Is MSNBC’s Jim Cramer on target with this charge? Is this decision what it all sprang from?
Cramer listed a lot more than just deadbeats.
Deregulation
Lax regulation
Idiots at the Securities and Exchange Commission
Short sellers
That was the first five minutes of the interview. I had to turn it off at that point ecause the yelling was giving me a headache.
John Gapper at the Financial Times makes a closer approach to truth:
This greed was beyond irresponsible
Maybe the simplest and most pedestrian way to think of it is this:
What kind of a business plan is it to lend $1 trillion to people that can’t or won’t pay you back and have your accounting department book it as profit generating assets?
A good one as long as you can find a bigger sucker.
And guess who that is?
At the risk of turning this into a GD: Could some of this possibly be due to the government’s “encouraging” lenders to make loans to people with bad credit? That is, lenders being afraid of government reprisal for not trying to bring more people into home ownership.
I think a lot of the people honestly weren’t deadbeats so much as people who just couldn’t afford to own a house but found a banker who told them differently.
About 3 or 4 years ago I looked into buying a house. I had a lot more debt then in credit cards and student loans and car loan and the like, but my credit was excellent. (Today I’ve almost no debt and my credit is “Detain him- we’re sending a unit”.) I was paying about $600 per month in rent and that’s roughly the payment on a $75-90,000 house (depending on term/rate/down payment/etc.) and a relative agreed to loan me some money for the down payment, so I started looking at homes. Bad news is there weren’t a lot in that price range where I lived, but the good news is- my bank approved me for up to $156,000!
I thought this was absolutely ridiculous. There’s absolutely no way I could have afforded the payment and the upkeep on a house in that price range- if I’d taken a loan for that or even for $135K then the first money crunch would have spiraled me into foreclosure. (I moved from that city anyway so it was really really for the best.)
Then I sorta kinda maybe inherited a house two years ago- one that my mother had bought (with admittedly a decent down payment) when she was 67 years old on a 30 year note with no pay-off insurance. While I’m glad my mother was able to buy a house (and even build a considerable equity and never made a late payment), loaning her the money was insanity- she was 67 and it was a 30 year note!
But anyway, I had no idea how expensive home ownership is. True, the payment here is less than I used to pay in rent, but the non-stop LITTLE things (a disposal stops working, refrigerator leaks, carpet snags, etc.- stuff I once called a landlord for and was irked if it took more than a day to fix) and then one big thing (a big hole in the ceiling caused by a pipe leak) and the taxes, extra utilities (more than at any of my apartments), lawn care, etc., all adds up to make it more than rent- significantly more when balanced out.
I can see a lot of people saying “I can afford [Rent Payment + $150] and I’ll be building equity!” and truly genuinely thrilled to be getting a place, but they don’t see the greater equation of ([Rent Payment + $150] + [$80 per month for taxes] + [$65/month homeowners insurance] + [oops! It’s August and the A.C. just went out- $300] + [$40 in miscellaneous extra utilities] + [etc.]) just sinks them. Once you’ve depleted your savings and then had an unexpected expense or two, it’s hard to stand back up, and if you paid $1,500 down on the house or (worse) got one of those accursed 80/20 mortgages I know several people who got so you’ve got no equity or even a reverse one- you’re on Shit Creek heading towards the rapids.
Point of this: of the people in foreclosure I seriously doubt that 1 in 40 really intended to be in foreclosure. There were probably many who’d never been late on a payment in their life. For many of these people it was the fault of the BANKERS AND LOAN OFFICERS who told them “Sure!” and then said to each other “Can they afford it? Maybe, maybe not, but we’re selling the mortgage anyway so whadda we care?” Sickens me.
This is the fault of the BANKERS letting people unable to buy homes buy homes. They were not forced to say yes to these people.
For many decades, it was quite difficult to qualify for a mortgage, and lenders were careful to make sure you could make the payments. Your parents, and grand parents didn’t need to teach you not to sign up for too high a mortgage, because the lenders took care of that. I recall my older sister having to jump through a number of hoops when she bought her first two homes, town-homes that she had no problem paying the mortgage, maintaining, and even tastefully furnishing.
When lenders suddenly became more lax, they found a pool of borrowers that were not culturally conditioned to be even slightly wary. Due to decades of very conservative lending, There was a strong societal expectation that causes many, perhaps even most, people to buy the most expensive home they can get a mortgage for. This was true before the problems started, and is true now.
Also understand, we bought a house in 2000. The monthly payment on our house has increased $400 due to increases in homeowners insurance, property taxes and flood insurance, it was more than that but the State stepped in and told the insurance companies to cool it. I could pay off my house right now, and still pay more in taxes than my original monthly payment totaled, and those numbers will never go away. Understand that? My insurance is costing me more than my home.
BTW, we were told we qualified up to $350,000. We bought a house for $115000. If we had listened to the banks, we would be one of the foreclosures.
I’m beginning to hear this from several places. Would you mind giving a cite about the government encouraging lenders to ignore well understood credit checks?
It seems a far more likely cause was that lenders were incentivized to sell the highest interest loans they could, since these were clearly more profitable - especially if you could dump them.
Lowering interest rates does spread home ownership by making loans more affordable, but that is a quite different thing.
I’ve seen no evidence that the government encouraged bad loans myself.
Sampiro’s anecdote is excellent. There is nothing far fetched in it and is all too common.
One element that wasn’t brought into the story is the possibility of a medical setback. One of the largest factors that contributes to personal bankruptcy is crushing medical costs. Usually when this happens the person is not a deadbeat, they have found themselves in a situation where a cost they didn’t want to take on has burdened them with a debt they can’t possibly see their way out of.
If you think about it, the banks have themselves to blame. All the while they have been pushing people to spend money they don’t have by advertising “free” money through use of credit cards and unsecured (or undersecured) mortgages. Meanwhile, they have lobbied for laws that that deregulate their actions, allow them to charge usurious interest rates and modify personal bankruptcy laws in their favor. It’s like a drug addict asking for more and more powerful drugs as if no harm is going come from it. There has to be a day of reckoning. If these guys had been told “no” in the first place we wouldn’t be in such a mess.
The bankers got what they asked for. The government and the regulators didn’t do their job. Now we pay the price.
A few days ago, Instapundit linked to this editorial. Then again, it’s an editorial, and Instapundit’s bias means that he doesn’t filter content very well. A couple of days later, he cites (and appears to agree with) Megan McArdle
"Meanwhile, I’m seeing commenters claim that the housing crisis is really all about the Democrats making lenders lend money to poor people.
The data doesn’t track you. The legislative pushes to expand lending to the poor do not match very well the subprime crisis, either in time or scope. Probably they contributed somewhat, but at best only slightly."
For me, it was the complete failure of the ratings industry to provide an appropriate rating to the bundled securities. We’re talking about securities that include large numbers of loans to people who can’t be relied upon to pay the entire sum back, people who didn’t even have to verify their income in many cases, and those securities were given high ratings. The only basis for that high rating was the assumption that real estate prices would stay strong, so the inevitable foreclosures would still result in full return of the principle.
Bundled loans get high ratings, and high prices in the market, so there’s HUGE gains to be had by loaning as much money as you possibly can, to anybody you can get to sign on the bottom line. You don’t have to worry about the guy actually being able to pay you back, because you can bundle it and sell it by the end of the month.
That last sentence is where I think it all fell apart. The people loaning the money didn’t care if it was paid back, because in a month, it wouldn’t be their problem anymore. That is a recipe for disaster.
All those golf outings and trips to las vegas paid off (big time) for the financial services industry! all of the senior manager of Merril-Lynch, G-S, etc., are walking off with multi-million$ bonuses-while the US taxpayer is holding the bag!
These guys wanted to lend YOUR MONEY-it didn’t matter if the borrowers couldn’t pay-they have the US Congress to bail them out!
WE NEED TERM limits!
I read the editorial and it is about the most biased piece of drivel you can find.
Was it “poor people” who were flipping condos in Las Vegas, California and south Florida? Was it “poor people” who were buying houses they couldn’t afford in golf developments? Was it “poor people” who were buying McMansions without considering the taxes, upkeep and heating costs? The editorial presents no facts, only bias.
It always amazes me how the Clinton haters can have 7 years of a Republican President along with 6 years of a Republican majority in Congress and still blame Clinton. If his policies were so wrong, why didn’t they do something about it?
And yes Cheesesteak, the ratings industry is a big piece of the problem. Now they want to use changes in stock price as part of the ratings equation. Nothing like creating a self-fulfilling prophecy.
That is a big factor. Doper puddleglum posted in this thread yesterday a link to a transcript of an NPR bit about the whole thing. It is good reading. One thing that I got out of it was that, as usual, there is plenty of blame to go around. Even one of the guys trying to avoid foreclosure said at one point:
RR
There are obviously a lot of people to blame, but one of the underlying factors imprudent optimism. Like several others have said, most people thought it would work out in the long run. Plenty of people got those “liar loans” with no documentation, but most people assumed that even if those went up in flames, they would be okay since they were bundled with more traditional loans, and because the housing markets would continue to appreciate.
It’s foolish optimism, but it understandable and unfortunately encouraged. That’s why people get married, despite the high divorce rate. Few people view themselves as average, let alone a screw-up. As a result, we often fail to anticipate the worst-case scenario, and we often underestimate the likelihood of ordinary (negative) things happening.
One of the reasons not mentioned above is the presumption that real estate is always a great investment. Many people got the advice that your home is the best investment you will ever make. This was mostly true under certain circumstances. However cirucmstances changed but the advice didn’t. It doesn’t matter as much if an underqualified person gets a mortgage if their house keeps going up in value. Housing values in America had been going up steadily for decades and then shot up due to low interest rates, higher prosperity, immigration, and speculation. When the housing market started going down instead of up, the risk of default shot up. The risk of housing prices going down turned out to be much greater than people had realized.
Deadbeats is a normative statement and not a descriptive one, but it does get to the heart of the matter, which was a misunderstanding of risks.
I know part of the reason is rents didn’t reflect the cost of owing a home.
For instance I know four people that all basically “rented” their house but had a mortgage.
In other words they wanted a nice condo. But a nice condo with three bedrooms etc was running about $1,500 to $2,000 a month.
All they could afford was around $750.00 which is a nice studio or a crummy one bedroom.
BUT and here’s the kicker they ALL qualified for mortages, no money down.
So they took out low cost mortages with a monthly payment of around $800 for three bedroom condos. The thing was after four year the payment ballooned to $2,500/month.
These people thought I can rent a crappy flat or I can live in a nice condo for four years then just sell it or refinance at a low rate. And this worked well as long as housing kept up with the cost of new loans. But when housing stalled or the price of the new homes was less than rolling over a loan, all four of these people I know defaulted on their loans.
They really didn’t care anyway cause to them it was like rent. Yeah it effected their credit but they all lived in a nice condo cheaply and to them it was like rent. They never really expected to “own” this condo.