll never know for sure but this smells.
Good work!
RW, can you explain two things to me?
1) How is it possible for an entire economy to be "overleveraged"? Every debt is someone else's asset; every purchase by idiots like Andrews was a foregone purchase by somebody more prudent. A big debt shakeout will shift about the pie's distribution, but why does it make the pie smaller, unless we owe all that money to the Chinese?
2) What regulations, specifically, would you recommend, and what odds do you give them of getting through Congress? I agree that the CRA didn't cause this crisis, but the motivation behind the CRA stands in they way of any attempt to tighten lending standards, does it not? You can't ban subprime without going directly against the CRA's goals.
People quite rightly relied on the fact that if banks lent you money, they thought you were a pretty good risk to pay it off. That changed somewhere around the turn of the millenium, but the joker in the deck was that no one let Joe Sixpack in on the new deal.
People who relied on the bank to tell them how much they could borrow were (and are) idiots. Seriously: why on Earth would you rely on a bank to decide how much you can afford a month, rather than, say, looking at your monthly earnings and expenses? It's insane. Doesn't excuse the banks: they should be looking at your income and expenses, too (and they did, as recently as 2000, when I bought my first place). But really, do you rely on the car companies to tell you how fast to drive, or the liquor companies to tell you how much you can drink?
I actually got one of those infamous NINJA loans from Countrywide in 2003. Like a dumbass, I paid it off. But at the time, I didn't think "gee, this is great, I must be able to afford this because the bank said so," I though "These Countrywide people must be insane to lend to me, but hey, I'll take it." I made good money off the bubble and lived in a nicer place than I could have paid cash for, so I'm glad I got it.
However . . . I also have no problem in noting that the economic theories and philosophy guiding this Very Bad Legislation is 100% conservative and libertarian. Twist and squirm, duck and dodge, there's no way around that one."
"Conservative" has enough different meanings and connotations to make this part of the comment effectively meaningless. While libertarianism has a more precise definition (though I'm sure that self-proclaimed libertarians could never agree as to what it is), libertarian is hardly a synonym of conservatism in most people's eyes.
This legislation, like most legislation, was driven by the desire of elected representatives to remain in office combined with the legislative leverage of campaign contributors who sought to profit from said legislation. I don't know that such a process can accurately be said to be grounded in "theories and philosphy," except perhaps "The Will to Power."
Barney Frank and Chris Dodd both hand a hand in this catastrophe, as did Phil Gramm and Alan Greenspan. Greed, the lust for power, short-term thinking, and the eternal allure of something for nothing are not confined to any particular branch of political thought. They are ineradicatable, but recogniton of this fact is perhaps the first step in coping with their deleterious effects.
Not an expert on bankruptcy law, but IIRC the great thing about your sister suing you for money would be that it pushes you into bankruptcy. You get to add all of the other debt you don't want to repay and your sister gets a tax write off for the uncollectable debt she had forgive. Win win.
"Conservative" has enough different meanings and connotations to make this part of the comment effectively meaningless.
Indeed. So once again the business whore conservatives will point their fingers at the religious and social conservatives and the media will completely buy it. Because any explanation that vilifies social and religious conservatives must be true.
How is it possible for an entire economy to be "overleveraged"?
I know that you are kidding with me with that last one, right? I mean, we are in the process of seeing what happens when the system starts to deleverage in one fell swoop, and it ain't pretty.
An overleveraged society is begging for a price correction. Make the correction nasty enough, and investors may lose heart and not just back in to buy the stuff when it gets cheaper.
Every debt is someone else's asset.
And if those assets erode in value enough, there may not be a market for them that would allow them to carry debt.
The US is fortunate to be a huge economy with the reserve currency. If we were just like us but smaller, we'd be Iceland West. Fortunately, the US doesn't end up with the sort of capital flight when the fit hits the shan that is found int smaller economies that experience the same corrections. If and when we lose reserve status, we're going to be like the UK; not quite Iceland, but still weak enough to get ratings downgrades. This won't be a good day for Americans when this eventually happens.
What regulations, specifically, would you recommend
The short answer is that once we've gotten into an economic recovery, I would restrict debt in ways that would combat the problems that I've outlined above. Of course, I'm not actually expecting that to happen...
The only hero in this story, of course, is our esteemed hostess, Megan, for her initial minor investigative efforts. I was prepared to add "RW" to the list of heroes, when he wrote: At this point, the details of his drama are becoming a distraction.
I don't have sufficient policy knowledge to argue what the policy implications are in this tangled web of Ed and Patty, but I agree I'd like to see some people who do know their stuff have at it here. I'd be more interested in that than in any more castigation of the characters. As for what caused this mess, I'll keep my opinions to myself (well, almost all of them...I doubt Reaganaut architects of the S&L scandal are the real movers and shakers behind the current crisis, and I am suspicious because Clinton Treasury Secretary Robert Rubin was able to cash in at Citibank on the relaxation of regulations that occurred in the 1990s, and it makes me nervous to see Rubin's NYC financial proteges like Tim Geithner of the NY Fed, Larry Summers, Peter Orszag, Rubin's son, and others writing the next round of rules for banks and financial institutions.)
But RW loses me along the way with things like this:
What concerns me is that people like this were given the opportunity to take on that kind of debt in the first place, by institutions that were allegedly regulated. I can't fix Mr. Andrews, but I might have a shot at fixing the lending system that allowed him to do what he did.
For Ed to say regarding his mortgage, in effect, "I don't know what I did but it felt cool to get a half-million dollar loan..." is kind of appalling, of course, particularly when compared to the testimony here of gijanefinance and melbel, lower-income and (in melbel's case) less well-educated people who were wise enough to pass up the temptations offered. To go into a mortgage broker and ask, "How much mortgage can I qualify for," rather than telling the broker how much morgage you want or how much in monthly payments you can truly afford is like walking into J. Crew, handing over your wallet and all your credit cards and asking, "How much overpriced designer clothing can I buy?"
And that does suggest to me one tiny policy fix for the policy experts here to consider. Ed and Patty complain that they could not get their mortgage restructured because the bank declined to do so until their were delinquent a certain number of months--that's why they've been withholding their mortgage payments for 8 months (and please, please, putting what's owed each month in an escrow account, right?!?!). Many experts seem anxious to encourage that kind of restructuring by mortgage holders with their debtors. Is there a limit on the size of the loan or the recent income history of benefiting debtors? I think there should be, and not just on class-warfare grounds, but Ed and Patty's story suggests that limit is not set low enough if they think they can cash in on this plan.
One of Megan's first points on the previous thread was that very, very few bankruptcies occur up here in Ed and Patty's high income ranges, and almost no multiple bankruptcies. Mostly bankruptcies befall those with below-median incomes whose entire world can be rocked by a medical or legal or marital bump in the road that Ed and Patty, in their day, might never have even noticed until months or years later.
Now Ed and Patty wait patiently for their turn at restructuring their mortgage, in the waiting room with lots of young families and individuals (few of them with homes in leafy suburbs of Washington, D.C., most of them in go-go former real estate hotbeds in California, Nevada, Arizona). Because Silver Spring, MD is not the far suburbs of D.C., where defaults and housing value declines are hair-raising and is not the West, where they are astounding, I suspect Ed and Patty might get their restructured mortgage, and might then wiggle out of this mess without losing their half-million dollar home, on the strength of the home's retained value.
And that's a moral hazard. Maybe we can fix the problems of all the young people and other deserving souls in that waiting room with Ed and Patty through new financial regulations that don't squeeze all the innovative life out of the financial industry, I hope, but for high-flyers like Ed and Patty, there is no regulation to cure what ails them. So, let's just cut them out. They are outliers, not part of a "systemic failure" but extra-systemic special cases.
If your income over the past few years is above a multiple of the median for your metropolitan area or your home value is in a high enough percentile, you should be warned at the outset that you are taking a much, much bigger risk pulling these kind of financial shenanigans than is a couple in their 30s buying a $325,000 starter home in outer Simi Valley. If things go sour, the couple in that Simi Valley starter home might get help from the financial institution or by government fiat, but right from the get go, the Ed-and-Patty's of the world should understand, "No bailouts for you, no matter what."
Wouldn't that keep the Bob-the-Mortgage-Sharks from returning Ed's frantic phone calls in the first place?
The extent to which you blame Ed and Patty as individuals depends on the extent to which you think we need moral rules, as well as legal rules and regulations, to back up the core institutions of society. I happen to think we need moral rules to carry at least 80% of the weight. We can't afford the level of regulation that would be able to look into every transaction, every time, and we wouldn't want to live under a system that was that intrusive.
Moral rules are enforced by two mechanisms -- personal feelings of shame and guilt, and social disapproval. People should feel like idiots when they behave like idiots. And, just in case they don't, there should be a large group of neighbors and other observers to point out that they are behaving like idiots and really need to stop.
A big problem I've noticed in the last ten years is that the "neighbors and other observers" have been offering advice that pulls in exactly the wrong direction. Instead of advising prudence, society at large has been hollering for more debt, more consumption, and more real estate speculation. We must turn this around, individually and collectively. We NEED to disapprove of Ed and Patty. And we also need to monitor our own behavior so that the things we say about Ed and Patty cannot be said about us.
Then, when the overwhelming majority of people have stopped thinking idiotic behavior is normal or excusable, we can back up legal sanctions on the persistent outliers. But it makes no sense to bring down the force of the law when people can't even agree on what is normal and what is outrageous misbehavior. The social, moral rule has to come first.
I know that you are kidding with me with that last one, right? I mean, we are in the process of seeing what happens when the system starts to deleverage in one fell swoop, and it ain't pretty.
Right, but what I don't understand is why. If I owe a bunch of money, I'm gonna get a windfall. If I own a bunch of bonds, I'm going to lose a bundle. But the total amount doesn't change; we just shift who gets to spend it. Why is that shift causing a massive crisis? I don't understand it.
If I owe a bunch of money, I'm gonna get a windfall. If I own a bunch of bonds, I'm going to lose a bundle. But the total amount doesn't change; we just shift who gets to spend it. Why is that shift causing a massive crisis?
That isn't quite accurate. The totals do change, because wealth destruction is taking place. It isn't just a shift or redistribution of wealth; the total quantity is actually shrinking.
Those who don't pay the loans aren't getting a windfall per se, in that they aren't gaining assets as a result. They do end up with the benefit of fewer liabilities and stronger balance sheets, but that is not quite the same thing as wealth creation.
The crisis lies in this sharp and sudden downward spiral of lost asset value and how the actors in the system respond to it. If asset buyers lose all their means to buy assets and/or lose their faith in investing, then shocks can turn into permanent losses. Economies work when people pass money around to one another; if people stop seeing the point of doing that and just stop transacting, then the system breaks down.
We NEED to disapprove of Ed and Patty.
I don't object to that in theory. A bit of moral hazard is a good thing.
However, moral hazard is no substitute for a well-managed system. This libertarian pipe dream of placing everything onto the backs of the individual and ignoring systemic effects is ultimately a danger, because Mr. Andrews and his bride will be used as some sort of excuse to avoid the necessary repairs, which will make the next crisis worse.
I see where this series of posts is going. Let's understand that to acknowledge that (a) there is such a thing as systemic risk and (b) regulatory reform is critical to remedying the problem of systemic risk is as good as saying that libertarianism is dead.
There is a tremendous incentive for the right to avoid discussions of systemic risk and to point to mortgage welfare queens as the root cause of failure. This crisis is essentially a torpedo to their ideology, and they know it. That doesn't excuse Andrews or motivate me to buy his book, but now he is being used as a decoy to distract us from the big game.
What would that regulatory reform entail?
Would it mean requiring banks to undertake sound lending policies that directly conflict with the CRA?
Would it require Fannie Mae and Freddie Mac to only buy up mortages based on sound underwriting and abandon the practices that started the whole sub-prime thing? What would Barney Frank and his liberal allies in Congress do if those GSE's (surviving on taxpayer dollars now and still losing money) went back to their old (and successful) ways?
Would it require the FHA to strengthen its policies? Right now they're a disaster waiting to happen and are "guaranteed" by our tax dollars (Google default rates on FHA loans then click on "news" for more on that).
Would it entail curtailing loans for building Section 8 housing? After all, once Sec 8 housing gets built (or current stock goes Sec 8) it loses most of its value and is "under water"?
Would it outlaw mortgage "banks"? They're not banks as most people understand the term. They were the prime movers of crappy mortgages and were especially strong in "under served minority areas". (see NY Times for more on that)
So exactly, what is this "reform" that you mention? What are the odds that any real reform, moving loan standards back to the way they were not too many years ago, would pass in our present, very liberal, congress.
I know of two people who have home loans w/ Chase, hoping for some help with their loans. Both bought a home they could afford based on their jobs at the time, and both lost their jobs within a couple years. One found a job a year later and took a 50K pay cut. The other, found a job 5 months later with a 60K pay cut. Both are current on their mortgages but with their pay cuts they have no breathing room and are asking for a lower interest rate and have not yet heard back from Chase about their modification applications.
Neither lied on their mortgage application about their salaries and/or support orders. Both scrimped and saved--made tough choices but were able to survive w/o taking on new debt or declare bankruptcy. It would make me angry if Chase chose to help Mr Andrews who deliberately misled Chase with his loan application (he knew what he was doing) and not help out people who made made sacrifices to remain current after facing a job loss--both being the sole provider for their families--one divorced with one child, the other married with 3 children.
ScentofViolets,
No, really, it doesn't work like that. Andrews was not "tripped up"; he knew perfectly well how much money was coming in and how much was going out, and that Bob the broker was helping him to hide the state he was actually in. He has no business pretending for even a second that he was suckered. "Bob" told him to leave his alimony/child support obligations off the application, and he did it. He knew exactly what difference that would make; he knew it was frickin' fraudulent, and he did it anyway.
SoV, he and his wife tripped themselves up. I am pissed off at them because there are people, hundreds of thousands if not millions, who really were "tripped up" and now are going to be amalgamated in the public mind with Andrews, who is digging himself out of this particular pit by writing what he hopes will be a best-seller.
If car companies had put a governor in my car that they could set at whim, and if they had been tinkering with the settings not just for my parents, but for my grandparents and their parents as well, then, yes, it would be a reasonable supposition. Doubly so if my car did not have a speedometer and I had to guess at how fast to drive by looking at the people around me and my own previous experience.
Thank you, an excellent analogy.
But back to the banks and mortgages: you may be a bit on the young side to remember this, but yes, really and truly, back in the day, people really did think that banks using their superior expertise scrutinized the prospective buyers' finances and made their determination of how much to loan based on based upon the recipients ability to repay. The reasoning - as I've heard it myself many times - is that the bank would be crazy to make you a loan you couldn't repay. If they did, they'd take the hit themselves.
Guess when this stopped being true. And did the good people taking out those loans know that the bank was no longer holding on to the mortgage, that in fact it was being almost immediately sold and sliced and dices seven ways from Sunday? No, they did not.
Note, btw, that while I am not passing judgment on the people who did not manage their finances as well as they could, I agree - emphatically - that their budgeting skills are execrable. Remember that these are the people to whom I teach basic math skills :-( And without going into the should's and ought's and what's wrong with the world and the Kids These Days, don't you think we really should be making policy at the macro level based upon what is?
Right. That was the post where she was visibly wondering about the suitability of minorities for mortgages while forgetting to mention that from March to April alone Blacks were 170 times more likely to their jobs than their White counterparts.
Which is interesting, because I was refused a loan in 1997; while I was following the necessary finance formulas, the lending institution was somewhat unsure as to how long I could actually keep my job. It turns out that they were right to turn me down based on this criterion.
So any guesses as to the size of his book advance? Would he have been on the NYT payroll all the time he was writing the book? And did he want Patty to not get another job so as to make their situation more dire and the story better?
I watched the PBS TV segment, and wondered if they'd made the house look so bleak for the cameras. No pictures on the walls, no landscaping (might want to plant a big vegetable garden, instead of that bare lawn).
Now I don't trust anything in the book. For all we know, her divorce stipulated that the kids visit LA and that the parents share the expense.
Traditionally, the Times encourages its writers to write books. It enhances their stature. Many other major periodicals do the same.
In some cases the writer goes on a leave of absence if he/she thinks the book will take too much of his time. However, that's not written in stone, and many write the book in their spare time.
Apropos of not much, is being not great with money a pre-req to getting a job at the NYT? There's a blog devoted to MP Dunleavy's column (which hasn't been around lately, anyone know anything?).
http://www.bostongals.com/search/label/MP
And further research shows he got an advance of about 30K. He'd have done better writing a book about a girl who falls in love with a vampire.
http://www.cnbc.com/id/15840232?video=1128613953&play=1
You're right. Usually I include tic marks and say 'conservative' and 'libertarian'. This is what I've been doing with 'liberal', 'activist judges', etc., for a long while, such is the debasement of the common language in these degenerate times.
Well, not quite. A lot of people have noted for a long time that there is a certain gospel of economics - long discredited - that is preached solely because it allows certain people to profit enormously. And I think it's safe to say that the 'conservative' or 'libertarian' economic credo contains the central conclusions that the regulatory and oversight climate that we had even as recently as the 80's were a bane to economic development. Less regulation and laxer oversight (as well as lower taxes, of course) were what the doctor ordered. Well, we got it all right.
So no, I don't think it's unfair to lay this particular brand of economics on the doorstep of certain political camps. That these idiotic actions were bipartisan in nature is indisputable, of course. Just not particularly helpful.
But you see, historically, that's exactly the way things worked. I know that a lot of people here are quite a bit younger than me, say under 40, but really, banks used to be a lot stingier back in the day. Time was, 20% down, 25% of gross income for the mortgage was pretty much the standard deal, as well as the best you could realistically get. And time was, pre-qualified didn't pass for pre-approved. Loan officers were specifically trained to go after dodges like looking at the partner's previous financial history whether the relationship was a formal marriage or not - and were encouraged to be aggressive in doing so(again - this can't be said often enough - this was a time when banks were risking their own money, not selling off the debt to a third party. Oh, did I mention that banks really preferred a couple to be married; none of this modern live-in stuff :-).
So what RW is really saying is that we need to go back to what was considered best practices circa 1970. I don't see anything particularly radical or far left in that. Indeed, one would almost be tempted to call it . . . conservative.
Do you honestly think that our current congress and administration would let that happen?
Would they be willing to gut CRA. Would they be willing to force Fannie and Freddie to tighten up? Would they tighten up FHA mortgage guidelines (another mortgage disaster waiting to happen)?
Yes, going back to the old ways would help stabilize banks. It would also help prevent bubbles as people would be priced out of an over inflating housing market since they would not qualify for a mortgage. However, that's not likely to happen as long a the government is intent on social engineering.
What's interesting is while the govt is trying to make home loans available to those who may not qualify for a conventional loan with FHA loans, most foreclosures (banks) and private sellers in my area will not consider an FHA mortgage. Several listings even say no FHA to discourage FHA buyers and an agent I know told me the banks do not want any FHA loans so if you're doing an FHA loan, you're going to face a huge hurdle in buying a foreclosure in certain parts of the country (like Northern CA) right now. You can do FHA for new homes that are being built but those prices are usually a lot more expensive then a foreclosure.
"Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.
The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.
If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation."
--John McCain, 2006
However," said Rubin, "the banking industry is fundamentally different from what it was two decades ago, let alone in 1933." He said the industry has been transformed into a global business of facilitating capital formation through diverse new products, services and markets. "U.S. banks generally engage in a broader range of securities activities abroad than is permitted domestically," said the Treasury secretary. "Even domestically, the separation of investment banking and commercial banking envisioned by Glass-Steagall has eroded significantly."
Rubin said Glass-Steagall imposed unnecessary costs and made providing financial services less efficient and more costly.
From an article about Robert Rubin's successful bid to overturn Glass Stegall in 1995
Well, if we brand Robert Rubin a conservative, and John McCain . . . something else (I wouldn't myself call McCain a conservative, by the way) then I take your point. However, as I've said, there is a multitude of definitions and undertandings associated with the term "conservative," and while I acknowledge that there is a faction -- a powerful faction -- that calls itself conservative and opposes regulation as a reflex reaction, I suspect that the reaction is driven far more by financial interest and political gain than by philosophical concerns.
I think we can all agree that CRA, and the "enhanced" enforcement of CRA under Clinton, were not examples of a conservative mania for deregulation. And yes, this was a contributory factor.
The Fannie and Freddie fiascos illustrate the gross hypocrisy of our congress.
While you hear all sorts of calls for vengeance, and even criminal investigations, against the private sector actors in the mortgage disaster, you hear nary a peep about the crooks at the 2 GSE's.
That silence also indicts the MSM. You'd think they'd be looking for scalps from the crooked GSE's. Instead, you get the sounds of silence.
You hear all sorts of complaints about the "Wall St. bailouts" and not a peep about the GSE bailouts. It seems it okay to defraud the taxpayers if you collected millions in a management position at a GSE, and were conveniently of the correct political persuasion.
Ah, the traditional 'conservative' argument by Heinleinesque assertion. Yes, Andrews had a master plan from the get-go that he was going to default on his obligations. Well, I can't prove that you're wrong. But I don't see that you have any evidence for this narrative either.
In fact, even fifty years ago, there was a provision for people who wanted to buy more house than they could currently afford, that incredibly edgy deal known as the 'balloon payment'. I don't think the assumption back then was that people were out to deliberately scam a lender. The problem - I admit this is a guess, based only upon anecdotal experience - is that people really aren't very good at figuring future income or future debts, and that they tend to go rather vaguely by the experience of their parents and their peers, and they don't tend to plan for worst-case scenarios. My take is that Andrews was (somewhat wishfully, in hindsight) counting on an increased income stream from his wife, as well as reduced expectations on her part.
In short, he thought, like many young women do about their men, that he could change her. That these spending habits weren't a fundamental character trait, but only an aberration brought about by the former Mr. Barreiro.
But you go with your version; obviously you're not going to change your mind, and equally obviously, you're not going to make the slightest attempt to be persuasive.
ScentOfViolets,
My point had nothing to do with Patty. It was about that place in the NYT piece where Bob says something on the order of "Well, we can't do the loan this way, because if your child support obligations are in the application, it's clear that you don't have enough money to pay the mortgage. But if we do it this other way, you'll get a slightly worse rate, but on the other hand we can leave those other obligations off the application and they won't check."
Now Bob, obviously, shouldn't have suggested this; but Edmund, equally obviously, shouldn't have leapt at it. The guidelines the two of them colluded in skirting are there to prevent people (lenders and borrowers both) hurting themselves. Andrews seems to me to be rather in the position of that guy last year (or was it the year before?) who injured himself trying to scale a prison fence, and blamed the prison guards for the injury on the grounds that they ought never have let him get so close to escaping.
So if Andrews happened to be African-American, and Bob the Broker suggested that he might not be able to afford this big loan, how long until Andrews wrote about the racism of subprime lenders?
I don't know when Patty Barreiro was in Argentina, but if it was after the financial collapse, inflation was so rampant that it was rational to spend everything you could and then some before prices went up.
Remember it was this way during the high inflation time in the late 70s/early 80s period too--especially given that interest paid on consumer loans/credit (not just mortgages) was tax-deductible.
With the money flying off the Fed printing presses, there is already the early part of inflation--an increase in the money supply. There is coming the stage when prices rise. Then it will be rational to spend everything you have and then some. We will all be Patty Barreiros.
Where is there a picture of this Patty Barreiros? I want to see what's so hot about this prize female that a man would utterly ignore her poor character and his own bottom line well being and go that batshit crazy. She better be supermodel hot or it will further damage his credibility.
Got it in one. Back in November, I was calling for the bailout money to be coupled with a live TV appearance of the executives running these failed firms where they would publicly admit that they made mistakes, that they apologize for those mistakes, and that they avowed a sincere desire to make amends. Obviously, that wasn't going to happen, but the responses to that suggestion made it clear that it was all about avoiding accountability and getting out of admitting that a certain economic ideology was massively, unmistakably wrong.
The odd thing is, the system worked according to their lights. Castigating people for behaving the way they did while at the same time proclaiming that 'the people' always and everywhere know best - or at least, better than meddling government officials with their 'burdensome regulations' - strikes me as a bit of a contradiction. That they aren't using this series of events as an example of just how well their ideology works is telling.
You can't make regulations stick if there is no broad consensus about what they should contain. You can't get the laws passed in the first place, and people will just cheat in the unlikely event that something contrary to the popular will does pass. Law reflects the moral standards in a society. It doesn't create them -- although of course it reins in the outliers who violate the standards everyone else feels bound to follow.
Which is why we should start with the moral standards. There should be standards for the bankers and regulators as well, of course, but in the end bankers and regulators have no purpose other than to serve the population at large. We all, as individuals, should figure out what we want them to do for us. If what we ask for is stupid, then what we get will be stupid.
Asking some magic fairy to let us consume more than we produce, year after year, is stupid. Expecting to retire at 50, live on unearned income, and spend the next 30 years playing golf is stupid. Thinking better of people with expensive clothes and cars, and expecting others to think better of us if we get those things, is stupid. It goes on and on.
And where did it all come from? It's an offensive cultural development that led people to think they could get rich making side bets rather than producing actual goods and services. Whatever regulatory failure we are facing, if any (the current crisis seems to have hit countries regardless of regulatory set-up), comes out of that cultural development. And that's what we have to fix.
And there's more at PBS:
http://www.pbs.org/newshour/businessdesk/2009/05/response-to-andrews-mcardle.html
Paul Solman liked them. If he'd known about the bankruptcies, he would have asked. (Sure, right, anything you say, buck-o.)
And it was all about the children.
Time was, 20% down, 25% of gross income for the mortgage was pretty much the standard deal, as well as the best you could realistically get.
I remember it well. And I remember that the stagflation in the 1970s, coupled with rising interest rates on 30-year fixed mortgages that peaked just south of 15% in 1982, led to a situation where almost no one under age 40 could buy a home. Nobody wants to go back to the 1970s and early 1980s.
The only way I could buy my first home, later in the 1980s, was through innovations that led to 10% down mortgages and an easing of requirements that qualified for mortgages people like me who could show the mortgage was no more than 29% of available monthly income. (Those relentless underwriting bloodhounds still wanted access to your savings and checking account records for last month, the month before that, the month before that, and if they saw a sudden infusion of $10,000, they wanted to know the source. If it was from the Bank of Mom and Dad, they insisted that you get in writing a "gift letter" from Mom and Dad stating you were not expected to repay the downpayment assistance they provided.) Eased underwriting standards, and a long, largely uninterrupted slide in mortgage interest rates to just north of 5% today, made homeownership widely available. Today, two-in-three adults own their own home.
That's good. What's bad is that innovations that allowed middle class people a little greater leverage in securing a mortgage also allowed a few at the top end to take on insane risks in the hope of hitting the really big score. Meet Ed and Patty.
At the top end, more than for those in the middle class, it becomes a character issue. Can you resist temptation, and if caught, will you come clean and meet your obligations?
By analogy, consider the situation that faced Treasury Secretary Timothy Geithner. As one of the biggest big shots at the I.M.F., he benefited more than others by ignoring the constant reminders to I.M.F. employees from the U.S. to pay their own Medicare and Social Security, as the I.M.F. did not deduct it automatically. He didn't, and he got caught in a 2006 tax audit. Rather than step up in 2006 and insist on repaying every dime he'd finagled, he asked, "How long is the statute of limitations on that?" Told by the I.R.S. that the statute of limitations was three years, in 2006 he paid what he owed for 2003 and 2004, but did not pay what he owed for 2001 and 2002. During his confirmation hearings, that became clear and he agreed to pay $25,970 to cover the "mistake" made on his 2001 and 2002 taxes.
Again, at the risk of starting a class war, why don't we recognize that the temptation is greatest for Ed and Patty and Tim. Let's assume for the argument that we agree a 3-year statute of limitations is a fair compromise for the bottom 80% of I.M.F. employees caught skipping their Medicare and Social Security payments. Any reason we shouldn't tell those in the top quintile at I.M.F., "We really mean it when we say you must pay your own S.S. and Medicare, and at your pay rate, there will be no statute of limitations should you fail to do so."
Similar to telling Ed and Patty, "For a house this expensive, and given your income, we cannot offer you a restructured mortgage."
Make common sense accomodations for most, but for those at the top who have the temptation of really cashing in for big bucks on risky tax manuevers or dopey mortgage deals if they get away with it, take away the safety net and ask them if they still think the risk is worth it.
Between the time of my 10% down and 29%-of-income first mortgage and today, the system was broken. Historic patterns where 98% of mortgage borrowers coughed up the cash each month rather than lose their home still worked when the risk was losing that 10% down. Borrowers in hock to their eyeballs on the purchase of a wasting asset in which any equity they ever held in the property is a fading memory--there's no reason to expect 98% compliance in that environment.
Let's restructure mortgages for the vast majority whose record indicates they intended to follow what rules are left and pay the mortgage. They are victims of a systemic flaw, perhaps. But Ed and Patty are outliers, and not an indication of any flaw in the system beyond naive or greedy underwriters being complacent about those looking to make a quick and easy buck without working.
"I remember it well. And I remember that the stagflation in the 1970s, coupled with rising interest rates on 30-year fixed mortgages that peaked just south of 15% in 1982, led to a situation where almost no one under age 40 could buy a home. Nobody wants to go back to the 1970s and early 1980s."
I bought my fist home in 1975, at age 26. I had a 15 year mortgage, which was the standard of the time. FHA and Vet ADMIN loans allowed a term of 20 years back then. Many of my friends, of my age, also bought homes at that time and into the 80s. None of us were rich and none of us had high paying jobs.
The "stagflation" you mention did not effect the housing market much because existing homes were not appreciating that much, due to ridiculous interest rates. Housing markets got "hot" in the mid eighties when stagflation, and silly interest rates had been cured.
The thing that allowed more people to buy homes was the lengthening of mortgage terms. In a very brief period of time the period went from 15 to 30 years, thus reducing the monthly payment. The down side was that housing prices increased everywhere since people could "afford" a higher price due to the lengthened loan term. In the 30 years that I owned that first home I saw its price increase by a multiple of 25. Yes, I sold it for 25 times what I paid. Of course, that's monopoly money, since the replacement house cost me that same multiple of what the original owner had paid.
I appreciated your fact-checking on the first article, but this follow-up seems a bit desperate. I'm glad the discussion about the spending habits of Americans is getting some press, but its time to move on from this particular case.
I, too, appreciate Mr. Andrews' candor. His article was instrumental in getting this conversation started. Unfortunately, Ms. McArdle, it isn't your business to determine whether or not he chooses to divulge the personal finances of his spouse.
And it's your anonymous business to suggest what she blogs about? I think that Andrews' status as a NYT reporter has shielded him from any tough questions from the interviewees he has met (See NewsHour's lame explanation). They're all in the same cozy little club.
To her, I'm not anonymous- nor is your response conveying anything useful. Tough questions have their place, in journalism for sure, which is why I noted her fact checking. At a point, the utility of such reportage falls short and bullying begins.
And where did it all come from?
Well, to be blunt, it came from your imagination (or, to put a finer point to it, an unwillingness to look at historical data.)
Here's an example - back during the Depression, the foreclosure rate on family farms with mortgages was 6.8%. By modern standards, that's a rather high figure.
Were the farmers immoral sluts looking to screw the system? Perhaps some were, but most of them made a bad bet and lost. In a society in which people try to improve their lots and accomplish something, some degree of failure is inevitable.
However, the overall foreclosure rate of farms was 2.8%. The disparity comes from the fact that only 42% of them had debt. Compare that to today's housing market, where about 2/3rd's of homeowners have mortgages.
In recent years, we greatly expanded both the size of the pool of borrowers and the amounts of money that we would loan to all of these borrowers. These are basic rules of finance -- the more debt one carries, the higher the risk of default.
The morality argument may be well intentioned, but it is just a sham and a distraction. Individual cases of fraud are exceptions to the rule; the more obvious problem that impacts the broader pool was that financial ratios were simply way out of whack. You could accomplish quite a bit simply by having reasonable standards and due diligence. There is nothing mystical about it, it's just basic finance.
I remember that the stagflation in the 1970s, coupled with rising interest rates on 30-year fixed mortgages that peaked just south of 15% in 1982, led to a situation where almost no one under age 40 could buy a home. Nobody wants to go back to the 1970s and early 1980s.
Mortgage rates increased because of factors in the economy, not because of reasonable lending standards. The stagflation was caused by increasing energy prices, coupled with the unwind of Nixon's unwise policy of wage and price controls, which took years to fix.
A stable economy with low inflation will naturally have lower interest rates. Reasonable standards should produce the lowest interest rate possible, because the risk premium component of the rate is reduced. Looser credit only contributes to higher housing prices, because the ability to borrow pushes demand. Easy loan products help to produce bubbles, just as we are seeing now.
Well then, what, precisely, would you suggest be done instead? Just throw up our hands and do nothing?
I'm afraid that I'm going to have to ask for some evidence about that 'enhanced enforcement', something that is not from the Usual Suspects(you know the drill, no Cato, no Heritage, no AEI, etc.) And some evidence that this was a 'contributary factor' as well. That is, some evidence that CRA policy and it's effects were more like the effects of lax regulation, and less like actions of Edmund Andrews personally. As far as I know, the record simply doesn't support that sort of reading. But I could be wrong, so let's see what you've got.
Again, what are your proposals for avoiding future occurances of these types of situations? Scarlet letters, 'B' for bankrupt, 'F' for foreclosed?
Well, that's sort of your interpretation, isn't it? I can hear the consversation going down a whole lot differently. Something that happened two years ago, a neighbor was asking about financial aid for college their son, and, er, how closely they checked the applications. I replied that it's perfectly okay for your son to report that he has recieved less than X amount of support from his parents, even if that was not really the case . . . provided that the parents didn't include him as a dependent on their tax returns. Iow, I get the impression that the conversation was more along the lines of how to properly declare items so as to pay the minimum amount of tax, as opposed to breaking the law. Should this guy have known better? You betcha. And when students leave my intro math classes, they should know how to solve rational equations involving smallish exponents.
The fact of the matter is, they don't.
Doesn't this argue rather strongly against certain 'libertarian' theories? And doesn't this suggest that in at least some instances, those 'guidelines' should have been laws, with enforceable penalties for noncompliance? Again, I don't have any particular interest in pleading this guys case; merely that his actions reflect the reality of these transactions, not what they 'should' be.
SOV,
And when your students go on to write math textbooks for a living, will you continue cutting them slack?
This is from the Andrews NYT article:
This is after the original deal fell through because Andrews had too much existing debt. It astonishes me that any bank would be this stupid, but you'd think a person who made a living doing what Andrews did might take the failure of "Plan A" as, oh, I don't know, maybe a faint signal that he was trying to do something monumentally asinine?
I actually find myself agreeing with both cm and benniejetz where they disagreed.
I'm glad Megan brought this up. Like cm, I do think the discussion is worthwhile, despite the unnecessary bashing.
And as a long-time NYTimes reader, I also think BennieJetz is correct - there's a clubbiness at the Times that actually impedes the quality of the work.
You see that a lot more in the last 16 years.
I actually think the fact that the Times is running up against a brick wall may be healthy - if it doesn't kill them.
Also: to what extent are the newspapers in trouble in large part because, as former journalist and "Wire" creator David Simon believes, they overspent on shiny new buildings while trying to please shareholders?
At the basest level, they made the same mistake Andrews did. And the US government has. They overspent and undersaved.
Now that's something I'd like McArdle to suggest. Although, as Benniejetz points out, it's not our place to determine what she covers.
they overspent on shiny new buildings while trying to please shareholders?
Yes. At the time the NY Times bought the Boston Globe, it reminded me of nothing so much as when Ford bought Jaguar. And the results have been farly similar, except that Ford eventually found a buyer for Jaguar (Tata iirc), albeit at a huge loss. The Times will never find a buyer for the Globe.
That's as may be. But either you've got cause and effect reversed here (you're not trying to argue that the difficulty in obtaining affordable housing caused stagflation are you? There's a well-known and widely-accepted history as to what happened in the 70's, and that wasn't it), or you're saying that even if this is true, that shouldn't stand in the way of being able to afford the house.
I don't know what to say to that one, except that trying to fix this problem with easy money wasn't the correct solution, in fact, was probably one of the worst possible alternatives.
Oh, I agree with restructuring mortgages, in particular, with utilizing the cramdown option. But we aren't quite there yet . . . if we ever will be.
Ah, another geezer - a term I use as an honorific :-) I would wager that in addition, probably very few of you had working spouses.
So what has changed since then?
This is one of nifty teacher things I pound on in class - I introduce this as The. Most. Important. Calculation. You. Will. Make. Ever. While the mathemtics is trite, they appear to be rather stunned about how much of what they are paying for a house is due to interest charges(admittedly, these are students for the most part who aged 20 and under.) They have the gut feeling that the interest on a $100K house over 30 years might be as high as $20K, perhaps even - maybe - as high as $30K.
It's easy to say that people should be financially literate. The reality is something quite different. I get the sense that most people get by financially by emulating their parents. While that has worked for a good long time, those times are just about over.
I think this bears a bit of extra commentary as well. The first is that homeowners have been encouraged by the industry to think of their house as an asset, not a home. Back in the day, those 98%er's were moving Heaven and Earth so that they wouldn't be forced to abandon Tara. But assets aren't like homes, and it's not that dinky 10% down that people are protecting. No, what's happening is that more and more people are finding themselves upside down, holding a mortgage on an 'asset' that is worth vastly less than what they are paying for it.
That is the proximate reason for 'noncompliance' these days. Bankruptcy? Foreclosure? Hey, our betters have taught us that this is just doing business. Nothing personal, and no stigma attaches to this sort of behaviour.
"That is the proximate reason for 'noncompliance' these days. Bankruptcy? Foreclosure? Hey, our betters have taught us that this is just doing business. Nothing personal, and no stigma attaches to this sort of behaviour."
Indeed. If GS, SG, and DB can essentially be bailed out by the taxpayer via AIG, then the bar has been seriously lowered.
There was a recent article in the Times on just this issue. It appeared within the last couple of months. The readers' comments were pretty interesting - with one group encouraging the underwater home-owners to accept foreclosure even when not necessary, the other group of readers trying in vain to make a moral (and yet arguably pragmatic) argument for honoring the contract.
I should look up that article - I wonder if it was by Andrews.
Nice post.
Looks like Megan is soaking up all the compliments she can get by not posting anything new ;-)
But either you've got cause and effect reversed here (you're not trying to argue that the difficulty in obtaining affordable housing caused stagflation are you?
No, I am not. I am just reporting an historical fact: After almost a decade of high inflation AND stagnation (caused by whatever--oil shocks, unwinding wage and price control follies, any other causes anyone cares to name) then a truly disastrous rise in interest rates that came to a peak in 1982, we had a problem in the mid-1980s...kind of a mathematical problem.
The percentage of young people in their late 20s or 30s who could come up with the down payment and show the proper income-to-debt ratio to qualify for a mortgage was at an historically low level, in fact had never been lower. Something had to be done. From Jim Wright on the left to Jack Kemp on the right, affordable home ownership was one of the top policy issues in the land in the early 1980s.
First, something reasonable was done. Mark Shields used to say the two greatest drivers in development of the middle class were the 4 year car loan and the 30 year mortgage.
Then things may have gone overboard. The 30-year fixed rate mortgage came with no down payment, no requirement to prove income, in amounts equal to more than 100% of the value of the home: a fancier-looking balloon-payment loan. (And the 4 year car loan became the 6 year car loan became the lease.) And these forms of dementia are only the barest tip of the iceberg. Under the surface, mortgage backed securities and derivatives of those securities and artificial derivative bets based on pretend mortgage-backed securities...
In short, there were and probably still are systemic problems. Is there any way for government to sort out the poor slugs who just showed up to get a mortgage and buy a house, and the hustlers who were going for the One Big Score in their life, risk be damned?
Scent,
One minor point when you're talking to your students about how much interest they will need to pay. They need to keep in mind that the last mortgage payment they will make will be paid for with somewhat inflated dollars.
The median home price in 1979 was $62,900 in 2008 it was 230,600. So, if you bought your home in 1979 for $62,900 you would now be about to make your last mortgage payment of $331.70.
But to your larger point, it's vital that kids learn to run the numbers on every large purchase. If you can rent a home for $1,000/month or buy for $2,/month it may make sense to rent and bank the difference. If you run the numbers on buying a new car vs. buying a used car, you may find that buying a 3yo Civic doesn't really make sense as they don't depreciate enough to make it worth while.
woops - buy for $2,000/month I mean...
I don't cut them slack now, in fact, am considerably disgusted with most of them. Or rather, their work ethic.
But here's the thing: I think you're assuming expertise that Andrews doesn't have.
I've read a few of his pieces and tried to dredge up some of his biographical data, and nowhere have I found anything resembling credentials in finance or economics. Even the NYT merely notes that he 'writes about economics', ie, doesn't claim any sort of special qualifications he might have to write on such topics. Further, reading over his pieces, he doesn't come across as particularly, er, numerate. I'm guessing he might have some sort of journalism or English degree, and - maybe - an MBA. Otherwise, nothing. And we know just how numerate MBA's generally tend to be ;-)
The bottom line is, if he really had the quals you seem to think he has you might be on to something. But the actual evidence that he does is thin on the ground.
I'm guessing that a person who made a living doing what Andrews did should (there's that word again) know better. But that's evidence of the shoddiness of the Time's hires, nothing more. Andrews strikes me as a guy who, like a lot of others, was guilty of being over-optimistic when estimating both future revenue streams and debt. He shouldn't have been, but that's another story.
Scent of Violets,
"I'm afraid that I'm going to have to ask for some evidence about that 'enhanced enforcement', something that is not from the Usual Suspects(you know the drill, no Cato, no Heritage, no AEI, etc.)"
Well, I can't resist asking, what would you consider to be a credible source on this issue, The New York Times? Anyway, as to the effect of CRA on banking mergers and expansions, here is the Mineapolis Fed, in 1989:
"In 1977, following increasing pressure from consumer groups, Congress passed the Community Reinvestment Act (CRA) to ensure that financial institutions meet the credit needs of their communities, including low- to moderate-income neighborhoods. The Act requires the Federal Reserve System, along with other federal supervisory agencies, "to encourage such institutions to help meet the credit needs of the local communities in which they are chartered." At the same time the supervisors are required to see that those institutions conduct their business in a safe and sound manner.
In other words: Make riskier loans, but don't risk the bank.
For a bank supervisor with a responsibility to encourage safe lending practices, the above notion creates the possibility that, from time to time, the supervisor may be faced with conflicting responsibilities. The principal issue I want to explore is how this conflict may get resolved within the CRA framework."
If you read the rest of the article, you will see that the Fed's recommendations for resolving this potential conflict consist of reading newsletters and handbooks and attending educational forums. The entire article is here:
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3796
On the "enhanced" enforcment under Clinton, here:
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
From the Wall Street Journal:
"Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.
The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.
Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages."
The article is here:
http://online.wsj.com/article/SB122298982558700341.html
You might also want to look here:
http://www.nypost.com/seven/02052008/postopinion/opedcolumnists/the_real_scandal_243911.htm?page=0
And from an article published in 1999:
The easy flow of credit during the 1990s has helped to fuel a nationwide housing boom and spending spree that has kept the economy humming. But analysts say banks have lowered their lending standards, particularly to tap into the fast-growing minority markets, and have been under strong political pressure to do so despite studies showing minorities are more likely to default than whites. The result of this largess may be soaring levels of bankruptcy and default during the next recession.
"We have created a tremendous amount of risk," says Cynthia Latta, economist with DRI/McGraw-Hill in Boston. "At some point, the economy is going to turn down. There will be large numbers of defaults that will trigger a lot of political heat."
Politicians have pushed for the lower standards out of a legitimate desire to spread today's prosperity to groups that previously were on the margin, says Latta. "Banks are under a great deal of pressure to lend in these communities," she says. "It is very political. But I still have reservations about whether you're really doing anyone a favor by letting them borrow 100 percent of the cost of a home. It makes it so easy for them to get in over their heads." If the economy turns sour and unemployment rises, minorities will be the first laid off -- paving the way for a wave of defaults.
Federal laws on fair lending and community reinvestment require bankers to reach out to minorities, notes David Lereah, chief economist with the Mortgage Bankers Association. The record rates of homeownership among minorities as well as the rest of the population shows that these reach-out programs are working.
Nevertheless, Lereah agrees that banks and the economy will pay a price in the next recession. "If the economy goes into a tailspin and experiences recession, then I do worry about some of the low down-payment loans," he says. "The borrowers don't have that much at stake, don't have that much equity in the homes. If they lose their jobs, they could walk away from the homes."
The entire article is here:
http://findarticles.com/p/articles/mi_m1571/is_41_15/ai_57748148/
Let me conclude with the following. In searching out these articles (no, I don't keep a databank of such information on my computer) I also found several that attributed little or no responsibility to the CRA. Opinions, and agendas, do vary. While I myself still consider the CRA, particularly after the more aggressive enforcement in the 90s, to have been a contributory factor in this mess, I do not see it as having been the main factor. As I've said a couple of times before, the prospect of political gain, coupled with strong financial interests, drove most of the bad decision making that led us here. Actually, from the perspective of those who made these decisions, they were pretty rational, in the most calculating and self-serving sense of the word.
People generally look for ways of dressing up their base motives so as to make them appear more politically irreproachable. "Concern for one's fellow man" is often a guise for dubious personal interests.
Edwards' defense doesn't fit with the timeline. According to his original NYT piece, Edwards and Barreiro bought their "small but stately brick home" together in August, 2004, 2 or 3 years before Barriero declared her second bankruptcy. To buy that house, they borrowed $415,000, with monthly payments of $2,500, not counting taxes and insurance.
So the best case you can make is that Edwards and Barreiro borrowed close to half a million dollars at the same time that she owed her sister $30,000.
I appreciate the sob story about how much he would have loved to have cashed out his 401(K) to pay off his sister-in-law but just couldn't. However, it's way to pat to say that "when Patricia couldn
t repay, her sister followed her east." For at least part of the 04-07 period, Patricia was personally making $60K per year, and Edwards was making $120K per year, plus overtime and stock. Wouldn't it have been possible for the Edwards family to live slightly below their means from 2004-2007 and start paying the sister back, rather than living substantially above their means, then declaring bankruptcy when the sister was so classless as to ask for repayment.
Finally, if it's true that the $30K debt is due to the sister cosigning on a car loan, that's not a pretty detail. It means that Barreiro bought a pretty nice car for a single mother with minimal income, asked her sister to guarantee the loan, defaulted, then bought a half-million dollar home and array of nice cheeses and gap clothing without making an effort to pay her sister back.
D'oh! I was sure I had the tags right, but forgot to click preview. Mea culpa!
But I don't think she was ever a single mother. The chain of events if pretty fuzzy, but it looks more like she left LA to reconnect with Andrews, they got married, bought the house, she declares BK, and he wakes up in a cold sweat.
True, this is sort of inside baseball, but it's not so much Edmund and Patty's tangled love story that interests me, but rather how the NYT and the rest of big city, East Coast media close ranks to protect one of their own. If this guy was a FOX economic analyst or worked for Reason or National Review, he'd be eviscerated and not just by random blog comments.
But because he's in the club, no pesky questions allowed.
You're never going to be able to police most of this bad behavior, in the sense that you won't have a third party sitting in on all the transactions in the economy making sure they are done "properly." Just about everything in life works that way. My town has cops, and every so often I see one. I haven't seen one on my street in months, but even so I don't think anyone is going to rob my place while I'm at work. Most people have an internal norm against stealing, and that MORAL rule takes care of the problem to a large extent. The cops are there to deter those few people for whom the moral rule alone is insufficient, and to clean up the mess if deterrence is unsuccessful.
If the moral rule against stealing went away, the police force would be completely unable to function. There's no way it could handle the lawlessness that would result, and we wouldn't be able to raise taxes enough to hire enough cops to watch everyone. Plus, a large proportion of the cops themselves would be corrupt, and might even participate in the stealing. Or the population as a whole, convinced that stealing is the correct thing to do, might refuse to cooperate with the police. Or might actively impede their investigations.
See the parallels? As long as people are trying to justify stealing (substitute "borrowing money you have no intention of paying back" and "selling securities that aren't backed by anything"), there's no point in talking regulation. Any new regulatory system would be undercut before it started.
So, assuming that is not what we want, what ARE the moral rules that should govern here? And how do we enforce them at the level of individual decision-making, banking practices, and government policy?
Is this inside baseball story over yet? Surely the 15 minutes are up by now.
You're never going to be able to police most of this bad behavior
Sure you can. The industry term for it is called "underwriting." The rest of us might call it "due diligence." Post-Depression, we had decades where underwriting was generally pretty good, even though homeownership rates were increasing.
What you are missing is that the lenders deliberately chose to curtail and avoid due diligence. It was profitable for them not to do their homework, so they didn't. Practices that were once typical were no longer required. It wasn't about morality, it was about money.
The lenders were perpetrators, not hapless victims. That willingness to ignore deficiencies was encouraged by the ability to sell this debt in the secondary market, which provide a place for questionable loans to be packaged and sold. Unfortunately, the lenders drank their own Kool Aid and kept enough of it for themselves.
In searching out these articles (no, I don't keep a databank of such information on my computer) I also found several that attributed little or no responsibility to the CRA. Opinions, and agendas, do vary.
That's true. You've cited a couple of conservatives and an article from an outlet of the Washington Times. Finding anti-CRA material from those sources is about as surprising as would be finding anti-capitalist arguments at the World Socialist Web Site. All that it proves is that conservatives are more conservative than liberals.
Instead of looking for loaded opinions from either side, look at the data. The subprime market -- which incidentally Andrews would not have been a part of if he was an Alt-A borrower -- was about 15% of the total lending market. The majority of CRA-area loans that were made during this decade were made by non-CRA lenders who were not obliged to make them. Prime defaults have exceeded subprime defaults since at least third quarter of last year.
It's hard to argue that CRA was a driving force when the vast majority of loans were not CRA loans and when most of the loans made in CRA markets were not made by CRA lenders. Obviously, there was a profit motives to make CRA loans, and most of the loans that were being made had nothing to do with CRA requirement.
Those facts aren't very exciting, because they make it obvious that the lending frenzy was not confined to nasty inferior types with dark skin who presumably belong in jail, but was actually a wealth driver for the entire country, including the middle and upper classes. This is going to require a rethink of these institutions; burning down the ghettos just won't do the trick.
The second bankruptcy was after Patty and Edmund "got together". I gather they hadn't married yet at the time, and therefore his income didn't disqualify Patty from a Chapter 7.
Was he nevertheless paying something for her support at the time? Rent on a shared apartment, perhaps? If she had no other source of income, and she'd been compelled to work by circumstance, she likely would have falled under Chapter 13 -- and continued to bear responsibility to pay what debts she could over a period of years before discharge.
Did Edmund and Patty postpone marriage, and Edmund provide subsidies so Patty didn't have to work, to game the bankruptcy system? Perhaps they were considering marriage at the time, and the pre-nuptials Chapter 7 (while Edmund paid her basic support) was a strategy to clear all her debts and ensure that Edmund would not bear any of the liability?
We know that he later used ill-conceived practices of the mortgage industry to shield his obligations to a former wife and children, *and* his new wife's bankruptcies.
The stench becomes more fetid by the minute.
RW -- How does this
What you are missing is that the lenders deliberately chose to curtail and avoid due diligence. It was profitable for them not to do their homework, so they didn't.
contradict anything I've been saying? It's like the bit where the cops decide to get in on the stealing themselves, because everybody is doing it. Once the cops are corrupt, that's it.
And once the cultural rot sets in, there isn't a simple procedural fix that will make things right and save people from themselves. You've got to fix the culture from the ground up.
RW,
"Those facts aren't very exciting, because they make it obvious that the lending frenzy was not confined to nasty inferior types with dark skin who presumably belong in jail, but was actually a wealth driver for the entire country, including the middle and upper classes. This is going to require a rethink of these institutions; burning down the ghettos just won't do the trick."
Funny that you mention this, as I was planning to torch a few ghettos this weekend, but your compelling arguments have stayed my hand. You've done yourself proud, but I do have to wonder how you square such a paragraph with your prior injunction to "look at the data," rather than "loaded opinions from either side."
None of this qualifies, I'm afraid. You need something that is recent - and a real analysis. here is a good starting place for this sort of thing:
And then there's Mark Thoma. I won't quote him because I'm biased: After Schlock Mercenary and 9 Chickweed Lane, Professor Thoma is usually the third site I view while drinking my morning coffee.
This stuff is all over the place, btw:
Then there's Elizabeth Duke who is something of the go-to gal for this sort of thing, I gather:
Notice how the same figures come up again and again. If you want to argue that somehow this small percentages, e.g., 6%, caused the mortgage crisis, fine, let's see the argument. If you're merely arguing that this contributed to the crisis, well, I'd agree, but so what? There were far more culpable actors whose responsibility can be rated at much higher than six percent. Even Andrews in his own way 'contributed' to the meltdown. Saying that the CRA and Andrews 'contributed' to the mess is true, but misleading, if one is looking for an overarching causal explanation.
You're all missing the big picture. The real story here has nothing to do with Andrews' finances.
No, the real outrage here is that a NY Times economic reporter believes he can conveniently omit something as pertinent as multiple, back to back bankruptcies, from a telling of a tale of financial woe.
Why? Because it makes his case less sympathetic and spoils his narrative.
Now, of all of the reporting Andrews has done in his life, what other major facts and details has he conveniently omitted because they subverted the conclusion he wanted readers to reach?
And that his editor, his book editor and other members of the MSM will go along.
I'm with M.C.
Without a culture that supports a morality of responsibility (both for people and for corporations) through both positive (social approval) and negative (guilt and shame) feedback there can be no successful regulation. Regulation will either be corrupted, ignored, avoided through cheating, or just plain worked around (the planning for the last war problem).
Why did the lenders deliberately chose to curtail and avoid due diligence? You claim it is because it was profitable but that avoids the issue of why did things not remain as they were? It had always been potentially profitable to avoid the due diligence so why had they been doing it in the past? The only reason I can see is that a cultural shift took place where profit became more important then responsibility. Society changed from one where personal responsibility, honoring debts, and living within your means are seen as good to one where gaming the system, socializing negative results, screwing the man, and living large are seen as good.
If we set up what looks like a nice tight regulatory scheme now what is to stop someone from finding the loophole or finding the right person to amend the regulations in a couple of years. Nothing is foolproof and the profit motive is still around. The only other degree of freedom we have to play with would seem to be morality.
Oh, and the fact that she could screw her own sister out of thirty grand while drinking expensive lattes, sending her kids to pricy private schools and buying a half million dollar home tells us a lot about her character. She has none.
That's how she can be so remorseless about all of the people (including you and me when she failed to pay her IRS tax bill) she has stiffed in her life; if your own sister, who cared for your very children, can be thrown under a bus, why not everyone?
She is a user.
SOV,
You seem to have forgotten the issues which we were originally discussing. Your comment of May 24th:
"I also have no problem in noting that the economic theories and philosophy guiding this Very Bad Legislation is 100% conservative and libertarian."
My reply:
"I think we can all agree that CRA, and the "enhanced" enforcement of CRA under Clinton, were not examples of a conservative mania for deregulation. And yes, this was a contributory factor."
Your most recent comment:
"If you're merely arguing that this [the CRA] contributed to the crisis, well, I'd agree, but so what? There were far more culpable actors whose responsibility can be rated at much higher than six percent. Even Andrews in his own way 'contributed' to the meltdown. Saying that the CRA and Andrews 'contributed' to the mess is true, but misleading, if one is looking for an overarching causal explanation."
Since I never claimed, and have in fact, repeatedly assserted, that the CRA is not "an overarching causal explanation," but rather a "contributory factor," I'm afraid that you have just agreed with me.
By the way, in the current atmosphere, I hardly think that Fed pronouncements can be considered unbiased. The fact that some of the documents I cited are not absolutely current seems to me to make them more, rather than less relevant, in that their authors anticipate the crisis to come, which would lndicate that on some level they possessed an awareness of what was going on, as opposed to the Monday morning quarterbacking we're being treated to these days.
Funny that you mention this, as I was planning to torch a few ghettos this weekend, but your compelling arguments have stayed my hand.
While I'm glad that you enjoyed my sarcasm, you glossed over two basic points made by the data, should you choose to review it: (a) the subprime market was largely a non-CRA affair, with non-CRA lenders experiencing higher default rates than the CRA providers, and (b) the prime defaults have exceeded the subprime defaults for some time now.
It should be obvious that these factors alone debunk your argument. You're trying to use exceptions to prove the rule, but of course, you should know that this makes no sense.
Incidentally, I'm not a fan of subprime lending, and I think that aspects of CRA are misguided. However, blaming CRA for this is a real copout, a hasty rewrite of history by the aggressive lenders and conservative ideologues who wish to avoid responsibility for their roles in the crisis. The degree of leverage is the real culprit, and that was a problem across the lending range, one that was certainly not limited to the subprime loans that comprised a small proportion of the loan portfolio.
And once the cultural rot sets in, there isn't a simple procedural fix that will make things right and save people from themselves.
I don't really know what "cultural rot" means. If something is profitable in the short run, it is to be expected that there will be those who pursue the market.
The easiest way to address this is to eliminate or curtail the sort of lending products that tend to lead to abuse, such as HELOC's and negative amortization loans. Simple, easily enforceable statutes are far easier to impose and enforce than some high-minded cultural imperative that sounds nice but ultimately does nothing. Not being able to make the loan in the first place renders the moralistic missionary zeal unnecessary.
So then of course, you agree with me that John Alvo's failure to keep up with his mortgage payments was a 'contributing factor' to the housing meltdown :-) Just like Nicole Leonards' failure to make her payments was a 'contributing factor' to the housing meltdown.
Right?
Which begs the question then of why would you mention this at all?
Shrug. I'm a numbers sort of guy. I have no reason to believe these widely cited numbers are wrong. Do you? And since the argument rests solely on the relative size of these numbers, I'd say that you really don't have much of a point - and currently, even the Austrians are crowing that they 'predicted' this financial collapse.
don't you think we really should be making policy at the macro level based upon what is?
That depends on what the meaning of "is" is. Provided it's what really is, not what some idiot NYT reporter's anecdote makes it appear to be, the yes, absolutely, we should care more about doing it right in a world full of idiots than trying to reform the idiots so as to live in a perfect world.
Some people want a HELOC and can handle it. It's only a certain kind of loan, and there's nothing that makes it inherently more dangerous than a credit card. If you want to curtail consumer lending generally because some people can't handle it, well, that's an argument to be made. I don't go that far.
I might accept an argument for eliminating the favorable tax treatment on consumer debt secured by real estate. The mortgage interest deduction itself annoys me, and it annoys me doubly that consumer borrowing against your house gets tax advantages that borrowing against your excellent credit history does not. I'm convinced that the second mortgage phenomenon was driven in part by this tax treatment. But that's another issue.
People will always have to control THEMSELVES. No one else can do it for them if they are determined to get in trouble. This includes people who are bankers and people who are NYT reporters.
In the abstract, there is always the possibility that loopholes will be found and exploited. But as a matter of practice, the historical record shows that regulation worked pretty well for over fifty years. Further, it was not loopholes that were found and exploited that brought us to this current pass; it was consciously deregulating the financial environment and letting enforcement of existing regulations lapse (plus lack of new regulation of the newer 'products'.) So why try something different than what worked before? In fact, isn't going with what worked in the past pretty much the definition of conservatism ;-)
Finally, just how, specifically would we play around with 'morality'? Discuss the mechanisms you would use to do so. I'm sorry, but this sounds very much like prescription for doing absolutely nothing at all. Note btw that near-universal opprobrium didn't do much in the way of getting banksters to return their bonuses. What does that tell you?
SOV, my guess is that you will find it just about as hard to prove that deregulation led to the mortgage crash as it would be to prove that the CRA did.
In hindsight, you always could have said "don't do X," but it takes hindsight even to see it. If you could find a consistent call from the dems to enact regulations that actually would have prevented the crash, then maybe, but pretty much everybody wanted rates of homeownership to increase, and wanted lending available to everyone. A few people worried that future home price shocks would lead to a consumer demand contraction, but AFAICR, no one was seriously predicting a supply side credit freeze, and even the Krugmans of the world weren't arguing that what we needed to do was keep GMAC out of mortgages.
ome people want a HELOC and can handle it. It's only a certain kind of loan
The only way for this to be possibly be true is to ignore fundamental principals of finance.
One basic rule -- the higher the amount of leverage, the higher the risk of default. A basic point that really no one disputes.
HELOC's allow borrowers to increase their loan-to-value ration. That inherently increases default risk. No getting around this, it's just a fact.
You keep trying to rewrite finance rules with your morality play. Your morality is utterly unnecessary if basic rules of finance, which are no secret to anyone in the industry, are followed.
The lenders didn't follow these rules because higher leverage also creates higher returns when times are good. Those returns were very tempting, but they backfire when times are bad.
If lenders would manage their lending to account for bad times, HELOC's would be strictly managed and would be few and far between. But when loan officers are paid bonuses to compromise the lender's balance sheet, such aggression is to be expected.
This sort of debt is a nice time bomb. Maybe you have such a bomb and you'd like to feel better about it. Well, here's the thing -- if your debt is higher than the value of the property, then you are servicing a toxic asset and you are part of the problem, even if you are making the payments.
SOV,
I don't know who John Alvo :-) and Nicole Leonard :-) are. If they are anything like Edmund Andrews in their assumptions and behavior, then yes, I do consider them contributory factors to the current crisis.
To go back to your original point: "I also have no problem in noting that the economic theories and philosophy guiding this Very Bad Legislation is 100% conservative and libertarian."
No one can with accuracy attribute a precise percentage figure, but if the CRA is culpable for 2%, or 4%, or 6% of the current problem, then your above-quoted claim (100%) is flawed. As a "numbers sort of guy," I'm sure this is obvious to you, as is evidenced by your statement: "If you're merely arguing that this [the CRA] contributed to the crisis, well, I'd agree, but so what?" I think the "so what" may now be clearer.
I'm sorry, but to refute "my claim" the the CRA was the principal, or a principal, factor in the mortgage meltdown, you're going to have to make reference, through quotation, to my comments on this thread. If you bother to go back and read them, you may notice that, from the beginning, I attribute the bulk of the blame in the following manner:
This legislation, like most legislation, was driven by the desire of elected representatives to remain in office combined with the legislative leverage of campaign contributors who sought to profit from said legislation. I don't know that such a process can accurately be said to be grounded in "theories and philosphy," except perhaps "The Will to Power."
BTW: I'm not sure that a website whose subtitle is "Truth to Power" is necessarily any more credible that the sources I previously cited.
RW argues that the subprime market was largely a non-CRA affair (where did I ever claim otherwise?) and that non-CRA lenders have experienced higher default rates (again, where did I claim otherwise?)
He goes on to say that "I'm not a fan of subprime lending, and I think that aspects of CRA are misguided." What aspects of CRA are misguided? Have these aspects of this legislation in any way contributed to problems for lenders and borrowers, and if so, how?
You claim that the data debunks my argument. What, in your eyes, is my argument, and, like SOV, can you support that interpretation from the things I've actually said here, rather than hyperbole and innuendo?
" I'm glad that you enjoyed my sarcasm . . ."
Sarcasm is irony, minus the subtlety and wit. "Enjoyed" might be a stretch. Let's just say I found it easy to riff off of.
What, in your eyes, is my argument
You have claimed that CRA was a "contributing factor." I would dispute that.
This crash would have happened, even without CRA. Once the securitization business allowed for easily bundling, a market was created for all kinds of overextensions of credit.
Had we had CRA in the absence of these other changes that had become commonplace, there would have been no mortgage problem, because CRA was never a significant piece of the total market. In that sense, CRA was a non issue.
Fannie and Freddie was overleveraged, just as the major banks are overleveraged and just as the average American is overleveraged. They were as badly managed as the banks. Strip away the details, and this whole crisis is predicated upon everyone being overextended. Higher risk deals demand higher reserves, and the reserves were not adequate.
SOV, you missed my bit about finding the right person to amend the rules. Regulation did work right up until it was consciously deregulated (your words). The possibility of profits had always been there but had been safely held in check by regulation. However at some point the shift occurred and the responsibility that behind the regulations was replaced with something else.
What I am saying is that any regulation that is passed now will be in danger of being deregulated away just as the last set of well working regulations was deregulated. Certainly we need to work out a good set of regulations. However we can not expect those regulations to hold forever without a change in morality (I prefer culture or general attitude but morality will do since it’s already in use in the discussion) back to the culture that held sway during the last period when the regulations worked.
I don't know how to change culture/morality other than just waiting. However I feel there is value in making the importance of morality very visible.
Which raises an interesting question: what would I have to do to prove or disprove that deregulation was the culprit? If you can't tell me, then I would suggest that the fault lies not in the stars, but in you. In contrast, it's pretty easy to show that the CRA wasn't the culprit; the numbers are simply way too small, in fact, much smaller than other sectors. I've posted those numbers. You can either disagree with the numbers and show that they are wrong, or you can show how that 6% share that was the CRA's portion had the immense amount of influence you claim for it.
And no, you can't say "How do you know that there wasn't something special about CRA's that lead them to make an outsized contribution?" Quite obviously, I don't. But that's not an argument for the CRA hypothesis.
Well, no, there was plenty of foresight to go around; even Megan claims that she predicted this crisis in 2005. Also, I don't think anyone is claiming that this failure was the sole province of either the Republicans or the Democrats. So . . . what do you want me to do to show a connection between deregulation and the housing crises? Or, alternatively, how could I disprove the connection?
I declare victory; at this point you're quibbling about choice of words. Quite obviously, if other agents are culpable, say an Andrews or a Leonard, then toting up the figures gives 100% plus. So go ahead and declare a gotcha! for the equivalent of saying that not all dogs have for legs, so that me to say that dogs are four-legged animals is clearly an error. Quite obviously, saying that CRA contributed to the crisis in the same way that Andrews contributed is very different from saying that it was one of the main or even a relatively minor cause.
So then why didn't you include my specific reply to exactly that point:
Iow, I wasn't even talking about the CRA here. No, I pointed out that you had no evidence for this fact when you said that:
Since your early attempts at proof were indeed about trying to make the CRA into a much bigger deal, I don't really buy your new line.
In fact, I think we're at the point where you've all but admitted that "If you can't make me say I'm wrong I win." So I won't be responding any further to you until you make a few concessions.
"According to the language of the new Clinton regs, banks that used "innovative or flexible lending practices" to address the credit needs of low-income borrowers passed the test. Banks with poor CRA ratings were hit with stiff fines and blocked from expanding their operations. Soon, "flexible" lending became the norm, and banks used subprime loans, which charge higher interest rates, to cover the added risk.
But it wasn't enough. So Clinton ordered HUD to pressure Fannie Mae and Freddie Mac to buy the higher-risk loans from private banks and lenders, while adopting the same "flexible" credit standards. By 2000, HUD had mandated that low-income mortgages — including CRA-related loans — make up half of their portfolios.
"To further spread the risk, Clinton legalized the securitization of such mortgages. In 1997, Bear Sterns securitized the first CRA loans — $385 million worth, all guaranteed by Freddie Mac. Thus began the massive bundling of subprime mortgages that wound up poisoning the entire industry.
The cause and effect is clear. As ex-Fed chief Alan Greenspan recently testified: "It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA."
It strains credulity for top regulators to now say the CRA had "absolutely nothing" to do with the subprime crisis. It smacks of political spin and bureaucratic CYA."
Article here:
http://www.ibdeditorials.com/IBDArticles.aspx?secid=1501&status=article&id=313718923222067&secure=1&show=1&rss=1
"When the CRA was created during the Carter administration, the administration also funded with tax dollars numerous "community groups" that have helped the Fed, the Comptroller of the Currency, and other federal regulatory agencies to enforce the act. Under the CRA, if a bank wants to make virtually any change in its business operations — merging, opening up a new branch, getting into a new line of business — it must first prove to regulators that it has made "enough" loans to the government's preferred borrowers. The (partially) tax-funded "community groups" like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank's activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other "community groups" by giving them millions of dollars as well as promising to make even more dubious loans.
In order to try to diversify the risk of these loans, the Federal Home Loan Mortgage Company ("Freddie Mac") pioneered the "securitization" of bundles of these high-risk loans so that they could be sold on secondary markets. Such "securitization" exploded during the 1990s as a result of government regulation. As Fed Chairman Ben Bernanke himself stated in a March 30, 2007 speech entitled "The Community Reinvestment Act: Its Evolution and New Challenges" (published online by the Fed)."
Article here:
http://mises.org/story/2963
I acknowledge that the CRA was not the principal cause of the mortgage crisis, and as RW points out, the crash would have happened even without the CRA. (Of course, I never claimed that it was the principal factor). I brought CRA into the discussion because SOV claimed that ALL of the ideological and philosophical arguments behind the mortgage crisis were anti-regulatory, and thus "conservative," a point with which I happen not to agree.
To say that this is "quibbling about choice of words" suggests an indifference to precision.
No one has refuted, or even attempted to refute, my claim that CRA enforcement was enhanced, or strengthened, during the Clinton administration. Based upon my reading, even advocates of the CRA support this conclusion.
There seems to be an admission on the part of both SOV and RW that there are problems with the CRA, and, at least in SOV's case, an admission that it probably played a role, but perhaps minor role, in the mortgage crisis. He suggests that that I am "trying to make the CRA into a much bigger deal," but of course, there are no references to anything I have written here in support of that claim. I suppose it was "intuited."
"I think we're at the point where you've all but admitted that "If you can't make me say I'm wrong I win." So I won't be responding any further to you until you make a few concessions."
If anything I've writen here, now, contradicts anything I've previously posted here, I'm sure you'll let me know. If anything I've actually written prior to this post, you consider wrong (intuitions and inferences excluded) I'm sure you'll let me know. Otherwise . . . .
"I declare victory."
In the 1960s, the poet Robert Lowell, while on a cultural goodwill tour of South America and while suffering from a bout of acute mania, climbed upon a statue in a Buenos Aires traffic circle and declared himself "Caesar of Argentina." It didn't work for him either.
No one has refuted, or even attempted to refute, my claim that CRA enforcement was enhanced, or strengthened, during the Clinton administration.
You keep restating this straw man argument, even though it has been addressed.
The issue isn't that CRA was free of risk -- by definition, such a program will carry greater borrower risk -- but that the size of the program was not large enough to matter.
Here's an analogy of sorts: Suppose you would like to claim that auto accident fatalities are caused by heroin users, and that you would like to blame heroin and heroin policies for the accident problem.
If I respond to that inaccurate argument by illustrating that there aren't that many heroin users, I'm not arguing in favor of junkies, but just pointing out that the junkies are not numerous enough to shoulder the blame for the macro problem of traffic safety. To acknowledge the statistical reality of their relative lack of importance is not the same as saying that shooting up is an activity free of risk.
Once again -- the fact that most subprime activity was not from the CRA suggests that CRA wasn't particularly important. If there had been no CRA, there would have been more non-CRA subprime loans to fill the gap.
It's fallacious to assume that the market would not have responded with its subprime loan products. We already know that it did. Maybe the Austrian fringe over at the Mises website haven't figured that out, but you can see from the lending data that there were plenty of free market players ready to jump in. When markets heat up, the weaker assets become more appealing. Until they're not.
ScentofViolets writes:
We're all Popper fans in the reality based community, so it usually works the other way -- if you can't produce some rigorous tests, your hypothesis is at best unproven. That said, I accept your challenge:
1) I would accept the following as strong evidence for your hypothesis:
1.1) A link or checkable citation to a mainstream democratic proposal for regulation circa 1/1/07 that looks like it would have prevented the current crisis.
1.2) (a) A link or checkable citation to which specific regulation(s) were removed or not enforced during the Bush administration, together with (b) a plausible explanation of how the continuation of or more aggressive enforcement of the regulation(s) would have prevented the crisis. In addition, (c) some evidence that mainstream democrats opposed the removal/non-enforcement of the regulation would strengthen the value of this evidence.
2) I would accept the following as strong evidence against your hypothesis.
2.1) Evidence that the regulation(s) at issue were in place and enforced in other countries, (or in the US at other times) but did not stop the behavior that led to the crash.
2.2) To the extent that your hypothesis is that Bush and or the GOP were directly responsible for the crash, evidence that the removal or non-enforcement of the regulation(s) was started by Clinton and/or supported by leading Democrats. (If your hypothesis is not that it's Bush's fault, ignore this one).
How's that? (This is more or less what I said in the first post, just in more detail).
That's not what I'm saying; I agree with your burden of proof standards, but I think I already have produced sufficient evidence. The problem then is that you reject this as any sort of proof/disproof, so the question then is what would be acceptable to you. That's it.
Stop right there. It seems that I have perhaps not stated my hypothesis clearly enough. I don't think this is a Republican vs Democrat issue:
This is what I am saying:
That is, I have what I think are good reasons to believe that deregulation of the finance industry along with lax enforcement of existing laws and rules was the cause of the meltdown. I also believe that this was done with the justification of a 'conservative'/'libertarian' economic credo that government oversight is in general a poor way to manage affairs; far better to 'let the market decide'.
Is this clear now?
I'm still lost. Can you tell me what specific deregulation you think is responsible for the meltdown, what regulation would have prevented the meltdown, and by what mechanism?
I haven't read the guy's book and don't plan to, based on what I've read about it. While his wife's financial profligacy may not have factored into his ability to get a mortgage, I'd wager it jolly well played a role in his decision to get a mortgage he couldn't afford. It's rather appropriate that he's an economics writer, of all things, for the New York Times.
A link or checkable citation to a mainstream democratic proposal for regulation circa 1/1/07 that looks like it would have prevented the current crisis
This is a dead thread, but by 1/1/07 there was no preventing the banking crisis. We were past the point of no return by that point.
Yeah, 1/1/07 is probably too late, but I thought I would be generous, since my standard also requires an explanation of how the reg would have prevented the crisis.
I agree that it's unlikely, but if someone wants to point to a regulatory proposal and explain a mechanism by which it could have prevented the crisis, I'm willing to listen.
Ah the wonders of the internet. Providing ways to have conversations with people all over the world that end before they are done just because the topic is a couple of days old or not on the top of the blog anymore.
He suffers from a terminal case of Knight in Shining Armor Syndrome. :)
Banks have huge debts, but they're getting a helping hand from the federal government. If you have overwhelming debt--perhaps from bad investments, or maybe a job loss, a medical crisis or just plain overspending--you're probably on your own. Check the website http://obamadebthelp2009.blogspot.com
to see if they can help. I am glad I did read it before I talk to my CC company and it helped - Jane Jim, California