I agree. That is why I am fine with letting both borrowers and lender deal with the situation they created. Unfortunately the Fed thinks that some lenders should have their bad choices subsidized and some legislators think that borrowers should have their bad choices subsidized.
Consider yourself in the know: Loan companies like Countrywide, Lending Tree, and parts of B of A were mired in practices specifically designed to dupe first-time home owners and people looking for a quick refie. Lenders gave loan originators bonuses and incentives on “selling” loans to people who had questionable credit ratings and questionable credit histories. Deep in the pages of loan notes and paperwork were written the terms of such agreements. Jazzed by saving a few bucks on their mortgage or by the looks of their new front lawn first time home owners and people finally able to pay their mortgage signed on to terms they thought were going to save them money and help them be a better part of normal culture, you know, House, kids, cars, pool etc…etc…
FF->>> 3 years that adjustable rate mortgage or refie adjusts - ones mortgage goes from $1200 a month to 1800 and they can’t pay it.
There are all methods in the book to get people to sign “of their own free will” and whether or not most loan originators are living in active denial or not this happens and it happens to good people like Shayna and others.
So until you walk in their shoes perhaps a little temperance would be in order.
It also depends on what the value of these assets actually are. If Bear went bankrupt and its paper hit the block, it would leave little to the imagination. Most of Bear’s competitors are stuck with similar instruments and are also quite leveraged. This creates the fear of a universal margin call once everyone realizes that the New York Post is more valuable than some of the toilet paper they are carrying on their balance sheets.
While that’s fine in principle, I am very glad that most of the rest of the world does not share your context-free assessment of the situation. If all of the buyers and lenders were to suffer as much as they perhaps deserve, we would all suffer far more than we deserve.
I did walk in their shoes. Perhaps you missed the part where I bought a house in the past few years. All these dazzling “benefits” of interest-only loans and ARMs were available to me. Guess what? I actually considered the long-term consequences of the loan and decided against them. So why should I feel any sympathy for those who now find themselves in an untenable situation? Why should I pay more in taxes (or more in future taxes, due to federal borrowing) to bail out people who were irresponsible? As usually happens, those of us who made the smart choice (and it wasn’t that difficult, by the way) get screwed by those who either shouldn’t have been buying houses in the first place or were too stupid to realize that in three years their mortgage payments would go up dramatically.
Lives change, jobs change, people lose their jobs, are you saying “so what, they’re screwing me so why should I give a crap?” Is that what you are saying? It’s that mentality that encourages suffering - not that you are inflicting the suffering, but that you are indifferent to it. Why not turn around and help the next guy or gal about to get screwed instead of saying - Oh well you should have read the fine print?
I’d suggest shouting “theatre!” in a crowded fire, but I doubt it would help.
This might sound good to a wide-eyed sophomore, drunk on his first exposure to the simplistic appeal of libertarian philosophy, but the facts on the ground are that the average borrower is not as sophisticated as the average lender, nor does the average borrower have the transactional experience and expertise of the average lender. The average borrower is, in other words, an easy mark. Now maybe you think it’s morally OK to steal from an easy mark, but some of us think it is a perfectly legitimate function of government to make that a little harder.
There you go again, playing the blame the victims game.
We actually considered the long-term consequences of the loan we got stuck with and decided not to lose our $20,000 and the house we loved, accept it, move in, and refinance later. We did our homework and went with a lender recommended by my boss who’d done a home loan with him for $2.4 million several years earlier, before all these bad practices became a fun game for them.
The second thief actually YELLED AT ME ON THE PHONE when I tried to get him to explain something on the closing documents that I didn’t understand. I mean, top of his voice SCREAMING. On the day we were signing the papers. After we’d gone through several brokers, filled out multiple, cumbersome, looooooong application forms, had our home inspected and our lives put under a microscope. We were done. I simply couldn’t go through that process again. And given that these were the best terms we found at that time, we took it.
So don’t tell me that you got screwed because I shouldn’t have been buying a house in the first place. You’re dead wrong about that.
No, I am saying that people should take responsibility for their actions. Instead of taking out tricky loans for homes they cannot afford from some shady lender, they should do some research and actually see the long-term consequences of their actions.
If this crisis is somehow being caused by people losing their jobs and not being able to pay their mortgages, your statement may make some sense. Since it has not, and it’s merely some people who took loans with interest rates that would rise and now they cannot afford those rates, I have little sympathy.
As someone who went through the process, it’s not that hard to understand borrowing money to buy a house. People know (or should know) the terms of the loans they take. If they do not, or they choose to take them and discount the potential problems these terms impose, then they should live with the consequences of their actions. The vast majority of Americans make perfectly resonable mortgage purchases. The “average borrower” is not as ignorant as you seem to think. Of course, it is a tenet of modern liberalism that everyone except liberals is an idiot and so we need a government of enlightened liberals telling everyone else how to live their lives. I reject that mindset in general and in its particular application here.
I’m curious how you’d recommend people do this due diligence. We’ll just neglect the fact that Shayna’s lender was a referral, which is usually enough. In California mortgage brokers are licensed. That is also usually enough.
You might remember the news report last week that said that far more people in minority neighborhoods were saddled with subprime loans, even when accounting for income disparities.
If the problem was so minor, we wouldn’t be in this mess, would we?
BTW, if we could only do the things we could afford without borrowing, we’d have to get straight out of Iraq, wouldn’t we?
Referrals are good. Shopping around is good. Looking at information online about lenders is good. There are a variety of ways to find a good lender. The vast majority of borrowers do.
Of course, income disparities aren’t the whole picture in how lenders arrive at the terms of your loan. Your credit history, how you obtain your income, and a variety of other factors
Those who have trouble paying on time or who are facing foreclosure are a small, small minority of all mortgages.
I’m fine with that. Let’s also stop the spending on Social Security. We can’t really afford that, either.
My wife and I bought a house a couple of years ago (right at market peak, worst luck) and we actually had to threaten the mortgage broker that we were going to walk if we did not get us a fixed rate. Even though both of us have credit scores 760+, had >30% to put down, and had good jobs, he kept insisting that we couldn’t be approved for a fixed rate, 30 year mortgage. A 3/5/7 arm would be no problem however. It made no sense to to us so we told our realtor and the mortgage broker (who were friends BTW - also jerks in retrospect) that we were happy with our current house as we did not want to take the risks associated with an arm in the current economy. Lo and behold, a miracle happened: we did get approved for the 30 fixed and with a good interest rate to boot. I’ve never seen anything like it. I came away with the sense that the mortgage broker (and the real estate agent, and the inspector, and the apraisor) were all ethically challenged and had honed the system to a fine cutting edge desinged to bleed the most money out of the system as possible. Bunch of crooks if you ask me.
I do love our new house however, even though we would probably lose ~100k if we tried to sell today. We didn’t buy the house to make money on it; I plan on raising my children in this neighborhood and that was the reason for buying… 
Renob’s kind of libertarian thinking works great when you doggedly refuse to see the big picture. The information assymetries are so profound that it has rotted some of the most trusted banking houses to the core. These are the highly paid professionals who ought to know better. These assymetries, not regulation, are what makes the market uncompetitive. The results are, obviously, suboptimal.
No, dude, you have it backwards. The government is borrowing from social security. It’s actually one of the few things that’s more than self-sufficient. (For now, anyway.)
And will be for decades. Longer, even, depending on your core assumptions.
No, when everyone can make risky and foolish choices knowing the govenrment will bail them out if they go broke, then that leads to the type of world we have today. Why shouldn’t all these lenders gamble on subprime loans? After all, it’s not like the government will let them fail. And why should borrowers be responsible and only borrow what they can afford? The government will rush in becacuse they are “victims” of shady lenders. Whatever. Let the market reward good decisions and punish bad ones. That’s the only way to help reduce bad decisions and increase good ones.
People who cannot see that big picture and focus only on the narrow picture of our fleeting present situation are the ones who lack foresight.
Exactly. This is a world where the Glass-Steagall Act was revoked, a world of toothless regulation, of inadequate controls over the rating agencies, and a world in which people just don’t want to pick up the rocks to see the worms beneath.
The “market” brought us where we are today. I was responsible: I have a 30 year fixed. But thanks to all of the shenanigans, I am affected by this crisis both personally and professionally. The point is, this is bigger, much bigger than the individuals involved.
As usual, when the money talks, the foresight walks. This is the boom & bust asset valuation cycles that have been the legacy of the “free” market since John Law. Are we no more sophisticated than we were in the seventeenth century?
Thank you for the thoughtful response, mazinger_z.
You seem to reflect the common philosophy held by most American economists – shake it out and weather the storm. A significant problem facing this economic downturn is that actions generally used to stimulate the economy and head off a recession (e.g., tax cuts, lower interest rates, and deficit spending) are a matter of policy in this administration.
Wall Street doesn’t seem to learn from mistakes. The dot-com bubble was quickly followed by the housing bubble, and there are numerous examples of corporate fraud: cooked books and cheating.
To quote Will Hutton:
Cite that most economists think that the Bear Stearns deal was a bad thing? I wouldn’t quite call it a bailout. Bear Stearns paid bonuses in stock. A lot of execs have lost hundreds and millions of dollars.
Every cloud does have a silver lining after all.