For those of you who have trouble wrapping your mind around the subprime mess that led to all our other economic woes, here's an instructive anecdote from the WSJ on Saturday. It's about a condemned house in Avondale, Ariz. An excerpt:
The story of the two-bedroom, one-bath shack on West Hopi Street, is
the story of this year's financial panic, told in 576 square feet. It
helps explain how a series of bad decisions can add up to the worst
financial crisis since the Great Depression.
Less than two years ago, Integrity Funding LLC, a local lender, gave
a $103,000 mortgage to the owner, Marvene Halterman, an unemployed
woman with a long list of creditors and, by her own account, a long
history of drug and alcohol abuse. By the time the house went into
foreclosure in August, Integrity had sold that loan to Wells Fargo & Co., which had sold it to a U.S. unit of HSBC Holdings PLC, which had packaged it with thousands of other risky mortgages and sold it in pieces to scores of investors.
You know, subprime aside, I was always uneasy about my mortgage being bought and sold as part of financial "instruments." But I figured the problem was me — the fact that I'm seldom comfortable with the way things work in the world of finance.
We could have avoided all this trouble if mortgages had remained on a personal level, with your banker or George Bailey or whoever you sat down with to take out the mortgage having a personal stake in your ability to pay him back — rather than having it bundled and bartered by people who made their money from the transaction itself, not from any real value the original agreement might have had. That's my communitarian take on it, anyway.
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I’m taking advantage of the economic downturn to refinance my mortgage.
The vetting process is much more thorough this time around than it was five years ago. Two years worth of W2’s, two months worth of bank statements and pay stubs. And that’s a good thing.
I believe the last time I got a mortgage in 2003, I was able to complete the entire “vetting” process via a 15 minute phone call that I took while watching my son’s baseball practice. Didn’t have to prove income or anything.
But the way to fix this isn’t just through more regulation, it’s by not providing any form of government bailout option either. Remove the risk and the free market will naturally ignore it as well.
As usual there is a very simple set of rules that could have prevented this situation from occuring:
1) Set a minimum downpayment on any mortgage (20%)
2) Set maximum debt to income level at a much higher level
3) Don’t allow interest only loans
4) Don’t allow financing of closing costs
Mighta also been good if someone had gone out and determined whether the place was 103,000. There’s also a difference between refusing to give a mortgage to a lower middle class person who has a family and a steady job, and just happens to be black or hispanic, or amerindian, and refusing to give one to a person with a history of bad credit and substance abuse.
Damn. I was hoping you ceased to exist.
The bank I used to deal with approved a refinance on my home five years ago. We received a lower rate and lower monthly payments but still had to go through a thorough vetting process including the traditional requirements of proof of employment, paid closing costs, and a credit rating of over 750. Yet, my loan was sold to another investor.
Karen, after talking to my current banker who has been handling our business for over 20 years, she told me that she did not make a distinction between race, color, gender, or any of the popular accusations of “racial prejudice”. I am not sure race had anything to do with being denied a loan pre-subprime collapse.
I wonder if any of the posters on this blog has first hand experience or knowledge of denial based on race, gender, or nationality.
Bird, Your problem is? Bart, I doubt seriously if racial aspects played into your refinancing. Your writing abilities reflect a level of education that suggests that you would be going to a first rate bank. The racial discrimination I was referring to, was the reason for the insistance that financial institutions offer loans to those who might not be able to prove a history of great, or even good credit (it takes time to claw your way to that point). I suspect that current (or immediately past) credit misbehavior targeted the less mentally and financially sophisticated, rather than targeting racial groups. However, I like you would be interested in any first hand info.
Karen,
Don’t worry. I think it is me who Bird (aka Chicken) was talking about. He disgorged the same anonymous words of wisdom on another post I replied to. I’m still weeping from his hatefulness.
A good friend of mine who is a staunch Constitutionalist and fringe Libertarian has consistently labeled the problem we are going through with one simple word – “greed”. He has made some very good points that I cannot dispute and he applies it to all levels of the socio-economic society we live in. From the top to the bottom, greed was the driving force behind the bastardization of the lending/borrowing process when it comes to the subprime fiasco.
The lenders who would do or say anything, abandon proven lending principles, overstate an appraisal, and any of the other agregious infractions against society in the name of greed were in my opinion, the primary force behind it all.
Then you have the uninformed public who in a desire to achieve the American dream, forgot who they were and just how much a limited income could be stretched much less survive a downturn in the economy or what to do when faced with unemployment. At some point we must place some responsibility on the shoulders of those who choose to remain ingnorant of facts and refusal to face reality. When a lender offers someone who is on welfare and child support a loan for a home worth $150,000, who is the adult in the room if the offer is accepted?
When we as a society attempt to place unrealistic expectations on everyone, who is to take the burden of responsibility? When social engineers try to enforce their version of financial equality on society, who do we turn to when the efforts fail due to human weakness and frailty?
Is it discrimination when a banker tells a potential home owner, no? If the potential borrower sitting across the desk is black, earning $25k a year with a credit rating of 500 is asking to borrow $100k for a new home is rejected, is this racial discrimination? What if the borrower is hispanic, female, etc? There is nothing wrong with wanting to own your own home. Problem is that just wanting to own a home and being capable of doing the due diligence required for home ownership are two different things. I don’t know anyone who wants to deny another person the opportunity to realize their dream but at some point, when do we have the internal strength to tell that person they are not qualified? Is it fair to expect a family of 4 or 5 with an income of less than $35k to be burdened with a $150k mortgage? Who will do without? College? Transportation? Food? Clothing? Medical? When do you and I have to step in and cover the short fall? When does the government come to the rescue? Is it mean spirited to expect anyone who borrows the money to be expected to pay their own way?
Greed motivates humans to do unscrupulous things and act with self-serving interests. Excessive greed leads to lies, stealing, fraud, and a litany of other sins associated with money grubbing. The color of skin, gender, nationality, political affiliation, sexual orientation, economic status, social standing, etc. does not preclude one from making egregious errors in judgment nor does it excuse it either. Whether sitting on the lending or borrowing side of the desk, each is faced with personal responsibility when making a decision. Unfortunately, those who continue to make informed decisions are the ones who continue to pay for the mistakes of others.
When Jimmy Carter first introduced his program to get more people involved in the home ownership process, it was done with all good intentions I am sure. Then Bill Clinton expanded the program further and moved it into a new arena altogether. In 1999 when deregulation was introduced by Gramm and heavily supported by Clinton and the majority of congress, another door was opened and new opportunities to pursue the path of greed was made available. The table was set for the last course of the indigestible meal we are trying to regurgitate now.
My life has changed considerably since all of this has come about and it is easy to place blame on one political party or the other. What is discouraging is the lack of willingness for both sides to readily accept responsibility for their contributions to the fiasco. It took both sides to bring us to where we are now and in some cases, the contribution of a few looms much larger than others.
An unchecked Fannie Mae and Freddie Mac with the support of politicians from both sides of the aisle has saddled the taxpayers with a burden we won’t unload for a very long time if ever. We can point fingers at Dodd and Frank with good reason but must remember that there were those who had the opportunity and access to the public forum to bring a case for stricter oversight and regulation to the forefront.
The innocent and guilty will be affected and each of us will suffer in some way or another. It may not be fair but it is reality and the time has come to pay the bill handed to us by the irresponsible – politicians, lenders, borrowers, and their enablers.
Well said, Bart.
No, Doug — that misery was for Brad.
Bird Whisperer to the rescue.
As for Karen’s suggestion that it “Mighta also been good if someone had gone out and determined whether the place was 103,000,” someone DID, allegedly. That’s one of the many outrageous things about this story:
For a $350 fee, an appraiser hired by Integrity, Michael T. Asher,
valued the house at $132,000. Mr. Asher says although he didn’t
personally believe the house was worth that much, he followed standard
procedures and found like-sized homes nearby that had sold in that
price range in 2006.
“I can’t appraise it for the future,” Mr. Asher says. “I appraise it for that day.”
T.J. Heagy, a real-estate agent later hired to sell the property,
says he can find only one comparable house that sold nearby in 2007,
for $63,000.
So much for that check on the system…
I’m sorry I was unable to indent the quoted material on that comment. I tried, twice. That’s one of many things that’s not working on the new TypePad platform…
it’s been my experience that appraisals have been more art than science. i have had appraisers ask me what number i needed to make the loan, and to use ‘comparables’ that were not even in the same, let alone similar neighborhood.
bart has summed it up pretty well, so i won’t echo his points, other than to say that our government is out of control, and this is just one of many issues they are woefully failing at.
Brad, this is not a kiss up so don’t get a swelled head.
I go to several blogs each day when time allows. Each one has a set of regulars and the general theme is set by the few, either conservative or liberal, almost never a good balance.
We are fortunate to have a good balance on this one even though we have some strong disagreements and occasionally take real potshot or two at each other but overall, the discussions may get off track and heated but we get a balance and have an opportunity to understand (if we choose to do so) the other person’s opinion, position, or political tendencies.
One other blog in particular that has open comments is primarily a conservative bent with the occasional liberal thrown in. It is a little comfort to be among like minded bloggers but it is not as educational as the ones where the lines are pretty well defined between participants and the discussion lively.
So, Bird, if you don’t like diversity of opinion and want this one to cease existence, get the hell off the blog and you be the one to freaking disappear. Brad is doing a good job as far as I am concerned and apparently even those who disagree keep coming back.
Jailing all those who signed off on falsified annual reports at the banks, FNMA and FMAC would be a start to cleaning up the mess. That would include a bunch of Team Obama, including Rahm Emmanuel, Chris Dodd, and Barney Frank.
Then jail all the mortgage brokers, appraisers and inspectors who lied on their documents.
Repossess the 5,000,000 houses sold to illegal aliens, and auction them off. There’s at least 15,000,000 people living in them who can be shipped back to Mexico. The sale of their confiscated belongings will help pay the shipping costs.
But, no, instead we’ll get prosecutions and persecutions of businessmen for “making excessive profits”, or “not paying their fair share of taxes”.
Doug, thanks for the kind words; it’s hard, but I’ll bear up somehow. Bart, I couldn’t agree with you more. As far as I can tell, most of these deals had been made without adult oversight. I do think that in these situations the more sophisticated, more educated person bears more of the blame, although certainly not all. The question becomes, what can we do to ensure that in the future, these unrealistic deals are prohibited while still ensuring that lenders use objective standards that are demonstrably consistent across racial, religious, and gender lines.
It is none of your business what criteria the lenders use. Don’t give them subsidies from the taxpayers so you can claim to have omnipotent powers to set lending criteria, either. Just let the free market run lending.
Honest bankers have no incentive to deny loans to blacks, Latinos, women or anyone who can repay the money.
The mortgage crisis was created by crooked Democrats so crooked builders and developers could sell homes to dishonest buyers, and stick the honest taxpayers for the losses. It was a massive bank robbery, in the name of “racial justice.”
The mortgage crisis is an example of what a writer from an earlier era said about war – “the way God gives the law to kings.” When I think back to the 12% APR mortgage my wife and I had to take out to buy our first house, I’m thankful we have no debt on our house now.
“SHEZZZAM”, bart,you’re good.
George McGovern said that after he got out of the Senate, and went into business, he learned how wrong he had been on many issues, and how it was a good thing he didn’t win in 1972.
Unforturnately, his former hippie campaign workers like Al Gore, John Kerry, Bill Clinton, Hillary Clinton, Nancy Pelosi, and Diane Feinstein are now implementing the McGovern Socialism, and sending the economy into a tailspin.
Lee, Bird is demanding an authentic LeeBobblehead doll. Bird is crafting a homemade BradBobblehead doll. They will be used in therapy, not voodoo.
I suspect one will fare better than the other.