Remember when mortgage lenders were gatekeepers?
I had a very weird initial experience with Busted: When I got the galley a couple of months ago, I for some reason started reading in the middle. Before long I was sincerely puzzled: Did the New York Times really pay so poorly that Ed and his also-gainfully-employed wife couldn't make the mortgage payments on a $450,000 house? Then I leafed back a few chapters and saw the reasons: divorce, alimony, child support.
This time around I started at the beginning, but was soon confronted with Ed's decision to volunteer for duty in the Times's Baghdad bureau and its dire consequences for his first marriage. If I tried something like that without months and months and months of spousal consultation, banishment to the basement would be about the mildest punishment I might expect. (And I live in a Manhattan apartment building, where moving to the basement means moving in with the super.)
So I think there probably is a lesson in here somewhere about marriage as an economic institution. Despite certain tax disadvantages, staying married is almost invariably a much better call financially than getting divorced. There may be lots of good reasons to dissolve the bonds of matrimony, but economics is seldom one of them.
I'm not comfortable pushing that lesson very far, though, and another major theme of Busted is one I wholeheartedly endorse. We used to rely on financial institutions to be the gatekeepers that determined whether we could afford a house or not. Through the mid-1990s, if the bank approved your loan application, it meant that you could reasonably be expected to make the payments. Then the financial sector and its regulators completely abdicated their responsibilities. I think it's pretty bogus to blame those who took out the crazy loans for all the problems that ensued. Individuals generally make their financial decisions using heuristics, a.k.a. rules of thumb. For decades the heuristic with mortgage lending was, if you got approved, you could afford the house. Then suddenly that didn't apply any more. Should we really be surprised that disaster ensued?
One last big lesson from the book: Follow Dean Baker's lead on real estate. As Ed recounts in the book, Baker sold his condo in 2004 and moved to a rental. So Dean, are you still renting? Or are you ready to buy a place yet?
Add one thing... your mortgage lender doesn't get paid for NOT getting you to take our a mortgage but they do talk like fiduciaries even though they aren't.
So you have a mortgage broker who wants to sell you a mortgage and, reasonably, they don't want to sell you a mortgage that ruins you, they'd like to sell you tons of mortgages and refis over the years. The broker is backed by a bank that, as you say, presumably doesn't want you to default so it's easy to think "why would they lend to me if they think I can't handle it?" Securitization is not exactly on people's minds. But even if it is... that just adds another layer of approval to the loan: even that hedge fund manager in Greenwich thinks I can pull this off!
All the feedback says "sign, sign, sign!"
June 25, 2009 11:39 AM | Reply | Permalink
Yes, the old joke was that the only way you could get a loan was to prove that you didn't really need it. (My Dad used to say that.)
I remember telling people in ~2004 that my wife and I could qualify for a mortgage for a scary amount of money. We knew instinctively that just having the bank qualify us didn't mean it was a good idea. We bought much less house (and much greater peace of mind).
-- ARG
June 25, 2009 11:51 AM | Reply | Permalink
Your post made me think of something else somewhat related. The last few years, I heard more than a few art dealers, with substantial business records and inventory, complaining the banks were real tough on loans to them UNLESS they had real estate. If you had real estate, then they would give you a business loan, if you didn't, you were persona non grata, no loans for you. It was like real estate was the only sure thing, the only collateral possible.
June 25, 2009 11:52 AM | Reply | Permalink
One thing about real estate: it can't be picked up and carted off. Whatever it's current resale value, the lender knows right where the asset is.
June 26, 2009 4:10 AM | Reply | Permalink
Two years ago my housekeeper bought a 500k house with no down on an ARM. It was her first house and she was joining the American dream not long after getting her citizenship. Now it's worth less than 250k and she can't make the payments.
It's really criminal but the responsibilities are so diffuse that no one person really created the mess. However, lots of people were very aware of the risks.
June 25, 2009 1:54 PM | Reply | Permalink
What's "criminal" about it?
She bought a "500k house with no down." She's lived in a nice house for two years (and most likely, another year if wisely, she stops paying the mortgage, now) at minimal expense to her and her family and at no capital loss.
Sounds to me as though she's made out like the proverbial bandit*.
* Did I misunderstand; do you mean to say she's the "criminal"? If so, I disagree; she's just doing once what Donald Trump does for a living.
June 25, 2009 2:40 PM | Reply | Permalink
The difference between my housekeeper and the Donald is one of scale and intent. My housekeeper just wanted a home, not an investment. They were all at inflated prices but wanted to own and believed the spiel that houses always went up and she could refi before the ARM reset. The Donald makes money in large scale leveraged real estate. Large enough that his bankers became "partners" when the market went south. My housekeeper's credit rating is now toast. Since she doesn't know how to milk the system she has spent all her savings keeping up. She's old school and thinking she has to pay her debts. The Donald is under no such illusion.
June 25, 2009 2:59 PM | Reply | Permalink
No, what my housekeeper did was unwise. The assorted players in the mortgage provider system were, collectively, "criminal," in the sense that the impact of the bubble crash is without precedent. It was also forseeable.
June 25, 2009 2:51 PM | Reply | Permalink
I don't get it.
What did she do that was "unwise"?
June 25, 2009 3:05 PM | Reply | Permalink
Trashed her credit, (it's really difficult to do a lot of day to day things without a CC). All that in return for a few years of living in her own house that cost her more than rent over the same period. And then there is the $250,000+ 1099 she has yet to get from the IRS when the loan get's written off.
Yeah, I'd call that unwise.
June 25, 2009 3:10 PM | Reply | Permalink
Firstly, isn't the IRS imputed income worry -- history?
Secondly -- and here's where you come in -- advise her to stop paying the mortgage and put the monthly payments in a savings account. When she's finally evicted she'll have a nice nest egg.
She takes out a secured credit card backed by her savings. Use it for a while and her credit rating will be repaired.
June 25, 2009 3:19 PM | Reply | Permalink
Thankks for the link. Indeed, the imputed income is history! Congress did something right. However, at the time she did that it was very real so it was an unwise move at the time.
I think people should pay what they agree to pay and am also reluctant to inject myself into another's business. That said I would have strongly steered her away from the purchase if I had known in advance. I did so with others at the time.
Perhaps there is a book I can give her that explores these things. However, it's a clash between her concience and reality. She does have to put her young family first.....
June 25, 2009 3:27 PM | Reply | Permalink
I've also considered that "Busted" would be a good book to give her. At least she won't feel so bad knowing that much of the world went temporarily insane.
Now Edmund I don't feel sorry for in the least. Sympathetic, perhaps, but sorry? No way.
June 25, 2009 3:33 PM | Reply | Permalink
Conscience?
Show her this slideshow and ask her whether these guys really deserve to benefit from the exercise of her conscience.
June 25, 2009 3:35 PM | Reply | Permalink
It's debt she took on knowingly. But I suppose it is easier to abandon one's obligations if one's creditors are scum. It is still a dangerous path. Lots of self serving breaches of obligations can be rationalized that way. empathizing with this is a standard technique used to interrogate suspects since criminals rationalize their behavior similarly. Very dangerous path.
June 25, 2009 4:42 PM | Reply | Permalink
Here is the way I see it. She signed a mortgage to back up the loan. That should be the limit of her financial and/or moral responsibility. She should be able to give the house back and be done. In some states, that is the law, in others, the lenders have gotten their legislators to add many other, onerous, requirements. I say any "moral" responsibilities are voided when the legislators start pass laws for their financial backers. A rabbit is not wrong to run away from a fox.
June 25, 2009 6:01 PM | Reply | Permalink
Dougnsd,
Your housekeeper was a real victim, and there were god knows how many thousands or millions like her.
I wrote a chapter on reverse-redlining, in which I spent time just outside of Washington in Manassas, VA. It was as if the mortgage lenders had orchestrated a mass con game, drawing in thousands of Hispanic families in the last days of the bubble. Housing prices there were the last to shoot up, and the first to collapse.
As I said elsewhere, I wrote about a family that had already owned a house and was persuaded to sell it and plow $72,000 in profits toward a $720,000 McMansion. They didn't know they had been sold an Option ARM, which meant that they were racking up $3,000 in debt each month they made the minimum payment of $2,800.
But here's what's really galling. It's been documented extensively for years, almost from the dawn of subprime loans.
HUD officials in 2000 (i.e., under Clinton) described how blacks were two and three times more likely than whites to end up with subprime loans, even when they had similar incomes. They studied eight major cities, similar results in all.
Since then, there have been numerous other studies updating the same results, using data collected under the Home Mortgage Disclosure Act.
The most chilling study was done by Calfornia Reinvestment Coalition and other groups, which studied WAMU's lending.
Can't recite the numbers, but WAMU's minority customers overwhelmingly got their mortgages from is subprime subsidiary -- Long Beach, I think -- and whites got them overwhelmingly from the prime bank, Wash Mutual Bank.
June 25, 2009 7:37 PM | Reply | Permalink
Edmund,
I couldn't agree more. My housekeeper is a good example. There were also minorities that weren't victims of anything other than their own greed though. Not all minorities though. A Filipino friend, who's very talented at real estate and has acquired a rather large inventory of rental property has managed it well is a counter example. However, her ex and his extended family was using easy credit to acquire more and more heavily leveraged property and have lost it all. They were gambling on continued increases in value that just didn't happen.
All of us are paying and will continue to pay for the fallout. What a failure by regulators and politicians from both sides of the isle. The positive rewards of bubbles make rational behavior all too hard at almost every level.
I loved your chapter on Greenspan. He's quite an interesting man.
June 26, 2009 3:44 AM | Reply | Permalink
I am so sick and tired of people who live beyond their means being excused as victims.
Come on, America! Grow up and take some responsibility when you make bone-headed mistakes!
June 25, 2009 9:07 PM | Reply | Permalink
"For decades the heuristic with mortgage lending was, if you got approved, you could afford the house. Then suddenly that didn't apply any more. Should we really be surprised that disaster ensued?"
In other words, for decades lenders had made responsible business decisions. As a result, writers like the OP and borrowers came to decide that borrowers weren't required to be responsible, or even to make any effort to determine whether or not they were being responsible.
Last I checked, both parties to a contract had an obligation to act in good faith; that is, to have a reasonable belief that they could fulfill their contractual obligations.
A lot of borrowers didn't really have any idea if they could do so. But that's not a reason to get on the lenders for "snowing" them. This is America. We generally expect people to be awake when they're making major decisions like how much money to borrow. The lenders weren't bad actors, they were just acting in their own interest. The borrowers were acting in bad faith, taking out speculative loans.
It's hard to criticize Lehman Bros. for leveraging 40 to 1 and at the same time claim that the borrower who invests with infinite leverage on a no money down mortgage in the hope of making money in a rising market is a victim.
June 30, 2009 12:26 PM | Reply | Permalink