Sub-Prime Victim-Perpetrators

“Fools & their money are soon parted” and “it is hard to cheat an honest man” are old sayings that make sense in light of the sub-prime fiasco. Some people borrowed money they suspected they could not repay; others lent money to borrowers who were not credit worthy. Both these groups deserve to get burned.

The Fed may have done the right thing yesterday by cutting the discount rate. It is important that the sub-prime mess not pull down honest and prudent investors and home owners.

But there are definite villains here and they are often the same as the victims. Justice dictates that they pay the most and bailing them out is not an appropriate response. It will just lead to more pain later.

Let’s start with sub-prime lenders and those who invest in sub-prime mortgages. They were merely seeking higher returns. Risk is related to returns. You expect to get a risk premium. That is what you get in return for ... risk. Risk means that you sometimes will lose. You cannot expect to get a risk premium and then get a risk free investment. Investors made money on sub-prime. They should expect to lose it too sometimes and we should let them lose their money. It is fair and just.

How about the borrowers. We always hear people are losing their homes. Tragic, if accurate, but it is not the whole story. Let's talk about this.

We are currently having a problem with potential foreclosures because real estate prices have stopped going up or even dropped. This means little to a homeower who plans to stay in his home. It is good for home buyers, bad for home sellers and really bad for real estate speculators. Many people bought houses as investments. These guys got burned first. If they were planning to "flip" a property, they suddenly found themselves with a debt, but w/o profit. We should waste no tears on them. They took a risk. Nothing wrong with that. I flipped a house in 2004. It worked out, but I knew it was a risk.

What about some poor guy who just wanted a home of his own? If he bought one last year, he still has one. It is just worth less than he had anticipated. My house value has dropped at least 5%. What does that mean to me? Nothing. The house is exactly as it was before. It did not get bigger when the price was going up and it did not shrink when the price dropped.

However, you do have some less than honest individuals who are just trying to get out from under the debts they agreed to pay. It is unpleasant to know that the house you bought last year is worth less than you paid for it. It is even worse if that house is worth less than you still owe the bank. But if your house is primarily for your shelter, that hardly makes you a victim. Some dishonest people default because they want to be free of the debt. The bank suffers a loss. If they made a loan to someone with bad credit, it is part of the risk they took. The homeowner may also take a loss. So what? He bought the house. Had it gone up by 20%, I doubt if he would have refunded that money to the seller or the bank. He has no right to demand anybody protect him from losses. It is in the nature of risk; it is in the nature of choice; it is the nature of life.

We all want to be nice guys. We all want everybody to like us and everybody to be happy. But if you bail out fools & crooks, you end up encouraging more of that sort of behavior. Even bailing out back luck is often a mistake. People assess risk. The risk assessment includes an assessment of random chance (i.e. luck). If you bail out the unlucky, they come to expect it and you encourage them to take risky behavior because you subsidize it. In fact, this was part of the mind set that caused our recent unpleasantness.

The Fed and our institutions have a duty to protect the stability of our economy. They have no duty to bail out the crooks, fools and unlucky. They should not. It is a hard to find the right balance between stability and bailout. So far, the Fed has done well. But let’s not be surprised when some people lose their investments and let's not cry for the sub-prime victims/perpetrators. Let's just hope that they do not take too many honest and prudent people down with them.

Fools are soon parted from their money. It IS hard to cheat an honest man. An smart person knows that a deal that looks too good probably is a scam and an honest one steers clear of such things.

Posted by Jack at August 18, 2007 1:45 PM
Comments
Comment #229827

Jack:

Such bullshit. My husband and I refinanced our home when interest rates went down significantly. We dealt with our bank, no sub-prime lender, and our bank did everything they could, short of giving us the money interest free, to try to talk us into one of the variable rate mortgages. My husband was interested but I put my foot down. He understands now what could have happened, but it didn’t occur to him at the time.

There are lenders who victimized home borrowers criminally, those victims should not be demonized. I do feel very sorry for those folks who were probably, based on MY experience with a reputable bank, not given all the pitfalls and consequences. It was painted as a rosy picture, to cover up the black beneath. Those victims are not stupid nor criminals. Those victims, many of them were just as honest as the “honest man” you mention in your cliche. Because they were not knowlegeable does not make them dishonest.

What a cruel joke you want to perpetuate.

Posted by: womanmarine at August 18, 2007 2:21 PM
Comment #229828

Woman

You took the fixed rate, why? Because you did not want to risk the variable one and becuase you were not enticed into doing so by the promise of a lower rate, that turned out to be too good to be true.

You did the right thing for you. You acted as a smart, honest person. Others should do the same and they would not be in trouble.

BTW - I use variable rates. It depends on how long you are going to need the money.

But consider the less savvy buyer. He got a variable loan @ 4.5% five years ago. Presumably, he built some equity. Now he refinances @6.5%. This is hardly usury. If this 2% drives him out of his home, he borrowed too much in the first place.

I agree that the less than prudent lender should not have lent him the money, but the consequence of that is that he would not be lent the money.

Do you prefer that the low income, poor credit risk people get no credit at all? We assume that someone making an important deal like a home loan has a reasonable grasp of what he is doing. If he does not, it calls into question his competency generally.

Posted by: Jack at August 18, 2007 2:41 PM
Comment #229829
We assume that someone making an important deal like a home loan has a reasonable grasp of what he is doing

Well, Jack, you know what assume means….

Wrong assumption and not an assumption made by lenders with the intent to make these loans come hell or high water. Whatever happened to truth in lending? It’s gone like the dinosaurs. Try reading any of the banking or credit card info. I watched economists and banking people themselves puzzle over it, never mind the congressional committees. The every day working person, especially those with less education, finds most of it over his head.

They were taken advantage of. Were there those thinking they could beat the system? Of course, but your attitude should only apply to them, not the people who innocently got embroiled in this mess by the unscrupulous.

How Republican of you.

Posted by: womanmarine at August 18, 2007 2:59 PM
Comment #229830

Woman

Do you not see the fundamental problem? IF we do not assume an adult is competent to enter into a legitimate business transaction, we have to assign him some sort of subordinate status.

Lenders who engage in illegal behavior should be punished. But you cannot take all the decision making out of it.

Consider this. A person who took out a variable rate in 1997. He paid around 5.5%. Fixed rates were about a percent above. He paid $100K for the house. In 2002, his variable rate ran out. At that time he refinanced another variable rate at 4.25%. By this time his home had roughly doubled in value. Now in 2007, his variable rate is up again. He will have to refinance at around 6.5%. His house probably is worth around 2.5x what he paid. It is down from around 3% last year, but still pretty good. Was this guy ripped off?

The difference is the nature of the housing & interest rate markets. A person who bought five years ago is still okay IF he did not waste the equity money in his home. Someone who bought last year may be in trouble - on paper, but he still has his house unless he cannot pay for some external reason.

In any case, when would you have prevented the deal? The future is always unknowable. The person buying in 1997 made a “bad choice” based on what the loan would have been in 2002. But a prudent, honest person would have survived and prospered. The fools and their money would have been parted and the dishonest guys …

But let me take your situation. I do not know the exact figures, but let me set up a likely scenario. You were offered a variable loan at around 4%. Instead you chose to take a fixed rate of around 6%. Now you are okay. What about the guy who chose 4%? He was making money compared to you for a couple of years. He probably would have made fun of you for not making such a good deal. You paid then; he pays now.

Posted by: Jack at August 18, 2007 3:20 PM
Comment #229831

Jack,

I also remember the phrase, “A fool’s born every minute”.

When my kid’s were young I taught them to stay away from the scam artists at the county fair. You expect a bunch of thieves lining the fairways at the county fair. I don’t think you should have to be just as suspicious of our nations lenders.

What a sad state, just one of many examples of the “you’re on your own” mentality of the right. A teeny-tiny part of my knew mural: “Robber Barons of the 21st Century, the Pursuit of Serfdom in America”.

Posted by: KansasDem at August 18, 2007 3:21 PM
Comment #229832

Womanmarine, it sounds like you were smart enough about your own financial situation to make a good decision for you. An adjustable rate mortgage is NOT, however, always a bad choice, and can actually be an EXCELLENT choice for some people.

When I bought my house, I put down a very high percentage (over 50%) of the total cost. I had little cash left over but a stable income which I knew was going to grow in the coming years. The ARM loan was an excellent way for me to substantially lower my monthly mortgage payments at a time when I badly needed that money for other things, and then when I could afford to, I paid off my mortgage well before the ARM could expire and my payments balloon. I ended up saving a lot of money on interest that I’d otherwise have had to pay with a traditonal loan.

There’s no substitute for educating yourself and living within your means. The loan product itself is not the evil. I know there are dishonest lenders out there, but if they screwed over borrowers, they screwed themselves over as well. In most cases, I think it was stupidity and overexcitement more than dishonesty. A lender loses big when they make loans that can’t be repaid.

I agree with Jack. If somebody offers you something you can’t afford and you buy it anyway, you share the responsibility. That’s not “Democrat” or “Republican.” It’s common sense. If somebody offers you a handful of magic beans in exchange for your cow, walk away. Use your head—it’s useful for a lot more than just a place to keep your hat.

Posted by: Loyal Opposition at August 18, 2007 3:30 PM
Comment #229833

Kansas

You are specifically NOT on your own. States, localities and the Federal government have created a forest of rules and safeguards. You can rescind any loan within a few days. Books are written on the subject. Magazines are full of advice. We cannot insure against the future and we cannot prevent stupidity, greed, or back luck from getting some people.

I think before going into any imporant dealing a person should repeat, “a fool and his money are soon parted”, “it is hard to cheat an honest man” and “if it sounds too good to be true, it probably is”. Then make decisions with those things in mind.

I have dealt with lenders on several occasions. My experiences were always good. But then I do not respond to those too good to be true deals I get in my mailbox almost every day. Those are the hucksters and we are right to avoid them. Some people will step right up, usually out of a combination of greed and foolishness. We can warn them, but if we want to treat them as adults, we cannot stop them.

Posted by: Jack at August 18, 2007 3:50 PM
Comment #229835

the world is full of con-men and crooks. mortgage lenders are just like anyone else, they make money by packaging loans and selling them. it is ultimately up to the borrower to do thier homework, and make sure they understand the cosequences of the documents they sign. many people didn’t, or they moved into proprties they normally couldn’t afford. that is no ones fault but thier own. buying a house you can’t afford, is no different than buying a car you can’t afford, or anything else for that matter. if you’re not suspicious of someone when they stand to make a commission or profit off of you, and don’t do your home work. it’s your fault, and no one elses, and all this talk of victimization is nonsense. people often see something they want and emotion takes over. they will find anyway possible to justify the purchase, including allowing a dishonest sales person or lender convince them they should take the plunge. there is no substitue for common sense, and responsability ultimately rests with the consumer.

Posted by: dbs at August 18, 2007 4:15 PM
Comment #229837


It is sad to say, but the American people have allowed themselves to be lured into blissful ignorance.

Having said this, the morgage lenders were like sharks in a feeding frenzy. Even the President got in on the act.

Of course, the Fed has come to the rescue of the lenders. Of course, someone is going to have to pay, down the road, for what the Fed has done. Of course, it won’t be the Wall Street crowd or the lenders.

This whole housing thing, over the last few years was in my opinion, a deliberate act perpetrated on the American working class. Anyone who is not off in la la land knew this was coming. I saw what was coming when it started a few years ago and I am not very intelligent at all.

Keep it up and we will put a sword right thru the heart of Caveat emptor. I guess I should not make idle threats because we the people will probably bend over more and spread our cheeks a little furthur so the corporations will have an easier time of it.

There will be more forclosures in 2008 than 06 and 07 put together.

Posted by: jlw at August 18, 2007 5:14 PM
Comment #229840

jlw

I advocate above that those who invested in sub-prime should pay when it goes bad. Some already have.

Nothing was perpetrated on the working class that the working class (whatever that term means these days) did not cooperate in doing. MOST people who bought houses and took out mortages in the last decade are much better off than they would have been had they not done so.

Some people borrowed too much or did so imprudently. I read that the foreclosure rate is around 1.5%. That means 98.5% are okay. I know that people are stuggling, but I would quote another old saying that still makes sense:

“Many people have too much money, but nobody has enough.”

A forclosure in today’s America costs the banks and investors more than the homeowner.

Re your prediction of home values, most people were predicting this for a long time. The key question is “when”?

In my neighborhood, if you bought five, four or even three years ago, you still made a lot of money. If you bought two years, you are looking at a decline. It was - and remains - a good deal for any prudent person to have bought a house as a primary dwelling. This year prices are a bit more reasonable and it looks like a buying opportunity again. It is a risk to buy, but that is life.

The “victims” of this crisis are those who left the door unlocked for the misfortunes that came in.

Posted by: Jack at August 18, 2007 5:31 PM
Comment #229841

Jack

“In my neighborhood, if you bought five, four or even three years ago, you still made a lot of money. If you bought two years, you are looking at a decline. It was - and remains - a good deal for any prudent person to have bought a house as a primary dwelling.”


can’t agree more. i bought my house in 93, but planned to live there for quite a while, and still live there to this day. i watched my home drop in value several years after i bought it, and have seen it do so time and again after making large gains, but i have to say i’ve made a lot of gains in equity overall in the past 14 yrs.

Posted by: dbs at August 18, 2007 5:46 PM
Comment #229842
“Many people have too much money, but nobody has enough.”

Gosh, someone in another article posted that Cheney had so much money that it wasn’t a consideration for him. Both can’t be true, can they?

This blame the victim shit is abhorrent.

Is my husband stupid because he didn’t understand the possible consequences? He’s a retired Master Chief. You don’t get there by being stupid. Everyone has good understanding in some areas and not so good in other areas. This applies to everyone. This does not make any of them stupid, or less a victim.

I shouldn’t be, but I still am utterly amazed.

Posted by: womanmarine at August 18, 2007 5:48 PM
Comment #229844

womanmarine

“This blame the victim shit is abhorrent.”


what is abhorrent is the use of the victim mentality. people are responsable for thier own actions. i didn’t understand is not an excuse, it only means you should’ve taken the time and done your homework so that you did understand. how many people actually read the loan documents entirely, and ask all the important questions? you obviously saw the danger and put the brakes on, but that still doesn’t make your husband a victim. if you were lied too, thats another story. the last time i re-financed my home i got a fixed 15yr. @ 4.875. i could’ve gotten an arm and had a much lower pmt, but at some point it may have bitten me in the ass, so i opted for the known quantity. either way, i was responsable for my decision.

Posted by: dbs at August 18, 2007 6:06 PM
Comment #229845

Jack-
The Republicans should know how awful it feels to lose a house, especially given the last election.

The problem here is that with the Republicans, the right hand doesn’t always realize what the left has been doing. You blame the victims of your own policies here, people who would have been denied the credit once upon a time to buy a home, but instead now, thanks to changes made by the Republican majority, they are given the chance to own your own home.

The old notion that you can’t get conned unless its out of your own greed often is an extreme and unfair justification. Did you know that the best predictor of bankruptcy is not profligate spending, but being a woman and a mother? Elizabeth Warren, expecting to find women wasting money on pumps, instead found a great many women who were just trying to put a roof over their children’s head, get them educated, keep them fed, and keep them healthy.

Has it occured to you that what’s in play most of the time when these people sign up for these loans and mortgages is not malicious greed and parasitic attitudes towards the system, but hope and desperation to improve or maintain one’s lot in life? The people who got soaked with these loans were not mostly speculators, though those people have done a lot of damage themselves. No, the people who got soaked with these loans were mostly people given false hope by their lenders, who, on account of our marvelously deregulated system, can now be sold these things and financed for them despite their inability to pay.

What’s crippling the economy is the crippling of its poorest participants by unscrupulous lenders and credit card companies. Thanks to a system that attempts to keep wages down as a method of reducing inflation, but which hasn’t succeeded in reining in real world prices, debt has become the only currency people can turn to even to merely maintain their standard of living.

When Democrats talk about the rich getting richer, and their standard of living alone rising, we’re not just flapping our gums, we’re stating the actual facts as they are. But the rich cannot continue to squeeze blood from a stone; the system is beginning to suffer from artheriosclerosis, and the overall circulation is beginning to suffer. America’s prosperity and happiness has long been dependent on a fair distribution of resources and services, on pricing that is dictated by real supply and demand, rather than artificial forces created by easy credit and growth policies that aren’t built on supporting that growth with substantial overall returns.

The credit crunch that now has the economy shaking in its boots is hitting the poorest people the hardest, and that can have grave consequences. You can’t get something for nothing, but unfortunately, that’s just what this economy’s been built on. And unfortunately, you don’t see that it’s not merely consumers who haven’t learned that lesson, but also big business. For far too long, they’ve treated making money as if its the right and the privilege of the business class. Even Adam Smith would tell you that this is a load of B.S. Good Economies built on the proper, healthy redistribution of resources, not the feverish policies of eternal growth. Or put another way, you can’t grow forever. At some point you have to rest, regather your resources, let the market correct itself, let real prices be sorted out.

Unfortunately, Republican policies leave things to be sorted out by people that they really shouldn’t. You want people to act like perfect rational actors all the time, but the fact is life is often a complicated affair, and unscrupulous lenders and businessmen know how to take advantage of that, to either convince people that the price is worth it, or to hide information that if known would allow them to use their best judgment.

You can’t count on people to be financial geniuses, and hardened examiners of legalese, interest rates and other esoteric minutiae. There have to be laws, and regulations out there that can effectively protect those who don’t have a good head for these things.

My feeling is that all this cannot be good for our communities, for our society, to always have to look over our shoulders, to be perpetually suspicious of those we do business with, to not trust the businesses out there, to be forever at war with our employers over basic necessities. At some point we have to structure our society so that folks are not at odds so much, where cheating and being cheated aren’t par for the course so much.

If you want a free market that operates properly, the rules of the game cannot be “screw those who allow themselves to get cheated.” Those who cheat small, cheat big. I do not think that the culture that created Enron is in any way distinct from that which created the current credit crunch. It’s the same crowd that wants to pull money from the thin air of fictional profits and questionable accounting to boost stocks and profits, and unfortunately, they are part of the driving force for your wonderful economic recovery. Just what did you think all those housing starts were paid for by?

Posted by: Stephen Daugherty at August 18, 2007 6:06 PM
Comment #229846

Ack. It’s “A fool and his money are soon parted” and “You can’t cheat an honest man.” The first quote smacks of wisdom, but the second is manifestly untrue; gullibility does not require larceny. Other W. C. Fields’ lines include “Anything worth having is worth cheating for” and “Never give a sucker an even break.”

In general, though, I agree with Jack’s article. That said, it wouldn’t surprise me if some lenders were deceptive. They should be punished.

Posted by: Gerrold at August 18, 2007 6:23 PM
Comment #229847

The term is called “Due Diligence”. Emotions play no part in this process. Emotions cloud the issue and obscure the goal. For most families, the home is the single largest purchase usually involving an amount greater than the annual household family income. To not go through your due diligence, leads to forclosure. No sooner would I allow someone who did not do their homework cheat off of me during an exam, then I would agree to bailing them out now.

Are there criminals pushing loans? Sure, just like bad real estate agents, car sales, Energy companies, priests, teachers, doctors etc. Prove it up individually and punish the law breakers. To impune the entire industry is the same as maligning the above professions for the minority who don’t respect the law.

Posted by: scottyp at August 18, 2007 6:26 PM
Comment #229849

Stephen

We extend credit to people to give them a chance. Some can make it. That is good.

I well understand the impulse to try to make one’s life better. We all want to make people happy. But what do you propose? Those nice people either get no credit, or they take responsibility for what they do. You cannot guarantee the optimal outcomes.

BTW – if a person gets “soaked” it probably is not profitable for the lender. Nobody wants a foreclosure. It often means a loss all around. If the house value has dropped, the foreclosure pays part of the amount owed. If it raises more than is owed, the borrower gets the difference. Of course, if the property is worth much more than the mortgage, the person could just sell it and avoid foreclosure. These are not great options, but not dire.

Re credit cards, this was not the subject of my post, but my advice is simple – just say no. You should not carry balances. If you cannot afford it, do not buy it.

Re cheating – there are crooks and liars everywhere. If someone does something illegal, he/she should suffer the consequences. The market is currently punishing people who extended credit too far. You are right that you cannot squeeze blood from a stone. Some people cannot pay their debts. Anybody who extended them credit loses money.

Returning to housing – the housing boom started in 1997. It accelerated in 2000 when the dot.com bubble burst. Almost every prudent person who bought a house in the last ten years is better off than he would have been had he not done so. Some people who bought in the last year are in some trouble and people who made poor choices are having trouble, as usual.

I bought two houses and significant amounts of forest land in the last 10 years. If this has been a curse, I sure hope I never recover.

This year, houses are more reasonalbe. It looks like a good time to be a home buyer. I would not buy a house on speculation, but I certainly would have no hesitation about - PRUDENTLY - buying one for shelter.

Posted by: Jack at August 18, 2007 6:39 PM
Comment #229850

Gerrold

I think it is hard to cheat an honest man, not impossible.

People who get caught up in scams are often trying to get something quick and jumping on something that is too good to be true.

I remember seeing some old guy on TV. He had been scamed by a sharp dealer who offered him some big interest rate. His son was with him. The son said “Dad. I am a financial advisor. Why didn’t you ask me?” The old guy responded, “I was afraid you would tell me not to do it?”

Posted by: Jack at August 18, 2007 6:44 PM
Comment #229851

Jack,

My point was pedantic — if you’re going to quote an old saying, quote it correctly. As rewritten by you, the saying is more accurate.

Posted by: Gerrold at August 18, 2007 6:51 PM
Comment #229852

This problem,Americans poor savings rate and a host of other problems can largely,but not entirely, be blamed on wages not keeping up with productivity or prices for basic needs.Dispite convoluted denials it is still common sense. People that earn more have less need for risky credit schemes. People that earn more have more ability to save. Stagnant wages are not the result of some grand natural cycle but the result of specifc and controlled government policies instituted by the Rep party at the behest of their real controllers.There is a great price to pay for this and this is only the begginning.

Jack
At least you have finally stopped pointing to “record levels of home ownership” as proof that Bush is doing such a great job. Seems that too was based on shaky credit just like his stupid war. How long before the world starts rateing US treasuries as subprime.

Posted by: BillS at August 18, 2007 7:06 PM
Comment #229853

BillS


“Stagnant wages are not the result of some grand natural cycle but the result of specifc and controlled government policies instituted by the Rep party at the behest of their real controllers.”

no they’re the result of the flood of illegal unskilled workers from south of the border that has saturated the market with cheap labor, and your beloved dems are every bit as guilty as ths reps for doing nothing about it.

Posted by: dbs at August 18, 2007 7:34 PM
Comment #229854

BillS

Home ownership is still near record levels and is likely to remina high. This shakeout will not significantly affect the numbers.

This particular problem is caused by the ending of the property boom. It has really nothing much to do with stagant wages.

Besides, wages have little to do with Bush policies. There are long term trends. I have posted the charts on many occassions. After the brief recession of the early 1990s, it took until 1996 to reach the levels of the 1980s. Today real wages are about what they were in 1998 (not a bad year) and they are rising.

The trends are also part of long term factors, such as baby boomers, women in the workforce, globalization and immigration. Many of these trends have worked through the system. I wrote a whole post re.

Posted by: Jack at August 18, 2007 8:00 PM
Comment #229855

dbs

And some how you figure that that is not part of the plan to keep wages low?Apoligies though. It is not just the Reps that have done the bidding of the oligarchs to keep wages depressed but they have done more. The immigration problem you speak of has been accelerated on their watch.


Jack
Several of those factors are syptoms as well as factor in stagnant wages. Women did not enter the workforce for fun, They largely entered it because their spouses wages were no longer enough for families to get by.Our trade treaties have been aimmed specifically at keeping American wages depressed. Had they included enforceable labor protections for overseas workers then we might be seeing some actual benefit for American workers by now . Please do not try and tell me NAFTA has help the auto workers or that now we can get cheap toxic toys for our children.My premise is that wages have NOT grown in proportion to productivity rises,nor have they grown in proportion to the cost of basic necessities like houseing or healthcare. This is evident to anyone living on this planet. It is not an accident.

Posted by: BillS at August 18, 2007 9:03 PM
Comment #229856

When going for a loan the ARM was pushed by many in the industry as a way to get less than qualified people into the housing market. This was not necessarily poor credit risk types but young people just starting out. Your credit score is lower when you rent instead of buy and when you have a short credit history afterall.
For a while it worked any many younger people joined the ranks of homeowners. They were told the rates may or may not go up depending on market conditions. They were told that income would increase with experience and should cover the rate increase. This turned out to be wrong as wages didnt increase to negate the impacts of higher mortgage payments. So many of these first time buyers had no alternative but to default. Such is life you would say, but as we all know at the peak of the housing market those in the know and with the political clout pushed a bankruptacy bill thru the repub led legislature and to W’s desk for signing. It became law, and as we should expect by now it protects the big and rich corporations at the expense of the individuals. So the defaulted homeowner not only has to move from the house but the bank nows can re sell it and if they lose any money by reselling guess who is on the hook for the money. Nope not the investors, nope not the corporations. Yes of course the little guy gets the tab. Yes as the housing market fell and credit tightened and buyers quit buying all aroung the same time it just amazes me that the bankruptacy bill saves the days for the risk takers at the top of the food chain.
So I guess its just tough luck for those in the next generation trying to get their foot in the door. Seems they will be paying off the bank on the house they dont own for years to come. Whay more could we want?

Posted by: j2t2 at August 18, 2007 9:22 PM
Comment #229857

BillS

You put your finger on it when you say “living on the planet”. We are now part of a global economy much more than we were. The trends you are talking about starting in the early 1970s. Median income has risen significantly since that time, but people’s desires have grown faster. The median new house today is around 1/3 bigger, has mulitiple bathrooms, central air and various other luxuries.

I do not know whether globalization is really an option. Countries that try to cut themselves off get relatively poorer. Personally, I would not mind if development just stopped, but I do not think we can do that.

Re wages and productivity, no wages have not kept pace. They have gone up by less than the rate of productivity, although they have gone up. But there is a big change in how Americans earn income. In 1970 most Americans got virtually all their money through wages. Today, most American households own financial assets like stocks. That is why the median income is significantly higher than the median wage.

In my case, for example, in most years my wife and my wages only make up about 75% of our total family income (although most of that is in the form of capital appreciation which we will not tap until retirement). I did not inherit these things, btw. Wages bought assets and now assets supplement wages. This is the case of many American famlies today. It was not in 1970.

Posted by: Jack at August 18, 2007 9:23 PM
Comment #229858

j2t2

The wages DID go up. You are mistaking median with that of an individual. When you start at a lower rate, you assume that YOUR wages will increase relative to the payments. Most young people are making more today than they were 5 years ago, even if the people starting at jobs similar to what they were doing 5 years back are not making more. I make more now than in 2002, even if the person doing the job I did back then does not.

Beyond that, your payments relative to income have decreased, since there has been some inflation. Even if you wages did not grow at all in real terms, your inflated wages grew by almost 14%, while your payment, still in 2002 dollars, stayed the same AND your house is worth more.

Posted by: jack at August 18, 2007 9:34 PM
Comment #229859

In that I am part of the Credit Union Industry, or in other words a not-for-profit banker, I’d add my two cents after 22 years in the trenches:

> Do not underestimate the how much people know about money and interest rates.
> People management payments, not total debt .. I hear it every day … can you make the payment $400 per month so I can afford it … forget about the fact it is 72 month car loan
> People pay their real estate loans first, last I heard was over 90% of mortgages were paid on time
> These are secured loans, the borrower defaults, the instituion sells the property, normally for the value of the loan and home equity

As a lender, this topic is very difficult for me. As a credit union, we lend as much on character as we do on credit. Meaning we find ways to help our members with their debt. And then we focus on financial literacy.

While I would like to believe that there are more people out there, that work hard, and are being hurt by their ARMs maturing. I would have to state from an industry point of view (and I would lump banks in with credit unions) that these people knew exactly what they were doing, they were leveraging their future, and they were hoping for a bigger paycheck, bonus, or some other miracle to help them when these 3-5-7 ARMs came a knocking.

By the way, I make loans and home loans to hundreds of people a year that have gone through bankruptcy. Why? Because I can lend on character, and work on credit history. Most of these people will recover, and will do everything in their power to own that home again. It is a part of the American Dream.

Posted by: Edge at August 18, 2007 9:48 PM
Comment #229860

Jack If your in the building trades your wages didnt go up by any significent amount. In fact due to the illegals they may have even went down if you live and work in a right to work cheap state.
Also Jack when your just starting out in the trades or other blue collar type work the amount of stocks and investments you have on hand dont really add up to much, afterall Jack as hard as this may be to believe there just isnt a lot left over when your not at the top of the food chain.

Posted by: j2t2 at August 18, 2007 10:00 PM
Comment #229863

Jack-
Credit use to be a matter of your ability to pay things back. That assumption still powers the sensibility that if somebody extends you credit, They’ve judged you capable of handling it. That is not the underlying assumption anymore.

The underlying assumption is that interest is an important revenue stream, and the more you build up on a person, the better. That is why they send credit cards to people who can’t afford it, or shouldn’t have them in the first place. I still get offers, and I’m no sterling credit specimen myself.

Speculators have raised land prices in many areas, which actually has lead to more old-fashioned farms closing down than any estate tax ever did- the land is worth more to sell than to to tend. Credit Card companies get away with charging rates that use to be forbidden by usury laws, and often change around fees and interest rates at will. Personally, I’ve had some serious experience with how unscrupulous these people are.

Extravagance is rarely what puts people in debt. Divorces and medical problems, especially with the way HMOs and other organizations handle these things, are often a leading cause. In truth, people aren’t being that extravagant, often enough. They’re simply trying to maintain a standard of living they once had, which has become more difficult to maintain as wages don’t rise, but energy, food, and other costs do. It doesn’t help that we have economic actors like Wal Mart, who make products cheaper at the expense of destroying jobs, eradicating benefits, and bringing back the bad old days.

There’s a difference between intending to do things to promote growth and prosperity, and actually doings so, in something so complex as a real world market.

Deregulation, in theory, promotes economic success by relieving the financial burden and lost opportunities that are caused by such restrictions. In practice, there are some burdens which people have to be obligated to take on to prevent costly breakdowns of one kind or another. In practice, there are some opportunities that should be lost.

In practice, a lot of supposedly necessary sacrifices produce indordinate losses. It’s one thing for an individual to suffer for a bad business choice, when whole swaths of people suffer for it, there are secondary consequences that can overwhelm the utility of the lesson taught by the primary. The Crash of 1929 was likely a very useful lesson for folks, but the cascading failures from it convinced people that simply letting the market sort things out in most respects was a recipe for failure.

Then, as now, the Republicans assumed wrongly that simply arguing that this was all just the market correcting itself would satisfy people. But you can’t talk for years about the values of deregulations, and small government, taking away safeguards in the name of punching up the economy, then tiptoe quietly out the door saying that all the disasters from those exercising the freedoms you let them have aren’t your responsibility.

It takes all kinds of people to make a society, and unfortunately for idealistic models that assume perfect rationality, not everybody has the same skill in dealing with the market. To some point, it is necessary and even helpful for people to adapt to things to a certain extent, but often enough, the adaptation to not knowing a lot about these things is to trust a professional to lead you and counsel you correctly on a matter.

Unfortunately, the Republicans have helped created an environment where people can’t trust those they deal with to treat them fairly or act ethically in their interest. That itself, by itself, even without the consequences of the economic “corrections”, creates economic friction. People who can’t trust businesses or professionals are less open with their money.

The Republican system has taken away the critical lubricant from the gears of the economy: trust. Even misplaced trust, if people are protected enough by laws, regulations, and the interests of the business, can help ensure prosperity. If it is absent, it makes the economy much more volatile, and critical relationships of business far more tenuous.

Meanwhile, people try to make their way through the world, trying to be reasonable, trying not to offend others, trying to serve their own interests, best they can. If you bankrupt and allow too many of these people to be cheated, you end up destroying the strength of the consumer base. creative destruction, however positive in some respect, still creates a lot of wastage. You can’t disrupt lives and business in these fashion for too long like this, without knocking one too many supports out and collapsing the strength of the economy.

Posted by: Stephen Daugherty at August 18, 2007 10:21 PM
Comment #229866

J2t2

There are always people who are poorer than others. Half of all people are below the median and half are above. This just states the obvious and we cannot be upset about this. Overall the median income has risen in real terms this year and last. It never declined in nominal terms, which included inflation. If someone bought a house five years ago, it is worth more today than it was then in most markets. A prudent and honest guy could have trouble if he had really bad luck. But most of the people having trouble made bad choices. That is how they stay at the bottom of the food chain you are talking about. If a person is not better off at 40 than he was at 20, he did something wrong.

Stephen

The market economy consists of rule of law and reasonable regulation PLUS the market mechanism. The market is a terrible system, but it works better in practice than any alternative ever tried.

You know that after 1929, all that interference with the market did NOT end the depression. The worst year was not right after the crash. It was in 1937, well into the reforms. What ended the depression was WWII. We have since enacted various useful regulations of banking, lending etc. These have proven to be good stabilizers, but it is very much possible to take more from the depression lesson than there is to learn.

The fact is that today borrowers have sufficient protections. Most people, the vast majority of Americans, use credit more or less wisely. They always feel a little strapped, but they do not lose their homes, they buy cars, plasma television, i-pods etc and are perfectly able to support their lifestyles. I personally think that we live lives that are too materialistic, but that is what most people want and it is what most people get. We are not living in the 1930s anymore.

Posted by: Jack at August 18, 2007 10:50 PM
Comment #229868

Jack and all:

While discussing preditory lending, the senior market should be discussed. Seniors have over $4 Trillion in home equity that can be tapped by reverse mortgages.

http://seniorjournal.com/NEWS/ReverseMortgage/2007/7-07-09-RevMortMarket.htm

Craig

Posted by: Craig Holmes at August 18, 2007 11:01 PM
Comment #229872

Jack
Not too fair of you to discount federal policy for ending the great depression. Abolishing the gold standard,low interest,policies to help product regain pre-crash prices,enactment of labor protections,the SEC,economic stimulas like infrastructure etc. played a part.Actually without them there is a reasonable chance the country would have been in such turmoil we may have failed,or at least had a more difficult time raising to the challenge of ww2. Furthur the stimulas brought by ww2 WAS federal government stimulas and control on a grand scale.
I said unfair because there are other economic views as to the end of the depression. You gave your opinion as fact,not that yours truly would ever do such a thing.

Posted by: BillS at August 19, 2007 12:08 AM
Comment #229875

Most of the customers that we had to turn down for poor credit would suddenly appear with someone else who would give them what they want. (I am a Builder) Most of the people our lenders would turn down become annoyed with us and seek someone else who will loan to them at risk. We just shake our heads and wonder how long they will keep it.
I have lived long enough to take risks that didn’t work out and I felt screwed. You just learn and move on. At least we don’t have a debtors prison. It sounds insensitive, but I personally know the stress of looking at losing everything. It takes sacrifice to get out. Moving forward is much easier when you aren’t gazing back and whining all the time. Victim mentality causes more loss to our ecomomy than anything else. Just add up all the whine time on a construction site. I ought to do a study.
Many of the sub prime people add a large closing cost to compensate for the risk up front along with the equity they aquire so they have no reason to complain either. It looks to me like the underwriters get immediate cash and then the high interest.

Posted by: Kruser at August 19, 2007 12:19 AM
Comment #229878

My point is that preditory lenders and preditory borrowers both get weeded out when the cycle goes down. It is a normal thing. With time the prices go back up. Who remembers the late 70’s. I bought my first home when interest was 12%. There were no jobs either.

Posted by: Kruser at August 19, 2007 12:28 AM
Comment #229879


People used to have to worry about burglars and highway bandits, but now they can rest easy because most of the bad guy’s have been replaced by a market economy.

Posted by: jlw at August 19, 2007 12:35 AM
Comment #229880

Besides wages not keeping up with cost another factor that needs to be remembered is that people need houseing. Even a crummy morgage deal can look a lot better than paying high rents with absolutly no chance of not losing money,not even a risky chance of building equity.
This brings up another question. Where are those losing homes going to live? Is it enough of an influx to drive rents,already pushed by these same rate increases,higher? Without higher wages this means yet another blow to American living standards.

Posted by: BillS at August 19, 2007 12:42 AM
Comment #229881

BillS

The New Deal did lots of good things, things I think helped ensure our country’s stablity, but it did NOT end the depression. I think the evidence is that the depression was NOT over in by 1937. In fact, that was the worst year re unemployment. Things started to pick up as the world geared up for war.

I admire what FDR did. I agree that his policies helped unify (and to some extent regiment and militarize) the U.S. and that prepared us for the WWII struggle. My father was in the CCC. He then was drafted into the Army Air Corps. He always told me that the transition was seamless.

BTW - who knows how long the depression would have lasted anyway. Neither downturns nor booms last forever. The biggest and most pernicious myth actually concerns the 1920s. They were generally good years where our country made lots of progress. We have kind of imposed a morality tale on the whole thing and we see the depression as payback for the 20s. We draw the wrong lessons from this history.

Kruser

You are right. We need the occassional shakeout to clean up. It is sort of like a forest fire. If you allow the little ones that are healthy for the ecosystem, you can often avoid the big destructive one.

Posted by: Jack at August 19, 2007 12:48 AM
Comment #229883

jlw

There is some truth to what you say, but not in the way you say it. The market economy takes advantage of the energy and imagination of the people. More oppressive systems make many of good things illegal. Things like smuggling otherwise legal goods, black markets, and corruption are the results of over or misregulation.

Posted by: Jack at August 19, 2007 12:52 AM
Comment #229887

Jack, great post and even better replies.

I’ve heard the liberal, pessimistic drumbeat of the housing market “bubble burst” for many years. I was a realtor for a few years starting in ‘00, so at least 7 years but I heard it before that. So my question is why, instead of basking in this remarkable achievement in American history, are the pessimist’s allowed to get away with this “see I told ya so” attitude?

I mean year after freakin year we blew away once unheard of standards. We’d have to tank for 8+ years to even get back to previous marks. Why not understand there are ups and downs, and we had one hell of an up btw, instead of waiting (for many years) to break from your depression with glee because you finally have the ammo to try to spread your depression to the rest of the world.

Posted by: andy at August 19, 2007 1:55 AM
Comment #229894

Jack, Your not suggesting that, instead of FDR and his administrations efforts to dig us out of the unrestricted free market caused depression, we should be thanking Chamberlain and of all people Adolph Hitler and Hirohito are you. FDR passed banking rules in addition to the programs that BillS has already mentioned yet it was our entry into WWII in 1941 that saved the day? Your not trying to imply that FDR had from 1929 until 1940 to bring us out of the depression are you Afterall he wasnt even elected President until 1932.

Posted by: j2t2 at August 19, 2007 2:45 AM
Comment #229904

By the way watchblog has an advertisment for MortgageSavingZone.com on side column. Don’t let them see this insubordinate behaviour.

Posted by: andy at August 19, 2007 4:41 AM
Comment #229905

Here’s what Warren Buffet has to say about the real causes of this problem.

Jack-
Well let’s state the obvious: the incomes of the poorer half of people in this country has hardly moved in thirty years, yet inflation and risen costs have not stood still. Add that up, and you have a net loss, since the buying power for the bottom half is reduced.

The market is not a terrible system. It’s a human system. Much of what you call market interference was actually the sort of laws meant to prevent the abuses that lead to the problem from happening again. That’s the problem with conservative thinking about the market: they would rather deal with serious, proven, nonproductive hazards as part of the market, rather than get that useless risk out of the picture.

Moreover, if you look at many of the deregulations that Republicans have recently done, pushed, and preserved, many of them have to do with just these sorts of things. You have accounting reform, which allowed more of this mark-to-market numbers game, which often leads to largely fictional numbers in profits. You have the deregulation to allow cross ownership of institutions that sell equity in companies and lend to those same companies. You have energy deregulaton, which has allowed energy prices to rise considerably in many places. It has also allowed deliberate shortages to be created, where generation capacity is shut down in order to raise the price of the energy.

This is but a sampler, but the point is this: manipulations of the market and information within the market have become more important to corporations than productive behavior and risk management. They, more than anybody else, should know better. The Republicans have been facilitators for this. The crashes and crises in various markets have not been coincidental here. They are the product of a market that’s been allowed to degenerate by a congress that decided that what was good for profits was good for the economy and the market.

The Energy sector is a great example. Deregulation of power companies have allowed them to artificially pump up prices by switching off generators. Republicans relieved them of the need to maintain a constant, dependable power supply. Because of this, both the market and the use of the infrastructure have become very inefficient. the surges and cutoffs that come from this “wheeling” of power across the grid are putting great stresses on them, leading to incidents like the recent blackout that plunged a quarter of the country into darkness.

The Oil Companies, allowed to consolidate by the Bush administration, have reduced their number of refineries, in fact doing so to the point that it can no longer weather transitions in seasonal gas mixes and disasters which damage refineries and other facilities without huge supply problems, or at least the intimation of them to the energy traders.

The energy traders were given power by the Republican Congress and this president to bid up prices however they please. Supposedly, it was supposed to lower prices, but as with so many situations in which people had such control over supply, the speculators just used that control to manipulate the market to raise their profits.

As for all the wonderful things you describe people buying? Do you think they could afford those things without credit cards?

Kruser-
What happens many times is that the lenders securitize their new liability, essentially selling it to somebody else so they can profit off of it.

The trick is, it used to be impossible for somebody to come up with that kind of credit if they didn’t have the income. Income used to be the determinant of who got credit, and who didn’t. Now, since folks didn’t want to raise wages to keep the economy going, or fund economic development and growth the in a difficult but workable way, we have this situation.

This cycle shouldn’t be occuring, period. It’s happened enough time in our history and over time so we should know this kind of lending doesn’t work, and simply impoverishes people. For the sake of our economy, we have to codify the word “No” into the law for certain practices.

Andy-
Our remarkable achievement? Shall I play Thus Spake Zarathustra for you? No, this achievement, if you look at the numbers, has been a gaming of the system.

We’re loading ourselves down with debt to afford everything, to get everything we want without immediate apparent cost. But we’re still leveraging ourselves over our heads, and that’s going to eat up most of our gains. Debt is deadweight, and the hard facts are that the Bush administration has created more of it than any other in America’s history.

There’s going to be reckoning, and I can only hope we’re lucky enough to get some break to avoid it. I haven’t enjoyed the problems of our current economy, and I don’t think I’ll much enjoy what comes of the problems it will cause for the future.

This isn’t about pessimism in the face of success, it’s about understanding that the so called success has been built by leveraging this country further into debt. Anybody can succeed in the short term by amassing such huge liabilities, but how will they succeed afterwards, when that burden starts to suck the life out of things?

Posted by: Stephen Daugherty at August 19, 2007 8:19 AM
Comment #229906

Without cycles there are no gains. Regulation always stagnates what it is regulating. Americans are pioneers and that takes risk.
Let’s just set the standard to the 1800’s by taxing everyone back to it. That way everyone would be equally miserable. You can always look to the future as being brighter as we catch up to the rest of the world. It would be impossible to have a downturn. We would be able to look stats of increase wealth for years since we have nothing to start with and marvel at how well the government has served us.
Warren Buffet is one of those out of touch rich people we were told not to listen to. He made his wealth off the backs of the poor..so I have heard.
Does increased energy consumption have anything to do with the failed Clinton/Bush energy policy? My power is on by the way..

Posted by: Kruser at August 19, 2007 10:17 AM
Comment #229910

Stephen

This isn’t about pessimism in the face of success, it’s about understanding that the so called success has been built by leveraging this country further into debt.

The latter hits the nail succinctly and directly on the head. I am no financial genius by any means Stephen. But when I heard that the fed was lowering prime rates and infusing money into the system to offset these investment fears I had an annoying thought in the back of my head that all is not right here. After reading all the posts here I have come to the conclusion that my initial thoughts on this matter have been correct all along. The corporate community under a republican congress and Bush executive branch have been allowed to manipulate the rules to favor the lender and insure a no lose situation for them. No matter how unethical or predatory their tactics are.

It reminds me a bit of Enron where everything looked great on paper but the realities were no where close to the rosy picture their books presented. The republicans have in kind manipulated the paperwork and shaped the rules to present an illusion of prosperity. As soon as that illusion starts to break down they throw up another temporary fix to cloak the real problem and delay the inevitable.

One thing I do not recall seeing mentioned here is that these were not just a few small time borrowers trying to take advantage of people. From what I understand these are some of the largest lenders in the nation. It is apparent that those who did the lending will be slapped on the hand, bailed out and told not to do this again. While those who are losing their homes will be weighed down with a bad credit record and many will need to resort to even more predatory lenders than those who were allowed to take advantage of them initially.

I think you are right about the reckoning. It has been showing signs in spits and bursts. The question is how long can the industry hide the realities. My guess is that many more borrowers will have to fall prey to these predators before the necessity for regulation will become apparent.

Posted by: RickIL at August 19, 2007 11:03 AM
Comment #229912

J2t2

I would have to give it a lot more thought and research to do justice to the whole FDR debate. Maybe I will do that some other time. But why cloud the issue with actual thinking, so let me give you my quick and dirty.

FDR’s policies did not end the depression. The depression was still going and even deepening five years after his election. What did end it? There are a couple of possibilities. First would be simple time. Recessions and what they used to call panics do not last more than a few years. There were big downturns in U.S. history before. They ended after a time. If FDR had done nothing, it is likely we would have come out of the depression in about the same time. The war bailed out the world economy. The very liberal economist, John Kenneth Galbraith, used to say that Hitler beat the depression in Germany and then exported the recovery to the rest of the world. It was a glib comment, but not entirely false.

I am not criticizing the New Deal in general. It did many good things to help develop the U.S. and unify our country. Such policies do not have immediate effects. They sometimes pay off ten or twenty years after. For example, the restructuring of the Reagan years bore their biggest fruits in the 1990s.

Presidents get too much credit or blame for what happens during their time in office. But what we can say with certainty, just by checking the history, is that FDR’s policies did NOT end the great depression.

Stephen

We have economic cycles. Government cannot outlaw them. They serve good purposes to get some of the deadwood out of the system. The people are smarter than the government. They are constantly thinking of new ways to do things and they are a couple of steps ahead of the regulators.

Kruser makes some of the same points and I agree. I would also go with Andy’s comments. This pessimistic is just silly. Homeowners who acted with reasonable prudence are doing just fine. Almost anybody who bought a home in the last decade is doing wonderfully by any objective standard. A small percentage of the buyers are having trouble.

This is the natural result of the end of the housing price boom. The prices cannot go up forever. They were getting too expensive for average buyers. It is actually a good thing, a needful thing. It is just that all times of change create some adjustment.

As I wrote in my original post, I hope that the Fed helps protect the economy, but I also hope that we do NOT bail out those people who abused the sub-prime market. Let the victim-perpetrators pay for the lion’s share of the costs of their own behavior. They have it coming.

There really is nothing to fix here.

Posted by: Jack at August 19, 2007 11:43 AM
Comment #229923


This is a “Christian” country and Many Christians fight the good fight against what they percieve to be immoral acts. They fight against abortion, homosexual rights and the immorality of Hollywood among other things.

From a Christian point of view, wouldn’t it be immoral to take advantage of a fool by takeing his money? If this is true, why isn’t preditatory Capitalism as practiced in the United States not close to the top of the Moral Majorities hit list?

I wonder how many devout, church going Christians earn their living by separating fools from their money?

Posted by: jlw at August 19, 2007 1:18 PM
Comment #229926

Jack, Perhaps your right but if as you say it was indeed WWII that ended the depression then we can agree that the policies and programs of the FDR administration allowed us to survive as a people and as a country through that diffuclt period. Because we have fallen back into the predatory capitalist economics that resulted in the depression, it seems it would behoove us all to realize that the Axis powers actually saved our country by their evil actions by causing WWII. If history repeats itself we should consider where we truely want to head as a country.
The capitalist predators that caused the great depression were not able to bring us out of the depression is pretty much a given wouldnt you say? Yet today with deregulation of banking and other industries we seem to be moving towards the same mistakes that caused the depression. Do we honestly think that more predatory capitalist deregulation will save the day this time around?

When the predators blame the victims and when the survivors also blame the victims it should give us pause Jack. Perhaps we should tame the predators a bit before they once again create the havoc that the defenders of the predators seem to think is “change”. I think we should start with the bankruptacy laws that favor the predators at this point. When you think about it if they threw loan sharks in jail for it in the 40’s 50’s 60’s and 70’s perhaps it should once again be illegal.

Posted by: j2t2 at August 19, 2007 1:49 PM
Comment #229927

Jack said,

As I wrote in my original post, I hope that the Fed helps protect the economy, but I also hope that we do NOT bail out those people who abused the sub-prime market. Let the victim-perpetrators pay for the lion’s share of the costs of their own behavior. They have it coming.

I generally agree with this sentiment. Personally, I am financially conservative. I think the excess of the system needs some purging. Home prices have gotten terribly out-of-whack because of cheap credit and financial illiteracy. What concerns me is the likelihood of the other shoe dropping.

Remember the S&L bailout at taxpayers expense? Remember the Long-term Capital Management bailout, a hedge-fund for heaven’s sake? I don’t even pretend to know how liquidity and meltdowns in certain segments of capital markets can so threaten the whole economic system, however it seems simple enough. If capital is threatened enough it can cause huge disruption.

The problem I have with this and with the silence of free-marketers in general is thus: the little guy gets screwed and the the wealthy owners of capital get a bailout so that we all don’t get screwed even more. Those who have the most are encouraged to take huge risks with the entire economy because the government will bail them out. Meanwhile, the mortgage holder who was told by the experts that adjustable mortgages were affordable and the loan for her might was lied to is now shit out-of-luck.

Now, certainly, if the problems created by risky capital do not spread rapidly capital may learn a lesson but don’t bet on it. They made a lot of money packaging and reselling these risky loans. If Bear-Stearns and other hedge funds are allowed to eat their losses it will be as it should. If, however, this mess is determined to threaten the whole economy then how is the government to respond?

If the penalties for those who risked us all are not truly severe then both government and the market have failed us.

Posted by: chris2x at August 19, 2007 1:55 PM
Comment #229932

Jack, it is far more difficult to cheat a cheat than it is to cheat an honest person. The Cheat, being a cheater, knows what to watch out for. The honest person will usually have far less experience on how cheating can take place.

Just one of your many assertions debunked by reality. Those most afraid of being stolen from, are thieves. Those most insecure about their back, are those who harm others in the back. Those most mistrusting are those who themselves are not trustworthy and project their own motives onto others. It is a fundamental paradigm of human psychology, we fear what we know ourselves to be capable of, or, how we have been victimized in the past.

The Sub-Prime lenders were not regulated by the rules covering banks and prime mortgage lenders. One need look no further than Republican rule to find out why. Republicans have been deregulating industries in a variety of ways ranging from defunding oversight and inspectors to legislative deregulation.

Posted by: David R. Remer at August 19, 2007 3:31 PM
Comment #229934

Jlw

I cannot speak for the Christian morality. I believe in honest business dealings all around because it is good for business. Beyond that, some practices are actually illegal and should be punished.

However, fools are often parted with their money by their own stupidity. A person buys things he cannot afford or cannot manage. He takes out loans w/o understanding the consequences. You cannot really protect fools w/o taking away their imitative. It is also hard to judge what is foolish. When I bought my first piece of forest land, everybody said I was nuts. I borrowed money to do it and theoretically risked my home. Now they say how lucky I was. I was neither lucky nor nuts; I just understood what they did not and to them I was a fool. I would not want the government to have protected me from owning my forest lands.

Remember that “protection” is a type of control.

Most of the people who are losing money in the sub-prime market were not “ripped off”. They just made bad decisions that have consequences.

J2t2

The times before the great depression were poorer in terms of material wealth, just as the times of the 1930s or even the 1970s were poorer in terms of material wealth than we are today. But they were not worse in other terms. They were often called the good old days. People looked back on the 1920s with some fondness.

The capitalist predators did not cause the great depression. It was a natural cycle, like the one we had in 2000. It got deeper than most, but there are lots of possible reasons. The one most often given is the Smoot Hawley tariff. We also had a truly dangerous international situation. John Maynard Keynes blamed the oppressive Treaty of Versailles and the distortions of industrial and trade patterns. We also had a deflation. The U.S. government refused to inject liquidly into the system. We just kept the gold in the basement of the Federal Reserve in NYC. In those days gold backed the currency. We had plenty of gold and did not back much money.

As I mentioned above, I believe that FDRs regimentation and militarization of U.S. society was very useful in facing the Fascists. He was very successful from that point of view. The New Deal also built needed infrastructure, dams, and roads. The CC planted billions of trees. BUT the New Deal did NOT end the depression. It was a political, but not an economic success.

Chris2x

Very few little guys got screwed that did not cooperate in their own debauchery. Most loans - 98.7% as I recall - are not in default. Most people who bought homes in the last decade made a pile of money on them. Median household net worth is near all time highs.

The people who are getting screwed unjustly are people like you and me who wisely and honestly did not take part in this sub-prime mess and now are asked to bail out the victim-perps. We will see our interest rates rise and our investments suffer. That is why I want the victim-perpetrators to pay more for their behaviors and do not want the government to bail them out. This group will include big guy investors and little guy deadbeats. In all cases they did it to themselves.

David

If you lent money to a non-credit worthy that you knew were bad risks, you were not a completely honest man and you deserve to pay the price if your deal goes bad. Similarly, if you borrowed money that you suspected you could not repay, you deserve to pay the price if the deal goes bad. Innocent victims are hard to find in this situation. Prudence dictates that you do not borrow more than you can reasonably repay, nor do you lend to someone who probably cannot pay it back. If you do either of those things, you should not be surprised if you suffer adverse consequences. It is not our business to bail them out.

Posted by: Jack at August 19, 2007 4:44 PM
Comment #229935

If a borrower is sub prime, they couldn’t previously get a loan and would have been renting.
Those who are forclosed end up doing what? Going back to renting where they started. No real disaster here.

Is there a study on how many sub prime people have kept their homes? Maybe the risk and losses were worth it if only for their sakes.

Posted by: Kruser at August 19, 2007 4:47 PM
Comment #229936

Jack
We won ww2 because of the New Deal programs.The needs of the war effort were addressed by these same programs,the progressive income tax,price stabilization,economic stimuli,wage and price controls etc. Saying that ww2 ended the depression and not these programs is like saying medicare part b cured an illness and not giving credit to the actual medications used.The rise of Keynesion economics also led to the post war boom.
You claim the New Deal programs did not help end the depression is revisionist. That things got worse before they got better is sited as proof while later you point out that economic changes take time means you are only allowing that time as a justification of programs and policies you favor.

Posted by: Bills at August 19, 2007 5:05 PM
Comment #229937

Kruser-
Regulations cannot prevent natural downturns, they can just keep the system clear of catastrophic downturns that really have no functional reason to be there.

A great deal of this comes from efforts by the Administration and by Republicans to avoid inevitable downturns. That’s why the regulations were made lax: to remove obstacle to grey area and near black market behavior like this, which inflates the numbers that need to be inflated.

Unfortunately, such behavior causes additional dysfunctions in the economy, in addition to not stopping and even exacerbating the natural downturns that it intends to forestall.

Or put simply, this is the product of years of the politicians, left and right, trying to prevent necessary adjustments to the economy, and trying to get around mathematics they would have been better off acknowledging.

This isn’t about cycle’s per se, rather the unwillingness of some to admit a downside must come, and the financial book-cooking they enabled in their misguided quest to keep perpetual growth going, if only on paper.

As far as Warren Buffet goes, he seems less out of touch to me than folks who think that we can keep these practices going forever and merely have the market correct things.

As for the energy policy? Yes, it’s increased somewhat, but the real question was whether our problems were caused by the inherent weakness of the system or whether the system has been manipulated in a way that reduces efficiency, strains the infrastructure, and creates artificial shortages. It’s proven to be the latter.

Jack-
This isn’t about the prices, so much as the practice of doing what it takes to shove people onto properties they can’t afford. The exposure is bad enough that these companies are in danger of collapse. The problem is not merely that housing prices have gotten too expensive for the average consumer, it’s that they’ve gotten so with people shoved into those homes, with mortgage lenders having arranged Home Equity loans that put people under greater obligations than they were before.

Additionally, there are emergent effects to come. The equities markets weren’t that important to the average person, really, in 1929, but the effects spread beyond the equities market because of the way the folks many depended up on depended on that system.

The real question here is not about bailing folks out, but rather softening the landings and restructuring the system to discourage and prevent abusive and unethically risky behavior.

Posted by: Stephen Daugherty at August 19, 2007 5:13 PM
Comment #229943

Jack

Very few little guys got screwed that did not cooperate in their own debauchery. Most loans - 98.7% as I recall - are not in default. Most people who bought homes in the last decade made a pile of money on them. Median household net worth is near all time highs.

These numbers are reflective of the current status. This dilemma has not yet run its course. I would think that there probably are many many more who are holding on by a shoestring. The coming months will tell the whole tale. And I wonder how much of that net worth has been re- mortgaged or was attained by credit card debt. I know these issues have been previously discussed on this thread. But they do pose a valid concern.

I was speaking with a 70 year old furniture sales person this morning who told me that she had been in this business her entire working career. She told me that she has learned to recognize thru her work when financial times are not good. And she feels that we are currently in a definite downturn. I know you would argue that the numbers state the opposite. Unfortunately numbers do not always accurately reflect real world scenarios. And they can be easily manipulated to create illusion.

Innocent victims are hard to find in this situation. Prudence dictates that you do not borrow more than you can reasonably repay, nor do you lend to someone who probably cannot pay it back. If you do either of those things, you should not be surprised if you suffer adverse consequences. It is not our business to bail them out.

As for a lack of victims I am in strong disagreement Jack. If such predatory practices were not allowed to exist there would be no victims. Those who perpetrated these schemes as usual will suffer no consequence. They are the wealthy and the rules have been designed to protect them from loss and in most cases retribution. As you can see I am in agreement that they should not be bailed out. However you and I and everyone else knows that without a doubt they will be, at our expense. We also know that without a doubt those who were taken advantage of will not be bailed out. The simple fact is that the industry saw a chance to make some quick billions at the expense of millions of credit hungry suckers with the fore knowledge that many would default when interest rates go up. IMO this practice is criminal and should be treated as such. Until such activities are made criminal they can not be treated as such and the practice will continue in one form or another.

It is only fair to say that the borrower should also hold some responsibility for bending to these predatory schemes. But lets face it Jack the american people as a group are very gullible and all too subject to the herd mentality. We have been programmed to ignore the obvious and believe in and trust that our financial institutions will just naturally do right by us. We the borrowers have few protections from those who manage the funds.

Posted by: RickIL at August 19, 2007 5:56 PM
Comment #229949

BillS

When fighting an existential conflict you need to regiment people and the economy. It is like running a sprint, however. You cannot maintain it and probably do not want to. Our war economy was based on the German model. In war we accept things we do not want in peace.

Beyond that, economic systems are in evolution. In the post war period, directive command and control worked to some extent. Europe was in ruins. We had an imperitive.

As choices become more complex, we require a different type of decision making. If a fire breaks out in your house, you would be justified in taking charge and ordering your family out. In ordinary daily living, you might want a different management strategy.

Stephen

I believe we should take steps to protect the equity market. The fed is doing that. I do not want to get into full bail out mode.

If people were “pushed” into properties, they were willing accomplices. They also can liquidate the property they were pushed into. And they will be no worse off IF they behaved prudently.

The market is in process of punishing imprudent and unethical behavior. Why stop this process with a general bailout and then make regulations that will hamstring honest and prudent people who want to use credit wisely.

RickIl

If you prevent the sub-prime lending, you prevent many decent, honest and prudent people from getting the credit they need. You condemn them to never getting ahead. In other words, to protect the imprudent, dishonest and unlucky, you will punish the honest & prudent who just need a break.

In this case, both borrowers and lenders should pay the price for their behavior. I do not want to bail out either group any more than necessary to maintain the stability of the bigger system.

BTW - how would you bail out the borrower? He bought a house with a loan he cannot afford to pay off. The loan goes bust. The lender takes the house and tries to sell it. If it sells for more than the loan amount, the borrower gets the difference. If it sells for less, the borrower probably will get to duck out on what he owes. What does anybody owe the deadbeat borrower?

Posted by: Jack at August 19, 2007 7:00 PM
Comment #229954

Jack you could bail the borrower out by changing the bankruptacy laws such that the lender cannot require the borrower to pay beyond what the lender gets when the house finally sells. Let the investors taking the risk pay the price.
The problem with getting out prior to foreclosure is that it is a buyers market and there arent many buyers . I know because, for different reasons than we are discussing, I was planning to sell my house and after 2 realtors not even bothering to show up to talk about it the third told us not to try to sell it know as there is to many houses on the market now. For many people caught in the trap Im sure they get the same results.

Posted by: j2t2 at August 19, 2007 8:05 PM
Comment #229956
The real question here is not about bailing folks out, but rather softening the landings and restructuring the system to discourage and prevent abusive and unethically risky behavior.

How do you do that? How can you encourage people not to make bad decisions if you take away the pain of making that decision, without dictating further what can and can’t be done between the two individuals?

We have fair lending practices in place now, there could be argued some very lax enforcement of those laws, but if we make more laws and they aren’t enforced, what help does it give?

We should enforce the laws and EDUCATE people about these things while we can, instead of indoctrinating them into servitude, in our ‘government controlled education system’. TO say that ‘these people are just uneducated to handle these types of decisions’ and it being left to fly just shows not only how much our educational system lets us AND our children down, but it is an even worse indicator in what we are willing to accept from our forcibly removed funds.

Posted by: Rhinehold at August 19, 2007 8:33 PM
Comment #229957

j2t2

I bought some stocks that are now worth less than they were. Should the USG bail me out if I want to sell them and pay the difference?

What about those many people who made money on their houses. Should they pay the profit back to the investor?

No bailouts would be the best outcome. We will have to settle for some bailout to prevent a liquidity crisis.

Let me question your assumptions. Do you assume that the borrower is just too stupid to understand the terms of the loan? If that is true, can you believe the borrower is competent in the rest of his life? If the borrower is competent and not stupid, why does he deserve the special help from other people? He took a risk. We all would just love to have an investment with nly a big upside. If I subsidize the guy’s losses, I want a taste of the profit too.

Posted by: Jack at August 19, 2007 8:42 PM
Comment #229962

It comes down to 2 things, Jack, risk and liability. Those that made money during the housing run up by lending to people with insufficent income are in the financial world and know the risks. Let them assume the liability. The corporations have changed the rules to buffer themselves from the risk and liability via the bankruptcy laws. All Im saying is let those same companies and investors face the consequences of their actions. By simply changing the bankruptcy laws to allow those that have lost their houses to be clear of any additional debt resulting from the difference between what the house sells for and what is owed on the loan. Let those corporations and investors assume the risk for their actions. Seems to me its a win win. Those that lost their house have a bad credit rating, are renting again and are broke. They took risk that suffered the consequences for the risk. Those investors and bankers that wanted to venture capital in a risky venture are losing the money and learning a valuable lesson yet are being bailed out by the USG to soften ther blow for all except the little guy.
To answer your questions Jack, I dont think anyone is stupid. I think all people are good at some things and not others. As far as bailouts Jack why should only the fatcats get bailed out? Why is it that only the individuals on the consumer end be the ones to shoulder the risks taken by the investor class?
The housing market and the equity taken out of peoples houses and spent the past few years have benefited us all as it has propped up the economy. So perhaps indirectly we have all gained from the excessive greed of those that took action. Onr does have to wonder how many times must we have to watch this same game played out before deregulation is exposed for the problem that it is.
To be clear Jack I dont think anyone should be bailed out by the USG. I think the USG should only modify the bankruptcy laws as I have stated in most of my comments on this thread. Let those that loaned assume some of the risk as those that borrowed has. Let the market sort itself out without a bail out. Lets just level the playing field for all parties and lets see if the economy is really that good after these past 30 years of trickle on economics.

Posted by: j2t2 at August 19, 2007 11:17 PM
Comment #229963

A local bank was the only one that would give me a loan in the mid 80’s. Five year baloon was all they offered. At the end of five years, the officer laughed at me and said there was no way he could loan the full amount again. my house had depreciated in value. We went to the bank president who originally gave us the loan and he renewed it, thankfully. This kind of thing has been going on for years. Diligence saved us. I remodeled the home later and sold it at a profit.

Today I talked to a guy who has mortgaged his home to the hilt. He said if things went bad his house isn’t even close to the value of what is owed. His wife has an in home business and he is a foreman for a big company. He said he was warned, understood what he did and would take responsibility should there be a future problem.

Bail outs produce dependants. it is better to owe business men than political hacks and mob rule. politicizing these things with our warm and fuzzy solutions allows washington to get even more control and gives more power to the hacks from both sides. Listen to both sides about their opposing team’s incompetence. Let it be a lesson against controls and intervention.

Posted by: Kruser at August 19, 2007 11:43 PM
Comment #229964

Jack-
It doesn’t take greed to make somebody vulnerable to cheats out there. All it takes is hope for better things, and an average to low understanding of the numbers. Let’s face it: you can’t get your ideal market. Most people aren’t financial experts, and when faced with some of the contracts these people put forward, most folks eyes are bound to glaze over.

There are people who specialize in doing this, who work all day writing up contracts only a very skilled lawyer can understand.

Let me tell you essentially what’s going on”: people are told that they have the credit, which they interpret to mean that the folks have decided they can pay for it. Unfortunately, that’s not a valid inference anymore, but those companies don’t tell them, and don’t concern themselves. They just securitize most of it, registering it as a profit on their books.

It’s the companies here who are at fault. It’s not like they have to give away free money to pay for property. They hold the purse strings, they’re the ones taking the immediate risk.

I talked about a soft landing, and I didn’t choose my words carelessly. I do not see a bailout of any side as a good idea. The companies should be allowed to fail. That should serve to discourage it well in the short term. Long term, the regulations should be put in place to prevent such high-risk predatory lending. It doesn’t appear to be benefiting anybody. The credit crunch is coming from the fact that nobody’s willing to securitize all that high risk debt anymore, and its reducing the mortgage companies ability to instantly offload the debt as a sold debt.

This is what I meant a while back in one of my previous articles about cascading failures and reckoning. It’s not pessimism, it’s logic. You can’t sell debt forever without somebody having to collect, and if you’ve put a lower middle class person in debt, or somebody poorer, you might have put the collection of the debt beyond that person’s reasonable reach.

Bankruptcy, at that point, might be a good option, but then you guys took that off the table for a great many people, on the presumption that the lower fifty percent of applicants were criminals trying to cheat the system. Once again, the moralism of the Republicans is depriving people of a path to actually dealing with their problem, and by doing that worsening the economic consequence of it.

Stop trying to judge people’s character and deal with the situation. The situation is that companies are lending at usurious rates to those who can’t afford to buy what they’re getting. You folks supported that in the name of convenient access to a house, but has it occured to you that you can’t have both, that you have to choose?

You can’t pump up record homeowning numbers in the absence of folks ability to pay, and still maintain a solvent industry

Posted by: Stephen Daugherty at August 19, 2007 11:55 PM
Comment #229966

Well, I’ll just add this little tid-bit, right here where I live the majority of foreclosures have very little to do with ARM’s or home purchasing. The two greatest causes of foreclosure are folks using “refi’s” just to keep above water waiting for wages to catch up with actual inflation, and folk’s being able to borrow up to 125% of their home value to finance anything they want (quite often to pay off medical bills)!

It’s all very bad practice, but it’s acceptable when our President says (through his actions) that debt don’t matter! Well, guess what ……. debt does matter. Now that the beast has been starved where in the hell do we get the $$$$$$$$$$$$ to live up to our obligations?

Social Security is just about the only thing that is still actually solvent but we’ve used it to finance everything from toilet seats to hard hats. Now what? Who do we rob next?

Posted by: KansasDem at August 20, 2007 12:26 AM
Comment #229967

Kruzer, Whats so special about businessmen that we should feel better by owing them? At this point in time they own the political hacks and the right side and part of the left side of the mob you speak of. When businessmen make the rules we have to play by no one wins. Except them.

Posted by: j2t2 at August 20, 2007 1:32 AM
Comment #229971

J2t2

Thousands of sub-prime borrowers made piles of money during the housing price rises. It was not a matter of their being victims. The recent price drops (or even stabilization) is what makes people thing they are victims.

I think we should apply similar laws to the big guys and the little guys. We differ in that you seem to think the little guys are victims, too dumb to resist the temptation or understand what they were getting into. As I wrote just above, many little guys made big money on the housing market. But anything involves risk. You cannot give anybody – little or big – the benefit of virtually unlimited upside reward and then guarantee them no losses. What will happen then is that smart guys, big and small, will seek the riskiest and highest payoff investments and leave others holding the bag when they go bad.

If we bail out the foolish, dishonest or chronically “unlucky” - big guys or little guys - the real victims are people who work hard to pay their debts and do not default, i.e. most of us.

Stephen
The lenders ARE taking on risk. If the borrower defaults, they lose money. I am advocating we NOT bail them out. They almost always lose money on a foreclosure and the best they can do is break even. The borrower is the one who cannot pay. Maybe the lender should not have given him the money. The lender will be punished by losing money. But the borrower is the perpetrator of the default. He took more money than he is willing or able to give back. He is a victim of himself. He is not keeping his promise.

The Fed should (as looks like it is) working to maintain liquidity so that prudent lenders and borrowers get this soft landing. Imprudent ones are the cause of the problem and should be shaken out. There is no morality or justice in subsidizing their foolishness or dishonesty.

Re judging people’s character. I am merely allowing the results of their behaviors to affect them. You know people’s character by what they do. They made choices that have consequences. You and I made different choices. They would not have shared their profits with us and I do not want to share their loses with them.

I do not agree with you that we should cut off the access to credit for the poor. I know that you did not say that, but it is implied in all your statements. You see the poor as foolish victims who cannot make good decisions and need the paternalistic care of government. That is the whole basis of the desire to bail them out.

I would also point out that the numbers of foreclosures are very small. Just a little more than 1%. Even if this number doubles, it is still very small. It is more of a blip than a crisis. We can make it into a crisis if we overreact.

Kansas

If a person who borrowed 125% of his homes value goes into default, he clearly in NOT a victim of the lender. He has, in fact, managed to steal at least 25% of his home’s value from the imprudent lender. Neither party deserves our sympathy or our taxpayer money.

j2t2

In the case just above, if the businessman makes the rules andd is the only one who wins, how can a lender win if he lends 125% of a home’s value to someone who then defaults? The only way I can think of is if the goverrnment bails him out.

Posted by: Jack at August 20, 2007 7:41 AM
Comment #229972

Jack-
The Lenders have staff who are trained to understand these transactions. They have people to take the wide view, to understand the levels of risk. They should know better. That’s their business to know, and to lump the consumers in with them is to ignore the difference in training and education.

Most people do not know enough about the business to protect themselves. Most people will never equal their lender in experience, or in the resources to determine what kind of risk they are taking.

We have ethical and regulatory standards on all kinds of professions, like medicine and law, rather than assume that people could somehow become the equal of professionals in their knowledge and understanding.

We don’t expect tenants to understand the engineering of buildings, we expect the builders to do so and hold them, not the tenants responsible for failures and defects there.

We don’t expect people to understand medicine sufficiently to chose their doctor, we expect the doctors to know their profession sufficiently to operate properly and ethically.

Why should we expect people to all of a sudden become experts in real estate and finance, especially when the lenders and creditors are playing such a high pressure game? We should expect professional standards and judgment from them, not from their customers. In fact, if the loans are predatory enough in nature, we should simply outlaw them, or put significant restrictions on them. I know you balk at this, but some financial instrument just have no legitimate reason to exist.

If we want things to run smoothly, you can’t have lenders telling everybody yes, especially people they could easily exclude as potential customers. They understand the risks best, and if they can’t resist the temptation of predatory lending the decision should be taken out of their hands.

Posted by: Stephen Daugherty at August 20, 2007 8:33 AM
Comment #229974

Jack

BTW - how would you bail out the borrower? He bought a house with a loan he cannot afford to pay off. The loan goes bust. The lender takes the house and tries to sell it. If it sells for more than the loan amount, the borrower gets the difference. If it sells for less, the borrower probably will get to duck out on what he owes. What does anybody owe the deadbeat borrower?

I was not advocating that the borrower be bailed out. I was merely making the point that the borrower is never even considered for bailout. By that same standard why should the lender ever be given bailout consideration. The lenders are the financial professionals. They know and are aware well ahead of time exactly what risk they are taking. And they are well aware that they are taking advantage of the borrower. They know exactly who is at risk of defaulting before they approve the loan. And I would also guess that there are a small number of exceptions who as you say simply need a break and will result in good loans. But to essentially initiate a wholesale method of risk lending while knowing that there will likely be little risk to yourself if the bottom falls out is morally criminal. This is the crux of the problem. There is little risk for the lender so long as the rules allow them to be bailed out at taxpayer expense everytime their business ventures go south. So yes the victims here are the borrowers who for the most part assume the bulk of the risk and are not afforded the same protections as the lender.

I also find it rather shallow to assess those who have defaulted as deadbeat borrowers. I am sure there were probably a few deadbeats who were knowingly taking advantage of the system just the same as those doing the lending. But I would guess that the majority of those defaults are good people who simply got suckered into a poor deal. As I mentioned before the herd mentality plays a big role. That and the fact that not all borrowers are by any means financially savvy are probably the biggest factors leading to this home lending failure.

Posted by: RickIL at August 20, 2007 10:00 AM
Comment #229976

Jack, Do you really think a businessman would give a 125% loan to value? That my friend is a loanshark and a very greedy loanshark at that. Why should this entity be protected in any way. They used to be thrown in jail. I would think the change I have proposed in previous comments would work to protect the lender from himself as well as protecting the buyer. If the buyer had the upper hand as he would in the 125% loan then perhaps the lender would think twice about making the 125% loan as often as they do now.
All Im asking for Jack is to protect the buyer to the same degree the corporation is protected. If the buyer enters bankruptcy as a result of the loan default then the amount the bank doesnt recover by selling the house should be forgiven the same as if the buyer was a corporate entity. Why are you not up in arms over this inequity in the bankruptcy laws?
Its the risk and reward thing Jack. With reward comes responsibility. The righties for reasons unknown to me have decided to favor the corporations over the individual. The corporations have done a good job of changing the rules to reap the reward while not assuming riak nor liability. Afterall Jack is it really a risk to loan money out if 98.7 percent of the time it is a good loan? And when the loan does go bad the bank, by law, can collect the outstanding balance from the individual or forever ruin the man’s credit rating?
So once again Jack Im not asking for any bail out for anyone, borrower or lender, just a return to fairness in the bankruptcy laws. The corporate written bankruptcy laws should be repealed as they were based on false pretenses from dishonest corporations and bought and paid for government. In fact this may be one of the reasons the lenders became so lax, knowing they could use the law to collect for any losses and using the strong arm collection tactics of the old and illegal neighborhood loansharks to coerce the borrower to ante up.

Posted by: j2t2 at August 20, 2007 10:08 AM
Comment #229981

The real problem here is not lenders or borrowers, at least not directly. The real problem is the sheer ammount of personal debt the citizens of the US have rung up, and how they are dealing with it. Most are going the route of home-as-piggy-bank, taking out Adjustible Rate Morgages and Home Equity Lines of Credit in order to pay down credit card debt, then ringing up more credit card bills before they pay off the loans. They then dig deeper into their homes, taking more ARMs and HELOCs, getting more and more into debt.

So what must be asked is this. If the housing market really tanks, if interest rates jump and values drop hard, what will happen to these people, and who is to blame? Do you blame the people from living beyond their means? Do you blame the lenders for making it too easy to dig one’s self into a deep hole? Do you blame the credit card companies, with their teaser rates and sky-high default levels? And much scarier, what happens with the federal government and it’s monstrous debt if this happens nationwide and a bailout becomes an actual necessity? What happens if we hit a period of stagflation, a potential worry with our high energy costs?

So, should we point fingers and blame, or should we worry instead about a solution?

L

Posted by: leatherankh at August 20, 2007 10:35 AM
Comment #229984


Let me see if I have it all straight in my head. We have an economic system that separates the fools from their money, a government procurement system that separates the fools from their money and a nice little war that is separating the fools from their money.

I guess the only thing standing between the Capitalists and their Utopia is the social safety net. Let’s all work real hard and see if we can’t separate the fools from their Social Security money.

I forgot another Socialist element that must be eliminated. The Socialist regulatory element in the stock market. I wonder what Socialist/Commie came up with the idea that trading can be stopped to prevent a major drop in the market. Let’s get rid of that rediculous rule and separate the fools from their money.

Without fools Capitalism doesn’t work. All of us fools buy all kinds of junk we don’t need. Fools buy SUV’s for $50,000, put a tiger in the tank and guzzle down the highway at 80 MPH.

Posted by: jlw at August 20, 2007 12:00 PM
Comment #229989

All,

Here is a simple summary of some of what this mess is about that appeared in my local paper this morning. It doesn’t talk of bailouts and talk of them may be premature. However, the recent talk of regulating hedge funds seems even stronger in light of recent events.

Posted by: chris2x at August 20, 2007 12:49 PM
Comment #229990

Stephen

I expect a competent adult to understand enough about the big loan he is taking to reasonably estimate if he can pay it back or not.

Understand that this is NOT an unregulated market. A borrower has lots of protections and lots of safeguards. There are laws requiring full disclosures. If a lender breaks these laws, I am in favor of punishing them. BUT if the borrower gives his word and his signature to a legal contract, he should pay it back.

Predatory loans are illegal. What we are talking about is loans made to people who have a bad credit history. It is a judgment call how far down to go. An excellent credit risk can also default. It is statistical.

If you outlaw loans to bad credit risks, you take away the ability of the poor, but honest and prudent person, to better his life. They are bad risks. If you lend money to a bad risk, you have to charge more because the chances of not being paid back are much higher.

RickIL

What the Fed did on Friday was lower the discount rate. This should have the effect of stabilizing the credit market. It will help bail out lenders AND borrowers. The idea is to prevent defaults. This helps the lender who could suffer from defaults, but it helps the borrower even more.

J2t2

I think that someone who gives a 125% loan is acting as imprudently as the person who takes one. They both are taking a risk and they both should suffer the consequences of their decision.

However, there are sometimes good grounds for such a loan. A person might anticipate much greater income in coming years than he has today. Or the property value might rise. IN fact this is the basis of our current problem. If you borrowed 125% of your property value in 2001, by 2003 (in most markets) you had made up the difference because of rising property values. You had done well. When property values stall, people can no longer take advantage of this. But that does not make them innocent victims, just imprudent investors.

Leather

We should look for a solution, which is what we have. Some of the imprudent lenders and borrowers will pay for their bad decisions. The Fed is injecting liquidity to protect others. Most of us who own assets will lose some money, but not too much. This is a necessary and helpful cleanup. Median household net worth is near all time highs. We (as a country) can deal with this problem if we do not overreact and the government does not try to “help” too much.

Jlw

The free market helps mitigate the effects of fools. It would work better w/o them, but they are always among us and even the wisest of us sometimes make foolish decisions. The feedback and incentives helps us make better ones next time.

The free market is a growing sum system. There are more winners than losers and even the losers are usually only down in relative terms. You would have to be a real fool to have lost money in real estate if you bought any time within the last decade, except for last year. Most people did just fine. We have a small number of people who lost out and a rather larger number who have become alarmed. If you do not plan to sell you home this year, you have nothing to worry about. Increasing home values did not make your home nicer and decreasing values will not make it less pleasant. It is mostly just a psychological loss for almost everyone. Virtually anybody who bought a home from 1997-2006 is much better off as a result. If you plan to live in your home, now is a good time to buy too.

Posted by: Jack at August 20, 2007 12:53 PM
Comment #229991

All,

Sorry about the repost but I didn’t get it all.

Here is a simple summary of some of what this mess is about that appeared in my local paper this morning. It doesn’t talk of bailouts and talk of them may be premature. However, the recent talk of regulating hedge funds seems even stronger in light of recent events.

Part of the gist I get from the article I just posted is many hedge funds and Wall Street acted just like irresponsible home-buyers or refinancers using ARMS to borrow (leverage) themselves to buy packaged sub-prime loans. I just hope Jack writes a nice article bashing hedge funds or Wall Street if talk of a government bailout ensues or inflation shoots thru the roof.

Posted by: chris2x at August 20, 2007 12:58 PM
Comment #229993

chris2x

Hedge funds can also get smacked to the extent they deserve it. It is a needful thing when investors suffer/benefit from their decisions.

More regulation of funds is less of a priority when the results of their actions have consequences.

Posted by: Jack at August 20, 2007 1:52 PM
Comment #229994

Jack,

That depends on what for whom the consequeces are as a result of their actions.

Posted by: chris2x at August 20, 2007 2:35 PM
Comment #229995

Jack-
The problem, to put it gently, is that without proper regulations, the system wildly over-reacts, penalizing people with good credit, and honest folks with poor credit. This takes the rug out from under these people, then that takes the rug out from under people who were making money off those folks.

This person, like me, places the blame on the lenders. According to his article:

The mortgage market went overboard in providing credit to people who couldn’t afford it. This was especially true in 2006, when lenders seemed to throw caution to the winds and issue mortgages that were clearly not sustainable. These included high-interest subprime mortgages that soaked up an unacceptably high percentage of income, adjustable-rate loans that were barely affordable at the initial below-market “teaser” interest rate (much less after they reset to market rates), and “no documentation” mortgages (aka “liar loans”) that required no confirmation of income or assets.

The financial market’s growing hunger for high-yield mortgage-backed securities meant that mortgage lenders could originate highly problematic, if not fraudulent or predatory, loans at little or no risk to themselves - since the loans would quickly be sold off and converted into mortgage-backed securities. Unfortunately, about 20 percent of all subprime loans issued in 2006 are currently delinquent or in foreclosure, a much larger percentage compared to subprime loans issued earlier. The relatively high interest rates of subprime loans were supposed to compensate for the higher risk of default, but apparently the risk was even higher than anticipated.

An underlying cause of the current crisis, in other words, is a cavalier, often irresponsible, attitude among mortgage lenders and investors toward risk. All too often lenders issued mortgages, and investors purchased them, with little if any attention to the ability of the borrower to afford the loan. In the worst cases, predatory lenders pushed vulnerable, often elderly households to take out loans far beyond their means to pay back. The inevitable result was widespread foreclosure.

You speak of market corrections and punishments, treating the market as if it had volition of its own. No, the market is just the sum and the emergent result of people’s reactions. What makes it seem intelligent is the way people share information within the market.

It’s important to consider then, the way information flows in the real world. That is, imperfectly, and often at the mercy of those with vested interests. The dominant policy of recent times, given main support by the Republicans, has been to require less full disclosure, to enable more lax kinds of accounting, and to subsidize and bail out those who make stupid decisions, and even those who seem to be doing rather well, profit-wise!

The housing market has long been a haven for those wishing to imply that the economy doesn’t have underlying weaknesses. But no boom lasts forever. The lenders and the hedge funds, in an effort to stave off the economic consequences, tried to sell off this debt, and at some point found there weren’t enough willing buyers. Debt that doesn’t pay off doesn’t sell.

Part of the problem is that the Federal Government largely took over regulation of such credit, but did not, unfortunately enforce the laws with enough vigor. Compromised, like the FDA, by the fact that it runs off of industry fees, it’s been loath to serve the taxpayers properly.

To put it plainly, catering to all these interests have made a mess of things. The time has come to put better limits on predatory lending practices, and to better regulate how the liabilities here are securitized, so folks with dollar signs in their eyes don’t put the cart before the horse on deciding who they’ll take a mortgage risk on.

Posted by: Stephen Daugherty at August 20, 2007 2:38 PM
Comment #229996

It seems like Consumers may not be the only ones feeling the pinch.

The real question here, is that without greater transparency, reliability of product, and trust in what’s being distributed, who is going to invest, who is going to get credit?

If there was one critical function for regulation, it’s ensuring the free flow of good information that participants in the market require to make informed decisions, to exercise their best judgments, and to create the kind of economic feedback that helps regulate bad actors immediately, before their deceptions and their failures create greater problems.

Posted by: Stephen Daugherty at August 20, 2007 2:51 PM
Comment #229997

Again worth repeating is that the underlying cause of the current troubles is that wages have not kept up with productivity gains as the usually do. These gains are producing wealth but that wealth is going to those that already have wealth. This is by design. Anti-collective bargainning policies,labor enforcement laxity,trade deals that do not take workers interest into account,tax policies that encourage off-shoring,immigration policies etc. These ARE USG responsibilities.
The failure of the USG to address healthcare inflation is another cause. How many people have lost their homes or leveraged them to the hilt to pay exhorbatant medical bills?
There is a price to pay for basically stagnant wages as compared to productivity.What we have now is the first installment.It threatens to get worse. If it triggers a wide spread recession even more defaults will occur,a decending spiral. That is a good reason for some sort of intervention.
I expect Jack will chime in that wages are just fine in the face of overwhelming evidence to the contrary. People are not just stupid. If they have disposable income they WILL save some. If people have money they WILL pay their morgages.American workers are working harder and producing more than ever. We are just not getting a fair share.

Posted by: bills at August 20, 2007 2:53 PM
Comment #229998

Amen to all that Jack has said on this. Like everyone else with a fixed rate mortgage I could have taken a low ball variable rate but elected not to just in case rates rose, as they have. Yes it meant buying less home than than I could have bought with a low rate mortgage but I chose to take the more safe route and buy a smaller home. It really doesn’t take a rocket scientist to understand the pros and cons of an adjustable vs fixed rate and that applies to lenders as well as borrowers.

Posted by: Carnak at August 20, 2007 3:29 PM
Comment #230001

All
Just out of curiosity are others being besieged by credit card offers. Boy,we have. It has increased since the “credit crunch.” Just coincidence?

Posted by: BillS at August 20, 2007 3:49 PM
Comment #230002

If you believe your own argument, then why are you always saying that the debt doesn’t matter? Surely you realize that everything this country does at this point is done on borrowed money that it increasingly looks like we will not be able to pay back????

Posted by: Max at August 20, 2007 3:55 PM
Comment #230021

This is just a quick note to congratulate myself on being smart enough not to be poor enough to be sucked in to the marketing schemes used to push variable-rate and no-interest mortgages on the disenfranchised. In any interaction between the powerful (those with enough cash to lend it to borrowers for housing and the sophistication to market the service) and the powerless (those without creditworthiness), the blame must go to the powerful. Without question. What kind of society are we?

Posted by: mental wimp at August 20, 2007 6:03 PM
Comment #230025

mental wimp,

Why exactly are people not ‘credit worthy’? It’s because they have abused credit in the past. You are not by default a credit risk, just because you are ‘poor’.

Why must the blame go to the powerful? When did they shove these loans down the throats of their ‘victims’? Unlike dealing with the government, NO business can force anyone to do anything.

The problem is that our society no longer fears debt, or the cost of debt, or bankruptcy. Go into a car dealer and what is the question that they ask these days? “How much do you want your monthly payment to be?” They are not talking about how much the loan will cost or how much the interest rate is, most people DON’T CARE. The laws ALREADY IN PLACE require the lenders to tell the borrowers just how much the loan will cost, not only monthly but also for the total life of these loans, but the people don’t care, having debt doesn’t matter to these people.

And why? One, we don’t blame individuals when they are irresponsible with the financial agreements they make. Second, we don’t teach basic finance in our government run schools. Our government wants to crank out ignorant consumers, it’s good for the economy and tax collection purposes, and since they own what is taught, that is considered ‘not important’. How many high school seniors can balance a freaking checkbook?

So you can feel sorry all you want for the poor downtrodden, but until you demand that they learn to manage their wealth (or lack of it) on their own they are never ever ever going to do so because we make sure they never have to.

Congratulations, mental wimp, you just ensured that they will always vote for whoever promises them the most of someone else’s money.

Posted by: Rhinehold at August 20, 2007 6:14 PM
Comment #230027

Stephen

They can offer you credit. YOU have the choice of not taking it if you cannot afford it. If you believe people are less competent to make choices, we can limit them.

BillS

You are right that wages have not kept up with productivity, but they have kept up with prices. In real dollar terms, the median wage last year was better than every year except 1999 & 2000 when we had a bubble. Wages are not the problem. It is a simple matter of housing prices no longer going up and people not making good decisions, lenders, investors and borrowers. They made their decisions.

If you believe in choice, you must also believe in consequences. Bailing out those who make poor decisions because we think they are too stupid to make informed decisions and making them more dependent is the road to slavery for them and us.

Posted by: Jack at August 20, 2007 6:28 PM
Comment #230042

Rhinehold-
One way of “abusing credit” that’s particularly popular these days, with insurance and HMOs the way they are, is getting sick and having to go to the hospital. Losing your job can turn you from a regular bill payer to a credit risk, even after you’ve become employed again.

This is a society where debt has become almost obligatory to one’s finances, where people raise prices and charge more for things, secure in the knowledge that there will be easy credit to enable people to buy it, or to at least get the obligation on the record so they can mark to market it.

Nobody has to give people credit, you know. Has it occured to you that the basic argument coming from the left here is that some people shouldn’t be given credit, shouldn’t be given loans they can’t afford? Since when did the standard, economics 101 notion of risk fly out the window?

People could be as flip about their debts as they wanted to, but if the companies didn’t seek them out and encourage them to take out loans, if they didn’t reject them when they saw what a risk they were, there wouldn’t be a problem. Those with th power to give and deny credit bear responsibility for the risks they take, just as the debtor bears responsibility for the obligation they take on. Democrats like myself merely want regulations to ensure a better match, and punish those who deliberately seek to put people in endless debt with their practices.

Jack-
Why are they offering me credit in the first place? That’s the question you’re not asking. The message is, we’re willing to take a chance on you. Why are these lenders and credit card companies taking on loans that they could pretty well figure out that these people are unable to pay? This is what makes the situation the lender’s fault. It’s their decision to give credit to those who cannot cover the debts that their credit history and their income shows them capable of covering.

Or put another way, because of the instant profit that the selling of these debts to others affords them, some of these companies decided to go for the short term appearance of surging profits, instead of properly handling their fundamentals. Result? Nobody knows crap about what debt is good. You treat it like a market correction of consumers, when what it is instead is a serious failure of the system for handling debts, in both its transparency and its function.

It’s easier to claim that this is just the invisible hand of the market giving mortgage cheaters a spanking, when what it really means is that your regulatory regimes have failed to give participants in the market the information they need to tell the difference between debts that will be covered and debts that won’t be.

Posted by: Stephen Daugherty at August 20, 2007 8:13 PM
Comment #230045

Stephen

We have a fundamental difference of opinon re choice. I like to make my own choices. I do not want to live in a world made safe for me by the decisions of others. I do not trust that bureaucrats, kings or rulers can do a better job than I can of deciding what I need or want.

I like to think that I am smart enough to make choices. I am not a slave to the will of others. If someone offers me something I am the one choose when, where and IF to take his offer. I do not want the government or anybody else to deprive me of my freedom and treat me like a minor child.

If some people cannot make such choices, perhaps they can be wards of the state. Perhaps, like children, they should not be allowed to enter into binding contracts, vote, drink, drive or operate heavy machinery.

Most people who bought houses in the last decade, including most subprime borrowers, benefited from their borrowing. A minority (around 14%) of borrowers are subprime. A minority of that minority cannot or do not want to pay off their debts. Only about 1.5% of mortages are defaulting.

MOST of the people with subprime loans ARE able to pay their debts. Even in today’s “crisis” 86% of the subprime ARE solvent.

As for the deadbeats, they have let us all down and it will cost us all, let them and those who lent them the money pay the biggest amounts. AND if they want to declare themselves unable to enter into binding contracts, I suppose we can declare them incompetent, as you advocate. I would prefer to treat them as adults.

Posted by: Jack at August 20, 2007 9:05 PM
Comment #230052

Excellent answer Jack.
I am a businessman. I guess that is why the trust. If someone marginal assured me they are capable to pay a loan I might give them a chance.

The reason businessmen have to pay protection money to lobbyists is because government has too much control. You pay bail outs then the bankers will have to pay someone to protect their interests so the government doesn’t replace or oppress the mortgage lender. Afterward you will complain about the money they have to pay as though they are trying to “own” someone.

It is funny how a borrower treats you as the enemy when they don’t pay you back. This principle works even on a personal level. Have any of you guys rented or given a loan to a friend who now avoids you? All of a sudden you are considered a loan shark or a predator when all you wanted to do is help them out.

I had a guy at work that kept our hotel overnight expense check after I paid the hotels. When confronted, this guy asked for time when the money wasn’t even a loan. He had the gall to show me around his new house a year later. There was a new TV and all kinds of expensive furniture with matching wall hangings. No mention of the time he made my wife and I suffer.

Paying your loans is called Integrity. The circumstances don’t matter. Go to the bank and ask for help with a plan. Get a second job, sell some toys, but pay it back.

Posted by: Kruser at August 20, 2007 10:34 PM
Comment #230059

Stephen, you realize that medical debt does not count against your credit score, right? Kind of a red herring…

AND, those that have had their credit wrecked by unforseen medical problems are usually not going to make stupid credit decisions, they are not the ones losing their homes now.

This is a society where debt has become almost obligatory to one’s finances

No, it is because our society WANTS it that way. I choose not to live in debt, as my father taught me as a child, “If you can’t afford to pay cash for it, you can’t afford it.” He worked as a sheet-metal worker and raised 5 kids while my mother stayed at home. He has never earned more than 30k a year. He has no debt, owns his house outright and pays cash for his vehicles. He does not use a credit card. He did have a mortgage that he paid off early because he wasn’t paying interest on credit cards and cars.

Look at what most people ‘have’ and ask if they really NEED those things. Cell phones, internet connections, multiple cars, DVD players, large screen tv’s, etc, etc, etc…

If we would learn to wait and save the money to purchase those things, not buy them now on credit (paying most likely nearly double what they are worth in the end just to have it NOW) they wouldn’t have that debt.

But we foster that image of needing credit to live in our society. Because it’s good for business and it gets tax money into our public works to spread around and increase political power.

Posted by: Rhinehold at August 20, 2007 11:01 PM
Comment #230061

Jack
Wages have NOT kept up with prices in some basic areas that everyone has no choice but to use. Energy cost ,healthcare and houseing. If they had, wages would be about 3 times what they are now.

Posted by: Bills at August 20, 2007 11:04 PM
Comment #230082

Rhinehold, what you say in your last comment is very very true. But, incomplete. Credit is not just a conscious voluntary act. I know this, because the psychology of marketing and advertising is in large part built around how to trigger impulse decisions, and it has grown into a multi-billion dollar industry.

Posted by: David R. Remer at August 21, 2007 1:14 AM
Comment #230101

Jack-
Yes, we have difference of opinion regarding choice, but not the one you’d like to believe. It’s the lender choice that was the problem. They were doing relatively well until last year, when they decided they’d try and squeeze blood out of a stone, and then use the securitization of the debts they racked up to avoid the consequences of all the credit risks.

In terms of your numbers, think about this: one in five mortgage loans made in 2006 went bad. That high proportion was not seen the year before, so you can’t say that this is just standard. This is recklessness in the lending practices.

What’s making this worse is the opacity of the securities used. Because nobody can see what they’re getting, they can’t tell the difference between the debts that people will make good on, and those they won’t. Because they can’t judge risks, they’re not taking any chances, even where the sector is not in trouble.

Risk is part of any functioning market economy, but if you pile too much on, without any means to manage it, to understand what you’re getting into, people will do what’s smart to them at their level, which is to hold back their investment, limit their exposure. Unfortunately, the market is not some smart creature, like you describe it, is the sum and the emergent result of a lot of individual’s behavior, which means things can add up on the large scale in a way that nobody on the small scale envisioned.

Because of that, Businesses with relatively good fundamentals are being denied credit as punishment for what these bad debtors in the home loan market did!

The truth is, we do deny people certain choices. No government can do its job without taking some freedoms away. You talk of some nanny state while your president and others do their damnedest to make sure they can spy on everybody, while they resurrect the intrusive spying of the fifties and sixties.

Moreover, this administration has attempted to intervene with the EPA to strike down aggressive emissions laws in states, and to funnel complaints about predatory credit and lending behavior to the federal government, without doing much about them. They intervened in the Schiavo case, even though they had no legitimate place to do so.

I would seek to get in the way of demonstrably bad behavior that creates disproportionate problems for whatever benefit it brings. That includes financing where the banks have a conflict of interest. That includes accounting practices which allow the hiding of losses and the false presentation of gains. And that includes here both lending practices that carry too much risk for both the debtor and the creditor, and securitization practices which leave the value of debt sold in great uncertainty.

The point here is to clarify and make meaningful the information the market runs on, and not to tolerate practices that create disproportionate instability and institutional weakness.

Kruser-
Don’t give me this. Nobody had to lend these people money. The results were depressingly predictable, but they, like many businessfolk nowadays, seem to think that the laws of economics and the dynamics of risk no longer apply to them.

Protection money. That’s a nice way of putting it. You know, the trouble is not the government is too powerful, the trouble is that it’s gotten into the business of doing business favors. Trouble with that is that a favor to one group, is a disfavor to another, so everybody competes to pump money into the system. I’d just as soon the government works as a third party on behalf of the average American, not aiming to do one industry or another’s bidding

The fact of the matter, the wounds of the mortgage industry are self-inflicted. Unfortunately, their behavior seems to have been self-inflicted the way the wounds of a suicide bomber are, and the shrapnel’s hitting others, causing a widespread credit crunch.

Rhinehold-
Actually, I was not aware of that. Unfortunately, it can contribut to bankruptcy, and that is a credit problem, of course.

I actually share many of your father’s attitudes. I lived most of my life paying for things with cash. As such, though, I can testify as to how many things others got that I did not. I can also testify as to how things have gotten more expensive.

In all honesty, I’d prefer people be able to live on a cash basis. That said, for this to work, wages need to go up, and Workers have unfortunately become the convenient waste around which business tightens its belt. My belief is that you can’t tighten that particular belt forever without cutting off the circulation of the economy and limiting its strength.

Debt, therefore, has become a major problem at all levels of our society. We’re trying to get something for nothing. That never works. Unfortunately, for the sake of Wall Street numbers, politicians have allowed more of the kinds of practices that abstract these numbers away from the real world conditions they represent. That can be dangerous, because an economy is more than just numbers. In fact, its mostly about what happens in the real world. When the market departs from that, it no longer acts so wisely as some people would maintain it does.

Posted by: Stephen Daugherty at August 21, 2007 10:10 AM
Comment #230114

Stephen’s comment to Jack: “Unfortunately, the market is not some smart creature, like you describe it, is the sum and the emergent result of a lot of individual’s behavior”

Quite right. This is what Adam Smith referred to as the invisible hand of self interest. Where the collective decisions of many acting in their own self interest, results in outcomes that may, or may NOT, be desirable for all, depending on whether those decisions are conditioned by BOTH 1) Enlightened self-interest (observing both the forest and the trees in short and long term) and 2) a healthy moral sentiment that allows compassion and empathy for the consequences of one’s decisions to become part of the decision.

Posted by: David R. Remer at August 21, 2007 10:53 AM
Comment #230116

Kruser said: “Paying your loans is called Integrity. The circumstances don’t matter. Go to the bank and ask for help with a plan. Get a second job, sell some toys, but pay it back.”

And if government signs a NAFTA treaty that takes a borrower’s job away from them? Or an auto accident renders the person in a coma for 1 year? What then? The circumstances DO MATTER, which is why in our compassionate society we have something called Bankruptcy Courts in our judicial and legal system whose primary role IS to consider the circumstances.

Or did you think Bankrtupcy courts were invented for the Chrysler Corp. and Adelphia CEO’s only? Duh! Thank you for playing this game of ‘Which conservative can ditch compassion the fastest with their comments.’ You may pick up your consolation prize at the door, Dick Cheney wins this game hands down, followed closely by Donald Rumsfeld and Alberto Gonzalez in 2nd and 3rd place.

But, don’t go away, in the next room we have the game of “What conservative can be duped and puppeteered by dogma and sound bite rhetoric with the least effort. The current winner is GW Bush, but, all contenders are welcome to remove Bush from this winner’s circle.

Posted by: David R. Remer at August 21, 2007 11:00 AM
Comment #230131

U.S. foreclosures rise sharply in July

Posted by: womanmarine at August 21, 2007 12:44 PM
Comment #230138

Woman

It is a spike and a problem, but it is from a low base.

According to your article, “The national foreclosure rate in July was one filing for every 693 households, the firm said.” That is a manageable rate.

Stephen

Where did you get that one in five figure? If that was really the case, we would be in the great depression by now.

Latest I heard (on NPR) was that 14% of the Subprime were going bad. Subprime makes up around 14% of the total. That give us around 1.9%.

Posted by: Jack at August 21, 2007 1:59 PM
Comment #230174

Jack-
Where did I get that figure? I got it from the article in one of my links above. It’s even in the text that I quoted in my comment below the link. As for the discrepancy, my instinct tells me it probably has something to do with the fact that the author of my article includes both foreclosures and delinquencies together. Remember, it’s just for 2006, not for everybody who has ever taken out that loan, or taken out a mortgage.

But you seem to be arguing that the deliquencies are not a problem. By themselves, no, but because of the way the system is set up, there’s a ripple effect.

First, the explosion of defaults and deliquencies is making people antsy about whether the debts will be repaid.

If everything was just a matter of letting the bad lenders and the borrowers be punished by their own failure, that’s where it would end. Unfortunately, the system wasn’t so simple.

Many Mortgage debts were securitized, that is sold off to others who would then treat them as commodities to be traded. This insulated the lenders from the risk.

To a point. If, at the end of the day, a significant number of the borrowers default nobody gets a dime. What everybody is looking to do is get access to that stream of revenue. No revenue, no actual return on investment. Would you invest in that? Of course not.

Trouble is, everybody’s debt’s getting securitized. It’s part of how we’ve spread the risk of all the debt being run up to keep the growth going. And from what I understand, once the debts are securitized, you really don’t know much about what you’re getting.

Now everybody’s realized they don’t know what their securitized debt investments are worth, and that’s making the creditors of the world, rational as they are, very skittish about giving out additional credit.

This recalls a line from The Hunt for Red October: the trick is, an economy this big doesn’t stop on a dime. People have not yet adjusted for this environment, so everything that was rational, and almost institutionalized before, suddenly becomes wrong.

If you look at everything in terms of rational correction, then you’ll miss the fact that real world corrections take time, are never perfect, and the first tries are often wrong, even disastrously so.

I look at these things like a geologist looks at a fault system. When one fault slips, it puts pressure on other faults, which can either hold up under the strain, or buckle themselves. During an especially bad event, the disaster ends up cascading along any number of weak faultlines.

Most disasters, in fact, happen something like that. If you look at it, it’s certainly happening here, and people are scrambling to keep this mess from getting bigger.

Whether they succeed, I admit, is an open question in the short term. Long term, though, this should serve as a warning. It’s easy to minimize the failure, to say that the system worked this time, and with such defenders of the status quo like yourself, that’s your first instinct. Unfortunately, just disregarding a problem or a threat will not make it go away.

Posted by: Stephen Daugherty at August 21, 2007 6:15 PM
Comment #230177

Your source says, “about 20 percent of all subprime loans issued in 2006 are currently delinquent or in foreclosure.” That is not so alarming. It tracks with what I heard on NPR that 14% of ALL subprime loans were in forclosure and that the subprime make up only around 14% of the total (leading to around 1.9% overall).

I do not say it is not a problem, but it is a managable problem. I also argue that the Fed and government should work to stabilize the economy. I just do not want any heroic measures to bail out either lenders or borrowers. Let them pay the most, since they caused the problem.

I was thinking about what happened to the many borrowers. They bought a house at $100,000, for example. Prices dropped. That house is now worth $95,000. They still owe $100,000 (minus payments). Why should we do anything to help this guy beyond stabilizing the market? He bought an asset whose value declined. That is life. If he can still pay the loan, he should. It would be dishonest of him to walk away.

Posted by: Jack at August 21, 2007 6:30 PM
Comment #230209

Jack, the housing market has fallen by 25 to 30% has it not? so that would mean the $100,000 house is worth $75,000. The buyer owes $95,000 and instead of his payment being $1,000 per month due to the ARM it is now $1350 and since his wages havent went up but his utilities gas and food has he cannot make the new payment. He tries to sell but unfortunately there are no buyers and those thast offer are the GRQ’s (get rich quick types) offering $60,000. Yet you would only allow the mortgage companies and hedge funds to get bailed?

Posted by: j2t2 at August 21, 2007 11:41 PM
Comment #230233

j2t2

It has not fallen by that much in most markets. No matter. It is a problem FOR THE BUYER. He bought an asset that is worth less. However, the does not significantly change his responsibility. It is also unlikely his ARM went up by that much.

You probably own some stock. Most American households do these days. My stocks went down last week. That does not make me happy. Should I be able to demand somebody else pay me the difference between what they were worth then and what they are worth now.

My own home has dropped in value. I do not know by exactly how much but it does not matter. I still live here in the same conditions as before, just like most borrowers.

I understand why someone who owes 100,000 on a house that is worth 90,000 would be tempted to walk away and defaut on his debt. But that is dishonest. We may feel sorry for the guy, but he is not a only victim of bad luck. He is a perpetrator of a dishonest act.

The lender took a risk in lending. If the guy is a bad risk, he charged sufficient interest to compensate. He will lose money in a default. Nothing wrong with that. The borrower took more money than he can or will pay back. He will also lose money. Nothing wrong wth that either. Our only goal should be to prevent their behavior from creating too much instability in the general market and let the problem work itself out with as little intervention and expense as possible.

Posted by: Jack at August 22, 2007 7:07 AM
Comment #230241

Jack-
You’re imagining that the people getting into this trouble are typically amoral dealbreakers. In truth, most people with these problems are probably defaulting and going into delinquency because they’ve run into a serious crisis, or because they’ve chosen to have their children eat or get the health care they need. It’s not an easy decision, really. I can tell you that from experience.

It’s easy for market advocates like yourself to dump on the losers in the game. It’s harder for you to see the systemic consequences of all these losses happening at once.

Because so much debt is securitized nowadays, in just the manner that mortgage debts have been, uncertainty about the value of such debt-originated commodities has spread to unrelated sectors. In response, other creditors are being very cagey about letting folks create new debt. A lot of legitimate yes’s are becoming overreacting no’s overnight.

The mortgage lenders, are getting hit in three ways by the upsurge in defaults.

First, those who have these debt commodities out, and who were depending on them to support the future bottom line having gotten the rug pulled out from under them. Some of these companies had this coming; I don’t mourn those who engaged in predatory lending. Others, though, are merely getting blasted by the shrapnel from the subprime lenders and their irresponsibility.

Second, those who have set up new mortgages now can’t securitize them, leaving them carrying more on the debit side of the column than they anticipated.

Third, the general credit crunch caused by the uncertainties in the Securitizing market has made it far more difficult from them to sell new mortgages. This will likely have follow on effects in home sales, home building, and other related fields.

Let’s be crystal clear about the causes of this problem here. Not everybody has a head for finances. That should not be a license for somebody to take them to the cleaners. Yet that’s just what they did. These lenders knowingly sold people mortgages they couldn’t afford. They looked the other way when people didn’t give them documentation. They purposefully set interest rates that would push payments higher after the teaser rates were finished. They purposefully either failed to check people’s income, or checked it and gave them the loan anyways, knowing they wouldn’t be able to make the payments.

They could do this because they felt secure they could sell the debt to somebody else and make it their problem. Something very similar works in the Credit Card industry. People give cards and loans to known credit risks not only knowing they won’t be able or likely to pay, but positively counting on it for the sake of fees and rate hikes. People are actually aiming to put people in permanent debt, to make a constant stream of money from the fees and the interest.

But that works only so long as there are no dead ends as to who you can sell this debt to.

As long as these predatory lending and credit practices are maintained, yes, you can claim this hypercharged economy, but no, you can’t avoid the potential of cascading failures like this credit crunch. I’m not sure the fed letting more money go into the system is necessarily going to help the long term health of the economy. It’s like giving Heroin to a addict in the hopes that their current good feelings will lead them to quit later. At some point, you’ve got to regulate the choice out of their hands, restrict how they take these risks. There use to be greater oversight and regulation of this particular industry. Unfortunately, some people confused helping companies look more profitable and play the game more dangerously with creating good economic policy. There’s no such thing as a free lunch, and no such thing as an economy that can grow forever, and in the attempt to ensure both, we may end up producing the opposite consequences.

Posted by: Stephen Daugherty at August 22, 2007 12:09 PM
Comment #230325
That’s still a small percentage of total households, but analysts warn that the big wave is still building. Many of the weakest loans were made in late 2005 and early 2006, and their two-year “teaser” rates will expire in the months to come. Many more homeowners could find themselves in trouble when their rates reset and their mortgage payments jump.

Yeah Jack, it’s manageable right now. Damn those ignorant crook borrowers anyhow.

Posted by: womanmarine at August 22, 2007 5:56 PM
Comment #230348

Stephen

The cause of the current crisis is the leveling off or drop in home prices. The other things you mention are part of the usual misfortune. Some people cannot pay back the money they borrrow. There really is not much you can do about that, except not extend them credit.

The drop in home prices creates a moral dilema. A person might end up owing more than the price of his home. Nobody feels it is unjust when the home prices rise and the home gets to be worth more. It is also not unjust if the prices drop.

If lots of people do not pay their debts, it is a problem. Currently it IS a manageable problem.

What do your really want to do about it? Should we reward lenders and borrowers who make poor decisions by having the taxpayers pay if they do not get what they want?

You guys are Desperately searching for villains. There are actually few villians. There are people who made bad decisons about lending and borrowing. You do not want to accept that a poor person is competent to make a decision so you want to protect him, as you would a minor or a ward of the state. That is what they do with minors. Their contracts are “voidable” since we assume they cannot make a competent decision. I do not want to treat adults like that.

Stephen

Investors have a duty of due diligence. They take a risk by buying mortages or making them. If everybody follows the legal requirements, it is just an investment decision. If there is fraud, we should punish the perpetrators. If there is simple bad judgement we should let everybody reap the just rewards of their decisions.

Posted by: Jack at August 22, 2007 8:31 PM
Comment #230391

Jack-
Yes, exactly! Don’t extend them credit! I just want clear regulations on the books to that effect. Why? Because when things get better, and people forget the lessons of today, they’re going to do it again, and the whole sorry mess will repeat.

The pressures of competition overwhelm many folk’s judgement. The leaders of companies are obligated to do whatever best makes the company money. When Amoral practices arise that make money, that seem to justify their great risk or great injustice with great profits, what can these folks do?

We cannot simply count on the markets to solve all problems.

It does not matter if you think the market is a superior well of solutions to draw from. That doesn’t necessarily make it so. The reality is, there often is no one, clear, exclusively right approach. The world is rarely that simple.

You still refuse to acknowledge that there’s greater fall-out from the crisis in the mortgage market. You want to believe that this is a simple market balancing act, with folks who have made their own bed, and must now lie in it.

I think Republicans want to believe that there’s no reason to intervene on behalf of those hurt, interfering with the system. Why help those who have dug their own grave? Why join with the bleeding heart liberals who want to help them?

In truth, the average liberal’s concern is for the system in general We’re not looking to bail out the creditors. We’re not going to bail out the mortgagees either. The Democrats instead aim to prevent the self-destructive behavior from being repeated, through greater enforcement of the laws on the books, and institution of new laws.

I haven’t heard anything about anybody suggesting that people be made into wards of the state. What I’ve suggested so far is shaping the credit laws so that these high-risk loans aren’t permitted, or are only permitted under very specific circumstances, and also improving the transparency of the securities that are the crux of this crisis.

This is about facing the fact that certain behaviors in the market aren’t punished fast enough to prevent damage, and therefore should be outlawed as at threat to it, and where the market has the agility to respond, giving people the information they need to figure things out.

Posted by: Stephen Daugherty at August 23, 2007 11:12 AM
Comment #247274

If you can’t afford your subprime loan payments:

1. Bank seizes collateral property
2. Bank sells property at auction
3. Bank applies sale value to total debtor owes
4. Debtor now has remainder of loan period to pay back remaining amount that was borrowed, but not recovered by auction

If debtor was able to qualify for original loan surely they would have no problem paying the reduced amount. Just the fact that the payments wouldn’t include fire insurance nor property tax might be enough to help them meet their contractual obligation.

The bank depositors get all their money back. The failed house flippers get to keep their credit ratings. The housing market is free to set price based upon supply and demand.

Unfortunately the Bushtard has signed legislation removing taxation on the canceled debts. This was exactly opposite of what should have happened. Joe Blow now has every incentive to walk away from his $400k loan on his $200k house, then purchase the nicer $205k house across the street using his spouse’s, uncles, mother’s, sister’s clean credit.

Congress and the Bushtard should have placed a 105% tax on canceled debt, with the proceeds from the tax going to pay FDIC insurance claims of failed banks.

Posted by: Foreseer of unintended consequences at March 7, 2008 10:42 AM
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