I'll take 3 bedrooms, 3 bathrooms, and a pool, please

I was all set to come on here and write a rant about stupid, greedy, thoughtless homeowners who bought more house than they could afford, and in doing so, screwed up the whole economy. I know it's not the sexiest topic, but it's one that really gets me all riled up, as someone who (wisely! there, I said it!) chose to stay out of the housing market when I couldn't really afford to get in, regardless of what lenders would have had me believe.

Then I saw the following video; be patient, it's five minutes and a little bit of a snoozer, but it's REALLY worth the watch. I think he's convinced me of something I never thought I'd believe - that the subprime crisis is as much the fault of lenders as it is the fault of homeowners.



The basic idea is this: as we all know, during the housing boom people were buying more house than they could afford. Using adjustable-rate mortgages (ARMs) or other, more exotic loan products, they were able to keep their payments low. To many, it seemed like buying as much house as possible was wise, since prices were going up, up, up, with no end in sight. They figured that when the loan adjusted - after a few years, ARMs reset to a higher interest rate and a higher payment - they'd be able to sell their house or refinance. The fact that they banked on their ability to sell the house is their own fault. They took a risk there, and it didn't pay off. I believe people were aware of this risk, but they saw their neighbors moving into their new, fancy houses, and wanted to jump on board, with no thought given to the consequences. A costly error; one that led to a lot of foreclosures because...

Homebuyers didn't realize they wouldn't be able to refinance their homes. As the video eloquently explains, mortgage lenders loosened their requirements for getting a loan, then tightened back up. That means you're screwed, Mr. I Bought A $400K House On My $50K Annual Salary! Does anyone think that homeowners were aware of THIS risk? No. I'd all but guarantee that lenders never said, "Now, just so you know, you might make the same amount of money and have the same credit rating when you go to refinance in five years, but we may not approve you and your payment will jump from $1,500 to $2,100. Is that cool?" That simple, true statement might have stopped many buyers in their tracks. To the buyers, it looked like free money, since they were operating under Bad Assumption #1: house prices will rise for ever and houses will always be in demand, and Bad Assumption #2: you can just refinance and your payment will never go up!

Homeowners screwed up, big time, and there's no question about that. When all is said and done, it's up to the individual to assess the risks of an investment. I now see, however, where lenders likely scammed people into taking a risk they weren't aware existed, and that's unacceptable. We're all paying for it now.

The Bush administration has a couple of proposals to ease the suffering that I think are good. The economic stimulus package seems like a great idea; people will spend their checks, and it will stimulate the economy. Also, if I understand correctly (and I might be way off), he called for lenders to freeze ARMs from resetting for a short period of time. Again, it seems like a good idea, designed to provide some aid to those who were taken in. This will especially help if the housing market rebounds. I think it would be wise on lenders' parts to more closely evaluate who they foreclose on, but it would be a terrible idea to have a moratorium on foreclosure, as I've heard tossed around in the news. This simply puts off the inevitable; if people can't make payments AND their rates aren't resetting, then they've just bought too much house and they lose. In a free market, some people win and some people lose, and you hope there are more winners than losers, I guess. But I'm certainly not the economist around here, so I'll be off to watch the Florida returns.

17 comments:

big.bald.dave said...

Good post, Mike - my thoughts on this topic are very similar. I am incredibly frustrated at all of the stupid home buyers that bought way more than they could afford, and obviously the predatory lending practices didn't help matters. No matter what the free market evangelists say, this is a scenario in which government regulation of an industry could have prevented a lot of people from getting screwed.

Oh well - at least I'll be getting $1800 in the mail. :)

The Wizzle said...

How funny - I was planning to blog on this very topic for my post next week! Guess I'm not very sexy either.

I think this situation is very indicative of our culture as a whole: everyone wants newer, bigger, faster, better, more luxurious STUFF. Me included. It's a constant battle with myself, this incredible consumerism. Part of it comes back to the incredible inundation of *information* we are bombarded with every second of the day (see Kevin's post about news news news) and there's a lot of appealing things in that sea of info.

Some people in our society have so darn much money, and because of this information overload all of us mere mortals know exactly what brand of jeans those wealthy few are wearing, what they use to keep their wrinkles away, what stroller their nannies use, where they vacation, how big their houses are. And well, we all kinda want those things! Because they're nice, and thanks to People magazine and E! we know exactly where to get it all.

And we figure, hey, I deserve it just as much as they do! And we do, but that's doesn't mean it's financially prudent. Obviously.

The housing market couldn't keep going up at that pace forever (mercifully, or no one would ever have been able to buy a house again) but I'm kind of surprised so many people were taken in by it. Didn't we just do this a few years ago? Is "dot com bubble" ringing a bell for anyone?

If it sounds too good to be true...well, it probably is.

And now it's everyone's problem because even if you bought a house well within your means a few years ago, say you are transferred for your job, or you have triplets, or you have some compelling reason to move. You have half as much equity in your house as you did 2 years ago and now you're in the thick of it even if you didn't overextend yourself. It sucks, no two ways about it.

See, my Idealist Self thinks the tax rebates are just feeding into this whole consumerism problem by saying "look, just spend some more money that we all don't really have and everything will be fixed!" I'm surely no economist either and maybe it will really help (I sure hope it does! I own a house too ya know) but it seems like such a laughably pathetic solution to a very deep running problem in our society.

The Wizzle said...

Well, I'll be darned! While I was writing that monstrous War and Peace of a comment, your little video buffered and I just watched it.

It's the mortgage companies' fault! I didn't do anything wrong, and yet here I am with my house worth $75,000 less than it was a couple of years ago, because they thought it would be a good long-term idea to lend money to people who couldn't pay it back. Genius.

I'd say good riddance to them, let the bastards go out of business, but I do participate in the same economy they do and it sucks enough as it is. Bleh. Nothing to do but ride it out, I guess.

KWS said...

I know it is tragically unhip to defend corporations, but I will say something on their behalf before we get too carried away. According to the video, the mortgage companies had evidence that the loans they were making in subprime were performing, and this was the reason for expanding guidelines further. Many times in economics or finance, there are counterintuitive results and phenomenon, such as good returns on specious loans whose premises are somewhat against common sense. Taking their cues from the success of the early experiment, they calculated that continued expansion would be profitable, and they didn't really feel the need to warn new borrowers because there were no warning signs at that time. In the end, a subprime "meltdown," as we've taken to calling it, is not good for their business any more than it is for the economy as a whole. If they thought they were going to begin seeing massive defaults, they surely would have taken steps to mitigate that, right?

Having said that, I also think Rachel's comment about bubble mentality is spot on. These lenders needed to stop and think for a second about what could happen and how bad it might be. Same goes for borrowers, no matter what warning they didn't receive.

Final note on government intervention. I don't think, if the housing finance experts at the lending companies couldn't see this meltdown coming (and remember they make money off figuring out what will happen in their market = profit motive), then what chance is there that a government institution could accurately gauge, much less know how to properly regulate, the excessive loans? In my opinion, based on conservative principles and a familiarity with the limitations of government both in wisdom and in means, regulation's track record is at best evenly split between favorable and unfavorable outcomes. Ad hoc regulatory intervention is an extremely, very extremely tenuous solution to economic woes.

Joel said...

The basic, underlying question: Whose fault is this? The lender? The borrower?

I'm sitting here with mixed feelings. I'm all for personal responsibility, self-teaching, making sure you know what you're doing, etc. I don't think it is somebody else's responsibility to tell you what you should do. Conclusion #1: It is the borrower's fault because it is THEIR problem they didn't know or understand or whatever what they were doing.

However! My wife and I (mostly my wife because I don't make much) bought a house in July. I was all gung-ho (?) about making sure I knew what mortgage I wanted and what terms I was going to get and making sure I wasn't gonna get screwed. To a point, I was able to learn and understand and get enough of the "lingo" down that I was satisfied with our mortgage. We understood the risk we were taking in buying a house. I love being a homeowner! Did I know enough? Did I make the right deal? The right deal may be different from the best deal. Should we have bought a house in Michigan while the economy here sucks more than anywhere else? Should I have learned something when the people SELLING us the house had to pony us $22K at closing?

I consider us to be well-educated people. The wife & I both have bachelor's degrees from a major university. I am actively pursuing a Ph.D. My wife will eventually get her Master's. Mind you, our expertise is more science-oriented than money-oriented. What I'm trying to say is that we should be able to figure out something as "simple" as a mortgage. If we can't do it, what chance does anyone else have? So, did I know enough? No. Did I make the right deal? Probably not. Did I make the best deal I could under the circumstances? I really think so. Should we have bought the house? I still think so. Are WE going to have to cough up $25K when we sell? Sure hope not, but we are gonna need some help for that not to happen.

We "ordinary" (non-money-studying folk) have to rely on and trust our banks or brokers to make the best/right deal for us. We have no other choice. There is just too much to know and understand for each and every person to have the responsibility to "get". Lenders have to understand this and not screw everybody that walks in the door. The vast majority have to conduct business in a trustworthy manner for the markets to continue to succeed. Did they do that here? Expanding "qualifying" buyers over and over? Likely not. But they weren't out to lose money. They just took too much risk. Like a 63 year old putting their life savings in a start-up. If it works, they make bank. If not, well... We are in a terrible situation now.

So should the guy making $50K buy a $400K house? Not a chance. THAT is his fault. Foreclose him him and move on. Should the $40K person have bought that $125K house with an ARM? Different question.

My final answer: Shared blame. The blame is gonna be dished out based on the situation. Pretty lousy answer, but I think it is the right one.

The Wizzle said...

That's true, Kevin - of course the lenders are in it to make money so they obviously thought this was sound business strategy. It does seem to fly in the face of common sense though!

Joel - I forgot you were in Michigan! You guys really do have it worst of all, I think. It's not that awesome here in AZ either because we had a huge investor market here (proximity to Califormia etc). I hope it all works out ok for you guys.

Joel said...

Why did this die so soon? I thought there would be more people with something to say... Good topic, Mike.

Anonymous said...

I haven't commented yet, because, having not bought a house, i haven't directly seen the negative effects - I'm kind of like you , Mike - 3-4 years ago, EVERYONE I knew was trying to get me to buy a house - Aileena and I just decided that we plain didn't want one (we don't like stuff tying us down) so we didn't, and everyone said, "Okay, keep throwing away 600 dollars a month (rent)" Anyways, I've been overjoyed that I stayed out of that one - So I agree with you, Mike on just about all your points. Anyways, that's it. - - By the way, Mike, I think this may be the most well concieved thread so far -and your title rules.

Amy said...

I'm with Rick. (Wow Rick!! You got me to agree with you on something!!!)
I don't want to be tied down yet. A house is a major commitment to that community, bank, etc. I'm just not ready to sign my life away to years and years of mortgage payments.

I think the one factor which excuses the lenders is that the government has been encouraging them not to draw a red line and give loans, etc to everyone. (Has anyone else gotten those annoying pre-qualifying credit cards in the mail besides me?)

With government encouragement to try to boost the economy, the lenders kept lending. *sidenote: Anyone know how badly the lenders will be hurt when everyone goes bankrupt?*

Kevin, you're an economist, right? Isn't it natural to have cycles in economy? It seems like no one wanted the wealth of the mid-late nineties to end. The bubbles grew bigger. And BIGGER. Here in Silicon Valley the housing market is RIDICULOUS. Why on earth should anyone in this world be willing to pay $850k for a 2 bed/1 bath/carport built in the sixties with a rotting foundation, termites, mold, rusted pipes? YET THEY BUY IT ANYWAY.

And so this horrible economy is being propped up on stilts instead of naturally regressing so that one day it can grow again. Right now most of the economic stimulus plans seem to not really allow for self-correction of the market. Am I wrong? Am I digressing? Let me know what you think.

So basically, I think our country as a whole is becoming more regression-phobic and will have a far greater fall when the market does crash than it would have if government wasn't trying to pop band-aids on everywhere. Band-aids only last so long when it is a quick fix, rather than quality fix. Here's an idea: how about the government keep out of the market so it can naturally rise and fall without creating widespread domestic turbulence?

KWS said...

It doesn't take an economist to know that the economy fluctuates, and I will concede your point that it may be time for a downturn. (The last recession in the U.S. was in 2001 and lasted about 9 months. I'm not sure how frequently we want to expect a recession, and the 7 intervening years may or may not be enough.)

I am interested in hearing more about the economic stimulus plans (plural) that are propping up our rotting economy. The one President Bush recently proposed has still not passed the Senate, and I can't think of any others in recent history. I need to see more on all the "Band-Aids" that are being applied by the government "everywhere," before I could speak to that point.

If I assume people are going to actually spend the money from tax rebates, I think I support the current proposed stimulus plan. On the one hand, I have no love for intervention because of all its attendant distortions, miscalculations, and unintended consequences. This particular brand of intervention, however, is not regulatory, and not an increase in government spending to boost production; it is simply a transfer of funds from the government to the citizenry. This can be thought of in the same way as a tax cut, which I generally support.

Amy said...

with the band-aids comment I was thinking of the different stimulus plans the various presidential candidates are toting in their campaigns, to be honest.

Joel said...

As much as I hate to say it, doesn't Huckabee have a point that a short-term stimulus package is going to (mostly) grow the Chinese economy? Aren't most people that spend the money going to go buy HDTVs or computers or cameras (that we don't make here)?

As much as I don't know anything about the economy, doesn't it make sense to go with a Romney-type plan that pumps some money into the economy now and then focuses more on long-term stimulation of businesses in this country?

But I agree with Amy that I don't want to see the government get this involved, anyway. We are supposed to be living in a free market economy, not a communist one. Taxing everybody unequally and then handing everybody the same check seems like socialism. Let the markets do as they will.

And stop lowering intrest rates! The dollar is gonna be worth CRAP at the rate we're going! It's time to make some tough decisions that people aren't going to like in the short term, and we've got a bunch of politicians trying to win votes. It is going to hurt more than it helps.

Jim Cramer really ought to have either the Fed Chairman position or be Secretary of the Treasury...

Anonymous said...

Wow I got into this one late, although I am lucky if I get to get on more than once a week, (two jobs, and the elders quourm and a house that is crumbling, even though I am renting, keep me busy.)

Here is the problem and the question, (I say that like I know, but I'm no expert either.) The problem is that there are some who cannot stand to see their children go through hard times without intervening. We want so badly to save our children from the hardships we endure, and rightly so, but in so doing, (like when those who "suffered" the last great depression made a better life for their children,) we rob our children from learning the lessons we learned in the most effective learning device; experience. So when we grow up we have luxuries they did not, and when we venture out on our own we want to maintain the same lifestyle. Aileen and I are personifications of this phenomena to the T. We have a warped sense of consequences, and are frivolous spenders, (recognition is the first step in change right?)

Now apply that to the economy, and we can see it's influence. It's the same. The ugly reality, and I hope I am not just being pessimistic, is that life is hard in this way. The natural cure or "band-aid," is a possible severe depression, with poverty and death and hunger. Please don't misunderstand me, I am not in favor of this or trying to say that we should let those things happen, however, our little recessions, and Amy beat me to the punch, are natural and have a way of weeding out the dishonest businesses, or those not built enough to survive. So even though closing a business is a terrible thing, it is also natural and cleansing.

I feel that one of our societies greatest blunders is in getting caught up in blame placing. For everything there has to be scapegoat to make people feel better and it frustrates me. It takes too long and at the end of the day doesn't really matter. We can learn from the mistake but not from who made the mistake, that is my two bits on that. Even though I post on the problem it isn't anyones fault, even if they may have known better. This may even re-enforce my point that experience will teach them to know better. Lenders with bad loans will forclose everything then not be able to get business if people distrust them, and lendees will be out of a home and way more cautious next time.

The beauty of a capitolistic society, (even with the negatives it has, there is beauty,) is the tie to the fluxuations innate in economics, it is self-correcting. By the gov't trying to keep it from happening, they are only gonna make things worse, and there has already been speculation on this. The money they will hand out has to come from somewhere and who's to say it will go to the right place. In addition the feds lowering rates will have a negative effect on some peoples retirement funds, but so will stocks I guess.

So the question is, do we allow a recession to happen, and have a natural recovery, or try to intervene? Do we allow people to have forclosures and bankruptcies, or teach them that hand-outs will always be there to negate the consequences of their actions? Can we allow suffering now for joy later? Or is the sight of suffering unbearable. That is one of lifes questions for many people when faced with religion too, whether God cares because he allows suffering. So I am not attempting an answer, just something to think about. We know that heaven doesn't have suffering, maybe we can achieve it here.

Anonymous said...

Here is the ugly side of this issue if anyone is interested in the speculation.

We might be prolonging the inevitable. I was listening to a cook radio program, (sorry if anyone is an avid,) called Coast to Coast with George Nory, propably mispelled, and he had a guest named Gerald Celente. This guy is a politically agnostic trend forcaster who supposedly has many many correct predictions under his belt. He said that the economy is headed for a full blown depression in 08, that it is long overdue for one. He predicted in 07 that we would wake up the day after New Years and already feel the effects of stock market decline. He said that this depression would re-define our standard of living. Kind of scared the crap out of me, cause it would also mean a loss in Iraq, among other things, and that would leave us vulnerable to terrorist attacks on our home soil. Interestingly he predicted a failure in Iraq too. I think his official site is http://www.trendsresearch.com/gerald.html
although I can't find his depression predictions on the site.
Anyhow, hope he is wrong, what a depressing job.

Anonymous said...

Sorry, kook, not cook, it wasn't a food show, more of a u.f.o./conspiracy/ghosts program.

Amy said...

ok, I just thought I'd add this info here since we're talking about money...although some of these points refer to other topics posted.

1. $11 Billion to $22 billion is spent on welfare to illegal aliens each year. http://tinyurl.com/zob77



2. $2.2 Billion dollars a year is spent on food assistance programs such as food stamps, WIC, and free school lunches for illegal aliens. http://www.cis.org/articles/2004/fiscalexec.html

3. $2.5 Billion dollars a year is spent on Medicaid for illegal aliens. http://www.cis.org/articles/2004/fiscalexec.html

4. $12 Billion dollars a year is spent on primary and secondary school education for children here illegally and they cannot speak a word of English! http://transcripts.cnn.com/TRANSCRIPTS/0604/01/ldt.0.html

5. $17 Billion dollars a year is spent for education for the American-born children of illegal aliens, known as anchor babies. http://transcripts.cnn.com/TRANSCRIPTS/0604/01/ldt.01.html

6. $3 Million Dollars a DAY is spent to incarcerate illegal aliens. http://transcripts.cnn.com/TRANSCRIPTS/0604/01/ldt.01.html

7. 30% percent of all Federal Prison inmates are illegal aliens. http://transcripts.cnn.com/TRANSCRIPTS/0604/01/ldt.01.html

8. $90 Billion Dollars a year is spent on illegal aliens for Welfare and Social Services by the American taxpayers. http://premium.cnn.com/TRANSCIPTS/0610/29/ldt.01.html

9. $200 Billion Dollars a year in suppressed American wages are caused by the illegal aliens. http://transcripts.cnn.com/TRANSCRIPTS/0604/01/ldt.01.html

10. The illegal aliens in the United States have a crime rate that's two-and-a-half times that of white non-illegal aliens. In particular, their children, are going to make a huge additional crime problem in the US . ht tp://transcripts.cnn.com/TRANSCRIPTS/0606/12/ldt.01.html

11. During the year of 2005 there were 4 to 10 MILLION illegal aliens that crossed our Southern Border also, as many as 19,500 illegal aliens from Terrorist Countries. Millions of pounds of drugs, cocaine, meth, heroin and marijuana, crossed into the U. S from the Southern border. Homeland Security Report. http://tinyurl.com/t9sht

12. The National Policy Institute, "estimated that the total cost of mass deportation would be between $206 and $230 billion or an average cost of between $41 and $46 billion annually over a five year period." http://www.nationalpolicyinstitute.org/pdf/deportation.pdf

< /SPAN>13. In 2006 illegal aliens sent home $45 BILLION in remittances back to their countries of origin. http://www.rense.com/general75/niht.htm

14. "The Dark Side of Illegal Immigration: Nearly One Million Sex Crimes Committed by Illegal Immigrants In The United States ". http://www.drdsk.com/articleshtml

Total cost is a whooping... $338.3 BILLION A YEAR!!!



Snopes is provided for doubters:

http://www.snopes.com/politics/immigration/bankofamerica.asp

Social Security Change For 2008

The United States Senate voted to extend Social Security Benefits to Illegal Aliens beginning in 2008. The following are the senators who voted to give illegal aliens Social Security benefits. They are grouped by home state. If a state is not listed, there was no voting representative.

Alaska: Stevens (R)

Arizona : McCain (R)

Arkansas : Lincoln (D) Pryor (D)

California : Boxer (D) Feinstein (D)

Colorado : Salazar (D)

Connecticut : Dodd (D) Lieberman (D)

Delaware : Biden (D) Carper (D)

Florida : Martinez (R)

Hawaii : Akaka (D) Inouye (D)

Illinois : Durbin (D) Obama (D)

Indiana : Bayh (D) Lugar (R)

Iowa : Harkin (D)

Kansas : Brownback (R)

Louisiana : Landrieu (D)

Maryland : Mikulski (D) Sarbanes (D)

Massachusetts : Kennedy (D) Kerry (D)

Montana : Baucus (D)

Nebraska : Hagel (R)

Nevada : Reid (D)

New Jersey : Lautenberg (D) Menendez (D)

New Mexico : Bingaman (D)

New York : Clinton (D) Schumer (D)

North Dakota : Dorgan (D)

Ohio : DeWine (R) Voinovich(R)

Oregon : Wyden (D)

Pennsylvania : Specter (R)

Rhode Island : Chafee (R) Reed (D)

South Carolina : Graham (R)

South Dakota : Johnson (D)

Vermont : Jeffords (I) Leahy (D)

Washing ton : Cantwell (D) Murray (D)

West Virginia : Rockefeller (D), by Not Voting

Wisconsin : Feingold (D) Kohl (D)



Note there are 9 Republicans, and Presidential candidates McCain, Obama and Clinton

KWS said...

The stimulus plan that has been called a Band-Aid more than once above is in no way different from a tax cut. Start with a tax, which is the taking of some amount from each citizen. Now, say the government wants to give some amount back to each person taxed. It can do this in at least two ways: 1) cut taxes or 2) send a check to each home. Modeled economically, these two look identical.

Joel made the only relevant counter to the rebates, which is that taxes are collected unequally and checks are distributed equally. It sure does smack of socialism, but then there's something else wrong with tax cuts for the rich and not the poor, too. There's no guarantee that government benefits or government levies will be evenly distributed.