DID WALL STREET SHAFT MAIN STREET?
I am so torn on the foreclosure debate. On one side, you have homeowners who made bad bets and are now getting kicked out of their homes and onto the streets – that’s a horrible thing no matter how you cut it. On the other side you have the big banks who also made bad bets, but arguably made these bets in good faith. They were essentially building models based on the fact that US housing prices never go down – totally irrational in retrospect of course, but at the time this did not seem so crazy to most people (aside from yours truly who advised his parents not to purchase several houses in 2006 and was ignored).
The homeowners obviously made a bad bet, but I find it hard to believe that the banks were intentionally trying to fleece the American public. After all, if they had known that 2008 would occur they never would have sold all that bad paper to one another. It was more a case of greed run amok. The fees and income generated from this business were too easy, too consistent and too abundant for any greed loving banker to ignore. Likewise, the homeowner wanted to profit from rising home prices and did little due diligence on the most important purchase of their life. The banks were equally ignorant in that they clearly did not do their due diligence either (some of the banks hedged their exposure which seems like a prudent thing to do after the fact. Whether that was legal or not is not for me to decide….)
At the end of the day it seems like a lot of people made bad bets and now they all want a government handout. And the government appears to be willing to give it to them. In other words, it’s more capitalism without losers. And now that the bankers got their bailout Main Street feels entitled to one as well (and rightfully so). I know it’s probably a harsh thing to say, but when you make a bad bet you have to face the consequences of that bad bet. One of the reasons I believe the US economy is such a mess right now is because we’ve attempted to create a marketplace where no one ever loses. It’s a ponzi approach to economics. It doesn’t work.
In the following video Josh Rosner, who foresaw the housing crisis, explains how the whole mortgage fiasco went down and explains why he believes the banks are more to blame than the homeowners:
Source: CNN
Lenders are the gatekeepers of the financial system. The whole point of underwriting is to ensure that default levels are manageable, not to achieve a default rate of 0%.
The nature of the lenders’ role in the financial system makes them responsible, irrespective of whether their failures were deliberate or caused by incompetence. They are effectively extensions of the Fed, and they ought to act like it.
It doesn’t matter whether the lenders meant to do it. Willful or not, they need to be regulated so that their greed, incompetence or whatever else ails them doesn’t morph into a problem for the economic system or the taxpayer.
Defaults are inevitable. The goal of a sound credit market is not to demand that borrowers be perfect — such an expectation is simply unrealistic and ridiculous — but to ensure that default levels can be managed. Blaming the borrowers is a waste of time; if the collateral had been adequate, this wouldn’t have been much of a problem.
I agree with you entirely on the regulatory front. Unfortunately, it doesn’t look like any of that will change.
But none of this means the homeowner isn’t to blame.
I’m personally not interested in “blame”, and we don’t resolve anything by worrying about blame.
The essential problem was the lack of adequate collateral. If borrowers could make themselves whole or close to whole via foreclosure, then we wouldn’t be talking about this at all.
This has turned into a crisis because foreclosure is not an adequate remedy, given the low equity and the inadequacy of the hedges. This is an actuarial issue, not a moral one.
Typo alert (again): If lenders could make themselves whole or close to whole via foreclosure, then we wouldn’t be talking about this at all…
(Sorry about that.)
I am interested in blame because I think people need to be held accountable. How can you run an economy based on capitalism when people aren’t going to be held accountable?
Sure, the blame game doesn’t help us get much done, but at the end of the day there need to be winners and losers. The banks were playing within the rules of law at the time so I don’t see how anyone can come back and say “I got sold a lemon”.
Playing the blame game implies that there are innocent victims here. There aren’t. Everyone played a part in this whole housing bubble, and everyone deserves their proportion of the blame, from Main Street to Wall Street.
Furthermore, capitalism has its own built-in mechanism of accountability, and that is failure. You don’t need to hold people accountable to “make” capitalism work if you let failure happen. Unfortunately, Wall Street held a gun to Washington’s head, Washington capitulated, and now Main Street wants their piece of the action, too.
I am interested in blame because I think people need to be held accountable. How can you run an economy based on capitalism when people aren’t going to be held accountable?
By having loan products with adequate collateral.
Again, the issue to solve for is not accountability. The issue is what happens when some borrowers don’t pay, which is an inevitable outcome.
If the lender can’t absorb losses on collateralized debt, then there is something terribly wrong with the collateral. The whole point of having collateral is to provide the lender with a Plan B, but they obviously didn’t have much of a backup plan.
Mortgages without adequate collateral are comparable to stock trades without stop losses — they are suicidal and doomed to fail. If the regulators simply didn’t allow these products to exist, then we would avoid a lot of problems.
Ultimately, I think this issue is one of leverage. A single rule could have prevented a lot of this from happening, and that rule is: you need a 20% downpayment to buy a home. With that rule in place, I think any type of mortgage would have been mostly fine, whether adjustable rate, 30-yr fixed or even interest only (OK, maybe I would still exclude negative amortization mortgages).
I think this issue is one of leverage. A single rule could have prevented a lot of this from happening, and that rule is: you need a 20% downpayment to buy a home.
Exactly right. The extra leverage helps to feed the volatility during the bull period of the cycle, then extends the whipsaw when the market moves to the downside. It creates problems in both directions.
If we want to have low down payment loans for social engineering reasons, then they should be limited to specific classes of buyers, and they should come from the non-profit sector and government, not from banks or shadow banks. The banks obviously can’t handle the responsibility, and their losses will necessarily be socialized.
I would also prefer a system in which we permit homeowners to have only one mortgage (no seconds, HELOCs, etc.) and that all home mortgages are long-term, fixed-rate instruments. Those sorts of restrictions would necessarily put a limit on private-label securitization and control the froth, as investors prefer to have shorter term, variable rate instruments.
(Of course, none of this will ever happen, so I’m just venting. Private-label securitization will return, and when it kicks back into high gear, a new bubble will be likely.)
I think ANGRY MBA is on the money here. It’s a systemic issue to be resolved at the system level. The moral argument is false. The issue is not whether people should be responsible for their actions, it’s whether the goverment builds a responsible system. You’re saying that people who sail on a ship that they didn’t know had a whole in it are at fault for when it sinks. That’s wrong. The people who built and maintain the ship are at fault. They should have known better.
Perhaps we can put this differently. There is a moral issue here, but it rests at the system, not the individual level. Anything else authorizes the kind of lax governance that we’ve got and that you’re constantly complaining about.
Actually, the banks were blatantly violating any number of laws at the time, not “playing within the rule of law”.
Please look up the entire problem at the heart of the “show me the note” movement, the Pooling & Servicing Agreement violations, and the completely illegal artifice which is MERS (dissected by a very important paper recently: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729). Yves Smith will tell you that MERS isn’t even the most crucial piece of lawbreaking.
I’m not interested in blame either, because there’s enough of that in equal amounts to lay on everyone involved in this mess.
What bothers me is that I’m not (yet) hearing anything from our esteemed, enlightened leaders that remotely resembles a solution to the problem, or regulations that will prevent it happening again. It’s a fact that there are far too many people still living in their homes long after they’ve stopped paying their mortgage. And all we can talk about is modifying their loans, and in some cases their principal, so they can remain there. To someone like me who saved for 15 years in order to put down 70% because the idea of a large mortgage scared me to death, that is obscene. In all those years my wife and I (and first child) lived in that crowded Brooklyn apartment, I heard all the siren calls for no money down etc. I never fell for it, and I’m not the smartest guy in the room by any measure. Why did so many others fall for it?
And, in the opposite corner, we have FNM still offering government guaranteed mortgages with $1000 down payments, because, you know, what we really need are more homeowners who are in negative equity the moment they close.
The regulators, banks, and homeowners are all in a see no evil, hear no evil mode. Two years into this mess and there are still no adults on the scene.
I think what TPC is saying is that a part of the solution is failure. No one seems to want to admit that.
The regulators are to be blamed. They purely and simply did not do their job. They looked the other way. Tim Geithner was in charge of regulating the banks from 2003 until he became Secretary of the Treasury. He failed to protect Main Street by reining Wall Street. Alan Greenspan did not want to hear about regulations as well.
Wall Street:
“Well, ladies and gentlemen, we’re not here to indulge in fantasy, but in political and economic reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market, when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company!”
No one cared in banking about because there were no accountability to the stockholder since investment banks moved away from being partnerships. Same applies to regulators. The lack of accountability to anyone led to the disaster we witnessed.
Yes, but the problem is that they were largely working within the framework and rule of law that had been provided by the leaders who had come to believe that everything was self regulating. There was no law stopping someone from buying a no down no interest loan. We removed a lot of the barriers under the guise of a self regulating market. Greenspan, Reagan, Clinton etc all helped create this environment. In retrospect it’s clear that there should have been people there to step in and stop some of the madness, but at the time the rules were not in place to help that happen. So, in essence, we got our self regulating market and it turned out to be a total nightmare.
Securitization of mortgage debt invalidates most of this viewpoint. When a market is willing to continually front money on high interest loans, then of course those loans will continue to be given out. The lenders were not just banks – they were investment banks, hedge funds, mutual funds, bond funds, pension funds, soverign wealth funds, high net worth individuals, etc.
Let’s not forget the large portion of the blame pie goes to the willfully blind regulators who chose to ignore their duty to those very people that pay their salaries. And of course, the slimy Barney Franks of the world who essentially legislated that everyone should be entitled to cheap credit. In fact, that still remains a highly debated subjected: should credit be considered an inalienable right. I say no – the vast majority can become creditworthy given the ambition to do so. And for those who can’t, McDonald’s is always hiring.
Remember that people – for the most part – did not buy their homes from the bank. They bought their home from some other party, who, in retrospect, probably got the better of the deal.
They borrowed money from the bank. Yes, the home was collateral… but that still doesn’t mean they bought the house from the bank.
i’ve been debating dropping your RSS feed for some time because of the frankly idiotic commentary you’ve offered. your site is rather like mish’s; you present some good info but many of the conclusions and commentary are of very little value. this offering pretty much did it for me. i don’t know if you’re just “too far inside the matrix’ or if you “can’t see the forest for the trees” or what. frankly, it just doesn’t matter.
the banksters have systemically bribed politicians and bought favorable deregulation for decades. its not limited to them, of course; its more of a corporatism than merely a banksterism. anyone who offers them the benefit of any doubt will get what they deserve. its hard to caveat emptor when the rules are designed around ‘heads i win, tails you loose’ and thats exactly the situation we have now.
best of luck
I find it humorous that you can somehow claim to be a regular reader of mine while also implying that I have not railed against the banks endlessly. I am the farthest thing in the world from an apologist for Wall Street. I said the banks should have failed in 2009 and I say the homeowners should fail now. The idea that you somehow think the banks just swindled us all without anyone knowing it is sheer nonsense. I’ve been railing against the rise of the banks and these neo-liberal self regulating ideas for as long as I can remember. You obviously just haven’t been reading or listening.
If you don’t take the time to actually understand my positions or you’re too closed minded to try then you are certainly better off not reading things that you either don’t want to understand or don’t care to understand.
Wow, what a narcissistic comment. You feel better now (i’m too cool for caps) Mickey?
Never knew you were here. Won’t miss you when you’re gone.
Has anyone wanted regulation and justice on the banks more than TPC? It’s obvious that you don’t even read this site regularly. Don’t let the door hit you on the ass on your way out.
MERS, REMICS, robo-signing were all created to better serve MBS. Now that these mechanisms are haunting the bank’s foreclosure process, it seems that the banks brought this on themselves.
The notion that bankers and homeowners significantly share in culpability assumes that each has approximately the same amount and quality of information, and approximately the same ability and preparation to make judgments based on that information. Homeowners will never be as informed or as financially savvy as banking professionals, so the professionals must bear most of the burden of risk management.
We do not expect homeowners to make judgments about the suitability of the electrical wiring in their homes – if the wiring is not correct, we hold the professionals responsible. If a homeowner buys an appliance that causes injury, the manufacturer is responsible for the damage. Why should the banking and financial industries be exempt from the toxic effects of their products?
So, I believe that the banking industry bears nearly all of the responsibility for getting us into this mess and should bear an nearly all of the responsibility for getting us out of it.
If you follow it through more than one cycle, it becomes obvious that the banks were contributing to fraudulent behavior.
If, having bought a portfolio of loans from Countrywide Mortgage and having found 50% nonconforming loans within that portfolio, a bank >>THEN<< returns to purchase another portfolio of loans from Countrywide, all with the intent of securitizing them as "investment grade" vehicles, then fraud has been committed – you can handwave all you like about the stupid consumer and bad bets. The banks weren't making bets in the traditional sense — they were actively(and with forethought) seeking to defraud their clients.
If you bought your house from someone else you thought the price was right at the time. There was no “predatory lending”. The banks didn’t sell these properties. It was other homeowners. The American public was just as involved in this ponzi scheme as the banks were.
I know it’s convenient and easy to just blame the banks and remove all blame from the homeowners, but these people made huge mistakes as well. The blame goes around to everyone. Not just bankers.
Where is the economic power held? It is not with the individual citizen it is with the money…the Fed by providing cheap money to the banks, the treasury/gov’t by manipulating demand, the investment banks who simply steal for a living and corporation executives who simply lay off human capital during this balance sheet recession in order to maintain their paychecks.
Lets get something clear, the citizens on the street were played for fools by the financial industry that feeds off a central currency which is manipulated at will by the Fed, FRbanks and the inside information of the investment houses, plain and simple.
The idea that the consumer made a bad bet is ridiculous…(Q) exactly when did it become speculative to buy 1 home to shelter ones family…(A) when the financial industry decided that another asset needed to be inflated…the asset just happened to be the last bastion of savings for the American citizen. Citizens were deceived into accepting manipulated interest rate constructs determined by the mortgage industry (banks) to purchase their primary residence.
It’s a suckers game….volatility that has created the large trading range will ultimately end, those speculators who pat themselves on the back for being smarter than the market are nothing more than Jesse Livermores.
So where does this country now find itself…watching the Fed search for another asset to inflate before the banks inability to generate earnings becomes to much of an obligation for the government, the tide recedes and there assets are bare. In the interim, the siren song for the small investor to jump into the market is being played as yet another round of quantitative easing is considered to ignite demand.
Pathetic!
I originate loans. Many of my clients are very sophisticated and intelligent, some less so. Some were complicated loans, most were pretty simple. I explained probably more about loans than my clients wanted to know.
Not a single borrower, not even the least sophisticated, misunderstood the concept “if you don’t pay, you don’t stay”. Not a one believed that someone else would pay their mortgage if they stopped paying it, or that they could live in the house without making payments. And no one is getting thrown out of their house that is paying their mortgage.
While I venture that some folks are losing equity, I’d bet that most are not, based on present value. Many people that are losing their homes did not lose very much capital, based on their purchase price. Some even gained capital, by taking advantage of high LTV cash out refis at the peak of value. If they were wise, and a little lucky, they might have invested that capital profitably.
If they have an income, they will find another home. Possibly, someday they will buy one again.
Policitians and lawyers are taking advantage of the foreclosure mess for their own gain, with collusion from the media, nothing new there.
While I too am sympathetic to the homeowners losing their home, nothing is made better by stopping the banks from processing the foreclosures that need to happen (despite the widely reported errors). Let’s get on with it, and get these homes back into the hands of people that can pay the mortgage. Get people working again, so they CAN pay the mortgage.
Amen to that Roger!
Honestly you should be more concerned with justice and the execution of our laws than cheerleading a quick end to the largest transfer of wealth in American history without justice.
Quark,
I have pleaded for changes in the laws so that something like this doesn’t happen again. I have written endlessly about regulation and trying to contain these banks. Much of what I write falls on deaf ears. But I am at least writing about it….
Justice and the execution of our laws are not, unfortunately, always the same thing. And as they relate to the mortgage mess, I’d go so far as to say they are mutually exclusive terms.
“Many people that are losing their homes did not lose very much capital, based on their purchase price.”
Instead of purchase price, that should have been “down payment, and subsequent principle payments”.
Large drops in valuation have occurred, and many people are successfully negotiating with the banks to forgive the overage, via short sales, and depending on the state and situation, the amount owed is never collected.
However, they have lost their down payment, and a lot of sleep and peace of mind.
While I too am sympathetic to the homeowners losing their home, nothing is made better by stopping the banks from processing the foreclosures that need to happen
Making foreclosure difficult should lead to better underwriting. In contrast, quick and easy foreclosure processes encourage sloppiness and predatory lending practices.
We have a statute of frauds because we realize that real property is the most valuable asset that most people will ever own. It really should be a royal PITA for someone to seize the most valuable asset that the average stiff is likely to ever own.
I’m all in favor of the obstructions that are coming out of the state courts and attorneys general. If the feds aren’t going to have the courage to take the Swedish approach, then this will have to suffice.
My sister and her husband bought a new home in a new subdivision (California) in 2001. The neighborhood was decent and the homes were fairly spacious. As lending standards became more lax, many of the residents who moved in had very low down payments, just like happened in many other booming areas. Many of these were people you would never (rationally) expect could afford these homes, but thanks to creative financing they upgraded their lifestyle — for a little while. Over the last few years, prices dropped very sharply in that neighborhood, and many houses were foreclosed (surprise); prices even dropped below the original prices of 2001 before the housing bubble.
When you say that
We have a statute of frauds because we realize that real property is the most valuable asset that most people will ever own. It really should be a royal PITA for someone to seize the most valuable asset that the average stiff is likely to ever own.
you don’t seem to be speaking about various (former) neighbors of my sister. Surely those who lost their home were hurt by their foreclosure, and of course this will matter if they want to buy again before their credit history is cleaned up with the passage of time. Yet they never had much skin in the game; they were living a lifestyle they couldn’t afford in the first place, merely benefiting (for awhile) from lax lending standards and easy money. In that sense, they never did really own their home in a “moral” sense.
One side effect of having neighbors with very little stake in their home (e.g., because they have stopped paying, or plan to stop paying because they are so far underwater): they have much less motivation to be good neighbors because they aren’t in for the long haul. I’m not just talking about letting the house take on trashy appearances; these short-timers can also be very noisy and inconsiderate, deal drugs for “spending money”, and so on, finally going away only when the lender mercifully (from the neighbors’ perspective) boots them out.
So when you want to make it harder to foreclose, you don’t just affect the people who invested a lot of their money and time into their major investment but have fallen on hard times. (Surely, most reasonable and compassionate people would be willing to cut those people some slack.) You also affect those who had very little investment in either their home or their neighborhood, and you affect the livability and property values of the neighborhood, meaning all the other neighbors who continue to pay their mortgages and keep up their homes (and who also think of their property as the most important investment they will ever own) become “collateral damage” to you goal of “teaching the banks the importance of strong underwriting standards.”
they never did really own their home in a “moral” sense.
There are two types of real estate title: legal title and equitable title.
A borrower with a mortgage has equitable title. Title is a legal construct, and we use contracts and deeds to define it. “Moral title” and “immoral title” do not exist.
The morality lectures do absolutely nothing to deal with the fundamental finance problem, which has been the lack of sufficient collateral. The 2008 crash rendered the banks technically insolvent, due primarily to the lack of sufficient collateral, so this is not merely an academic textbook issue, but the real-world fundamental driver of the problem.
The constant beating of the morality drum needs to stop, now. Three years of this incessant whining about bad borrowers this and subprime that has not only accomplished nothing, but it has become a distraction that keeps us from focusing on what counts — results. The rhetoric is worse than useless, it is counterproductive.
Lending is ultimately an actuarial process similar to insurance, and should be treated as such. It isn’t particularly moral or immoral, so much as it is a numbers game. More regulations are needed to ensure that lenders do not have the right to offer mortgages with inadequate levels of collateral. It’s really that simple.
As far as I can tell, you have missed my point and interpreted my comment as saying something I wasn’t trying to say. Perhaps you aren’t familiar with the colloquial form of “moral” that I used. Did you notice I put “moral” in quotation marks in my previous comment? I was using the word informally and not talking about literal morality; I meant something along the lines of “effectively” or “essentially,” but not in the sense of either legality or morality. (If I sound irritated, I am. Rightly or wrongly, the tone of your response struck me as a bit too presumptuous. Okay, back to the discussion…)
I’ll try to be more clear about what I meant previously. You gave a rationale for certain fraud statutes: “…because we realize that real property is the most valuable asset that most people will ever own.” This is a social or principle-based rationale, a possible intent for the actual law but not something that is actually codified in the law; it seems you acknowledge and respect the social aspect. Later you said, I’m all in favor of the obstructions that are coming out of the state courts and attorneys general. If the feds aren’t going to have the courage to take the Swedish approach, then this will have to suffice. In this, it seems you have a different goal than the courts: the courts serve a social goal by making foreclosure more difficult, whereas you seem to like it because you believe it will make lenders more careful in the future.
In my previous comment I tried to explain (with examples) why I thought your two reasons were sometimes in conflict. If you take the social reason seriously, and it appeared that your comments indicated that you do, then I think you should consider things like “moral hazard” (people seeing their neighbors getting a free ride thanks to the courts) and potential degradation of neighborhoods (which affects the value of the most valuable asset of those paying their mortgage), and not just the “feelings” and finances of the foreclosed person or family. On the other hand, if you are willing to disregard the social aspects and treat foreclosure as a purely fiscal matter, then it really is irrelevant whether a home is the most valuable asset that a person will ever own. My argument was that social considerations do and should matter, and those considerations can argue against making foreclosure overly difficult.
Please understand that my comments above and previously are specifically directed at the present situation since the start of the subprime “crisis.” More generally, I very much agree with you that loan underwriting should be a rational process that requires strong commitment (adequate down payment and collateral) and evidence of ability to continue paying over the life of the loan. I also very much agree that we need to take positive steps to recognize the full extent of our problems, take responsibility for them, and endure the pain to get them under control so that we can move on to a brighter future. The main part where we seem to disagree is whether society is well served by the courts making foreclosure more difficult than necessary, i.e. to prevent abuses like fraud or extortion, regardless of whether the extra rules are there to serve a social goal (the courts) or to encourage strong lending standards (you). Keeping people in their homes long after they have stopped paying is not a good way to clean up the current mess, in my opinion.
You gave a rationale for certain fraud statutes: “…because we realize that real property is the most valuable asset that most people will ever own.” This is a social or principle-based rationale, a possible intent for the actual law but not something that is actually codified in the law
The statute of frauds is a common law concept that arose specifically because of real estate. The statute of frauds requires that all real estate sales, liens on real estate and some leases need to be in writing. It is a legal concept that goes back hundreds of years, predating the founding of the United States.
The reason that every county in the US has a recorders office and uses deeds, title insurance, etc. for real sales is because of the statute of frauds. We rely upon surveyors, title insurers and others to make sure that we can specifically discern exactly who owns property, who has a lien on it, who has a right to use it, and where it is. Property rights were fundamental in the founding the country, and the statute of frauds is a reflection of the particular importance of real property, as land has long been a key component of wealth.
So yes, there is a long legal tradition that places a value on making it difficult to transfer title without the owner’s approval. The reason that the statute of frauds exists is to make it difficult for us to steal or swindle another out of their real estate.
A system that doesn’t create some obstacles of this nature is a good candidate for fraud and theft, so I welcome reasonable obstacles. That’s exactly the point of the statute of frauds.
it seems you have a different goal than the courts: the courts serve a social goal by making foreclosure more difficult, whereas you seem to like it because you believe it will make lenders more careful in the future.
The court isn’t serving a social goal, it is reviewing both sides of the contract and the statutes of that state related to the seizure of real property. Certain rules have to be followed, and if they aren’t followed, they’re going to halt the process until they are followed.
Again, the statute of frauds makes real estate seizures a big deal, and it is the job of the courts to enforce the law. My concern for lenders to be more careful is exactly in the spirit of the statute of frauds, which is to make sure that improper transfers don’t happen. If the legal system condones sloppiness, then you can bet that the sloppiness will get worse.
If you take the social reason seriously, and it appeared that your comments indicated that you do, then I think you should consider things like “moral hazard” (people seeing their neighbors getting a free ride thanks to the courts) and potential degradation of neighborhoods (which affects the value of the most valuable asset of those paying their mortgage), and not just the “feelings” and finances of the foreclosed person or family.
The current system was engineered by lenders to ensure that borrowers carry plenty of moral hazard. An individual who defaults on a loan is going to have lower credit capacity, higher borrowing costs and a whole host of other disadvantages. No shortage of moral hazard there; ask yourself whether someone with a 500 FICO is in the same boat or will bear the same costs as someone else who has an 800 FICO.
Moral hazard has been notably absent on the lending side. Making foreclosure difficult is a direct, simple way of imposing moral hazard where it belongs.
Keeping people in their homes long after they have stopped paying is not a good way to clean up the current mess
It’s a good way to stabilize pricing, which is a benefit for the greater economy and, ironically, the banks themselves.
Let’s keep in mind that “extend and pretend” has helped the banks, as it has allowed them to avoid recognizing losses and trying to fire sale inventory that they can’t sell. The reason that you are seeing more foreclosures being attempted today is because bank balance sheets are stronger than they were two years ago, so they can now afford to pursue them…thanks to the taxpayer propping them up.
Without good controls, the banks will take advantage of us at every point of the curve. It’s about time that we used some sticks in dealing with them, rather than just feed them carrots and hope that they behave nicely. As far as sticks go, this foreclosure stalling is fairly tame, but at least it’s a stick.
I agree if you completely stop paying on your mortgage then you sacrifice your right to remain in the property…unfortunately in some circumstances that is the only way to get the bank to begin the workout process.
It seems that most Americans did not view purchasing a home as a speculative excercise. When the Fed/Gov’t decided to monetize another asset to keep the gravy train rolling they chose the ‘last bastion of American savings”, homes.
Now lets just step back and look at this problem and I’m even willing to bring to discussion of the morality question.
If you want to be fair and equitable across asset classes then a market (absent gov’t or the Fed) should find its own equilibrium. That said there is no doubt that we now would be in a depression and most paper assets would be either severly below the ’08 lows or worthless ie: pensions, stocks, many bond classes, most commodities, treasury receipts would collapse and government programs would be even more underfunded…in short, ruinous.
Given this scenario all individuals and institutions holding these asset classes would suffer the ‘clearing process’ so stronger hands could step in and purchase these assets.
So is it moral to step in and save these foolish investors who held onto these asset classes even when it was evident that they were (are?) overvalued?
It seems ludicrous in a normal environment to make banks or other financial institutions to lower the interest rate and principal on home loans. For long term fixed mortgages this would create problems with hedging but my guess is these institutions hedged their assets biased to the short term…well below their average duration but I digress.
Now individuals have seen how dishonest the game is and instead of making decisions that are beneficial to the integrity of the system they are making decisions based on learned behavior through strategic defaults which has caught the eye of the regulators. If the financial institutions do not work with homeowners you will certainly see strategic defaults rise..perhaps this is why we see a push for a moratorium?
Yes…the bankers still have their jobs but those individuals who took out a mortgage loan…their jobs are gone…not just one of the household incomes but often times both incomes were wiped out. I suppose these individuals were simply stupid to think that they would lose both of their incomes.
These are the individuals who do not have control over interest rates, who work daily to save their money to purchase a home and they do not have the expertise nor the spare time using the financial markets to speculate and ‘hedge’ the systemic risk that central bankers, investment houses, mortgage bankers and the treasury expose them to.
There have been massive losses in the financial services sector over the last few years. There should have been a lot more, but there have definitely been losses. The bankers didn’t walk out of these without taking a hit at all.
Give me a break…
Quark:
“Yes…the bankers still have their jobs but those individuals who took out a mortgage loan…their jobs are gone…not just one of the household incomes but often times both incomes were wiped out. I suppose these individuals were simply stupid to think that they would lose both of their incomes.
And sometimes, they are both working and doing fine, they’ve just decided to not pay the mortgage, and throw good money after bad. OK, a rational decision and I would not shame them for that, but you seem to be advocating that the banks should stop all foreclosures because they are omnipotent and evil?
OK, what if the folks that lost their jobs were your renters. Because you are a property owner, and comment on blogs, I might assume you are financially more sophisticated than your renters, maybe by a lot.
Would you want the government to change the rules, and not allow you to “foreclose” on your renters when they stopped paying the rent? And not let you get new ones that would pay, even if it was for less rent? I would not want that for you, or anyone else.
Plenty of the loans being foreclosed on are pretty simple loans. It has nothing to do with hedges, and heck, the interest rates they pay may now be lower, if they were in a conventional ARM.
I’m NOT defending predatory lending or obscene profiteering, or any kind of financial shenanigans, but we must have some reasonable code to conduct our economy and everyday lives. By all means, prosecute the bankers that defrauded their investors and borrowers, take back those obscene bonuses, shame those who knowingly manipulated the system for outsized profits. Insist the politicians and regulators be accountable. And, follow the law as it exists, and abide by the contracts, as they are written, in regard to foreclosures.
But please, can we agree that living mortgage free, in a house that the bank (or some nameless investor) owns, against the owner’s wishes, is not a morally acceptable practice? Stop paying if you wish to or need to, but accept that the consequence is that you leave the premises, and live somewhere else.
And yes, Quark, there have been massive losses in the finance industry, and most of those losses were at the lower level. Ordinary folks, many of them with mortgages they can no longer afford, in houses that no longer seem to be such “can’t miss investments”. I’d agree that a lot of them should never have been in the business, but I can tell you, many that did take those jobs would have rather been working in industries that have disappeared in the last 2 decades.
And, just to be clear, if borrowers “saved” their money to purchase a home, they wouldn’t be dealing with a bank at all. In truth, most buyers saved a little money, and occassionally VERY little money, to to enable them to borrow money to buy a home, most in the hope of a secure future and potential profits.
For every one that wishes the banks would just go away…ask yourself how would you sell your home? At what terms would YOU be willing to lend money, and hand over such an important asset to a stranger?
Quark, here’s where I would agree with you on principle. The entire economic system is engineered to benefit the wealthiest and most powerful, and it appears to be getting more so. This is largely a result of the political system we live under, that allows nearly unlimited financial influence on elections and the government.
I don’t know how to change it, but I hope that the rational exchange of ideas, in forums such as these, contributes to the change, and I appreciate reading your contributions.
“These are the individuals who do not have control over interest rates, who work daily to save their money to purchase a home and they do not have the expertise nor the spare time using the financial markets to speculate and ‘hedge’ the systemic risk that central bankers, investment houses, mortgage bankers and the treasury expose them to.”
Excellent point about the clear difference between both sides of the mortgage.
Cullen,
You need to read this article by Axel Merk.
http://news.morningstar.com/articlenet/SubmissionsArticle.aspx?submissionid=104074.xml
Thanks for passing that along Hrux. Axel and I have very different understandings of the way the US monetary system functions. Ultimately, our conclusions are the same however: the Fed won’t fix anything with QE.
Cullen,
For a contrarian perspective on QE please see this blog post by a former pension fund consultant, Leo Kolikavis. Leo has been a strong advocate of the risk on reflation trade. Would appreciate hearing your comments after reading this. Thanks
http://pensionpulse.blogspot.com/2010/10/gold-plated-burden.html
Hrux,
First of all, the states have very serious budget problems. Unlike the Federal govt, they require external financing so they are revenue constrained. This is a major hurdle and in many ways is why we are mired in an economic mess similar to Europe’s sovereign debt crisis. Our debt crisis in govt terms is at the state level.
Unfortunately, that article implies that QE is inherently inflationary. First of all, that’s what the Fed is hoping for. So, the conclusion is incorrect. If QE works then the Fed will likely help boost the US economy. On the other hand, as I have argued, QE is merely an asset swap and does not add net new financial assets to the private sector. Therefore, it has no real inflationary impact except some marginal interest rate effect and in terms of some psychological impact as everyone views their policy incorrectly. Ultimately, however, QE does nothing to support the real economy so there is no reason for these assets to remain elevated as money has neither been printed and fundamentals have not changed.
Ultimately, I think we’ll be discussing disinflation in 6 months again and everyone will wonder why QE didn’t cause hyperinflation like so many said it would.
It seems like just talk about QE is killing the USD though. How much of a lasting effect do you suppose this will have?
“On the other side you have the big banks who also made bad bets, but arguably made these bets in good faith. They were essentially building models based on the fact that US housing prices never go down – totally irrational in retrospect of course, but at the time this did not seem so crazy to most people (aside from yours truly who advised his parents not to purchase several houses in 2006 and was ignored).”
Are you frigging kidding us?
Is this piece meant to be ironic or sarcastic, perhaps I’m missing the joke?
You knew in 2006, hell people were posting about this impending disaster as far back as 2003 on the yahoo finance boards for Christs sake and they knew and even I knew but Goldman and Morgan and Duetsche Bank and Wells Fargo and the like….THEY DIDNT KNOW?
It was all one gigantic FRAUD
“Sure, the blame game doesn’t help us get much done, but at the end of the day there need to be winners and losers. The banks were playing within the rules of law at the time so I don’t see how anyone can come back and say “I got sold a lemon”.”
Insert random ad hominem!
Crucial point is that the servicers (part of the big banks) and the people selling mortgage-backed securities (part of the big banks) were engaged in massive, systemic, premeditated fraud against both borrowers and investors. It’s all documented at numerous websites starting with the hard-to-read 4closurefraud.org, or more clearly at The Big Picture and Naked Capitalism and Rortybomb.
So, don’t be torn. The banks acted in bad faith and deserve to go to prison and lose all their money.
Oh, apart from the systemic violation of real property law, there’s an added bonus: the profit model of most servicers was one of adding bogus fees (illegal and unauthorized) and failing to credit payments properly so that they could add more “late fees” et cetera. This is disturbingly well-documented.
I will point out one funny thing: each bank was running a giant scam, issuing worthless mortgages and selling them as fast as possible to investors.
Each bank also thought every other bank was selling *real* mortgage-backed securities, so they all bought these worthless “securities” from each other! They scammed each other, reciprocally!
Has America’s moral hard drive been irrevocably corrupted by moral turpitude? How can anyone trust Americans with anything when they don’t trust themselves anymore. While the moral rot that is eating away at the American system from top to bottom I do place the blame squarely on the business and political leaders for establishing a rich environment for corruption and general sociopathic behaviour to flourish. Many years ago I read somewhere that America’s political and business classes where better behaved so long as the Soviet Union was a threat to the West. While it is becoming clear that the American right got busy undermining the New Deal almost as soon as it was signed into being, their ultimate goal of reverting America to a country governed by corporate interests for corporate interests picked up steam post Soviet collapse. With the communist bogey man eliminated the need to pay lip service to the concepts of Justice where summarily tossed freeing the way for the complete takeover of every branch of government by the Kleptocracy.
Having long been a keen observer from North of the U.S. border I have long been dismayed at how a nation with so much potential to do good has allowed itself to stoop to such depth of deprivation.. There is no other way to describe it. America is up to it’s eyeballs in corruption.. It makes me ill… I’m not sure what disturbs me more.. the fact that yet another layer of systemic incompetence and willful ignorance of procedure has been revealed or that once again nothing will effectively be done about it. I mean the Emperor truly has so cloth.. Christ he has no skin!! If this doesn’t become a full on Constitution crisis that challenges the very fabric of America. Great country in the world? Try greatest joke!
Sorry ’bout the bad grammar in places.. Posted a bit quickly.
No worries tunnel. I think most people would agree with your sentiments. This country is not headed in the right direction.
I know this post ruffled some feathers, but how can we have a working system where there are no losers? This isn’t the third grade where everyone gets to be a winner. This is a God damn game of global chess where the winner gets to pass the winnings onto his and her children. At the end of the day our competitive and innovative juices are what keep us strong and fit as a nation. If you start generating this belief that the govt will give you everything on a silver platter the complacency starts watering down the product. And yes, the American product has been watered down.
Unfortunately, before we can start to be the winner again, some people might have to remember what it’s like to be a loser. I’ve lost a million things in my life. I don’t like it, but it makes you a better and stronger person. Economics is not so different.
I appreciate your comment TPC. Being Canadian I’m obviously left-leaning but only to the extent that I believe the State has a role in leveling the playing field.. I think most Americans would be shocked to know that in Canada “have” provinces, the ones that have a surplus, transfer some of that surplus to the “have-not” provinces through the federal taxation system. This money is supposed to help the have-not provinces provide an equality of services, especially when it comes to our infamous Universal Health Care. Of course there is much political maneuvering that centers on this but I’m just mentioning it here to underline the extent to which Canadians, of all political stripes, consider the distribution of wealth as morally normal. Of course the U.S. has influenced our politics and the current Conservative government is desperately trying to convince Canadians that Government is bad. But our National motto is Peace, Order and Good Government.. And for the most part that is what we get. We trust that our Parliament has the Nation’s interests at heart. Canadians have long been suspicious of people who tout their success and expect to be treated differently because of it which is very unlike the American way. When Americans succeed, they rub it in peoples’ faces and make the losers feel well, like losers. It is no surprise then that the U.S. political and economic culture has evolved to become obsessed with making everyone feel like a winner.. To render losing the ultimate crime against the State. How else can a country incarcerate so many of its own? How else can a Nation with so much wealth make Justice and Health Care so difficult to access for so many?
But to make the cornerstone of “No Loser Left Behind” the capacity for anyone and everyone to not only get a mortgage, but a mortgage on a poorly built McMansion with no money down and teaser rates and all the rest was an unbelievably cynical and downright stupid thing to do. And then to have done it with so little regard to procedure and established law? In a country that won’t shut up about the value of Justice and how great and free its people are? Give me a break.
Not to be inflammatory or anything but I think that only The Holocaust can be held up as more tragic example of so many people at all levels of society being so stupid and so blind as to what was going on. So the next time an American asks how the Germans could be so oblivious to what their State and its offices were up to a simple look in the mirror should be the first place he or she looks for an answer. Let’s hope that America can get its act together before the pathological narcissism that is gnawing away at it’s core is unleashed in a wave of collective madness.
And it’s not like I think Canada is a paragon of virtue. My country is populated by smug, free-riding opportunists. My fellow countrymen are being quite complacent about how much of the shit that is going through the U.S. fan is going to land on our faces. We are not prepared and will suffer the consequences.
“After all, if they had known that 2008 would occur they never would have sold all that bad paper to one another.”
Why not?
They got paid didn’t they, got paid, received fantastic bonuses and then were even REWARDED with record setting bonuses over the last two years.
Heres where TPC screws up, in 2006 he knows that what the banks are doing is “irrational” and he tries to talk someone out of buying a house, later it all blows up and he says “see I’m smart I knew” in 2004 I also knew that what they were doing was “irrational” I also try to talk people out of buying houses, then it all blows up but I dont say “see I’m smart I knew” I say “if I KNEW how come they didnt!!?”
How come the quants and the mathematicians and the geniuses on Wall Street didn’t know but I knew?………….because they did know!!
Fraud!
Goldman buys CDS swaps on a bunch of MBS crap they are peddling and insures an amount that would ruin the firm with a SINGLE counter party AIG, now I, or anyone here would conclude this is absurd, so why did they do it, should we conclude that “hey we are smart and Goldmans dumb, we knew that was wrong and they didn’t” of course not, we should conclude the swaps were for plausible deniability and that when AIG couldn’t pay back Goldman knew they would be bailed…..and they were
Fraud!
That doesn’t make any sense. If the banks knew it would all come crumbling down then why were they loaded with this paper? Your theory collapses because the banks were the ones who had the most to lose here. They had no idea that something like 2008 might happen. And I didn’t either. I just had the risk management and prudence to realize that the potential was there. The banks clearly did not. They would have have all gone out of business were it not for the bailouts. No rational person can say they were intentionally loading up on this toxic debt while at the same time knowing it might lead to bankruptcy. That makes ZERO sense.
“If the banks knew it would all come crumbling down then why were they loaded with this paper?”
Because they were unable to foist it off to the Widows and Orphans Funds (and then short it!) fast enough.
“They would have have all gone out of business were it not for the bailouts.’
Yet they did not go bankrupt……and that’s what THEY knew!
Ok lets take a situation that’s happening now and ask why we know but they don’t know
http://www.bis.org/statistics/otcder/dt1920a.pdf
Here is a snapshot of the derivatives market, these markets barely even existed a mere 15 years ago, for instance the CDS market was only 100 billion in 1995.
Every large financial firm right now are using a variation of LTCM’s reversion to the means trading strategy, fantastically leveraged and hedged seeking tiny incremental gains from a slightly positive bias multiplied by the fantastic notional values.
Someday soon something will happen, Lithuanian debt will blow up, or there will be a default on debt in Timbuktu and the markets will go wild and all of their hedges will explode, longs will fall and their shorts will ramp and with the incredible amount of convoluted counter party risk all of these banks will go bankrupt……I say I know this now and that anyone should…..so how come THEY don’t?
Because they don’t care, they will rake in as much in bonuses as they can in the meantime and they figure, screw it, governments will have to bail us out.
There are a lot more important things to worry about then whether some dead beat Joe Schmoe gets to keep his house and if this mortgage scandal is big enough and finally drags these guys and their frauds out into the light then so be it if the cost is some stiff gets to keep his house.
Its absurd to even speculate that these guys act in good faith.
I enjoy the collection of articles on this Blog very much. But most of all, the comment sections have a significant amount of insight and thought provoking information.
There is certainly a lot of “blame” to go around in this incredible situation. Two years ago, so many “experts” and talkers consistently said that the US economy could never truly recover until we “solve” the housing situation. Yet very little has been done to target the problem from that angle. So much of the direct government intervention, and the FED, has been into the “banking” sector. So little of that has targeted the mortgage problem. With the latest difficulty of processing, fraudulently or otherwise, the mortgages, it looks like this situation is destined to last many more years.
As we talk the “blame” game, i do think that we should also consider that not all foreclosures or defaults were from speculators or those “buying beyond there means”. Many people whom bought during the “explosive” years of 2002-2006 bought what they could afford; but unemployment later has resulted in there inability to pay (or sell and get out). I know people in that situation, and they were NOT part of a get rich quick crowd. Not all foreclosures are from deadbeats.
As long as there is no incentive for the banks (payment processor) to renegotiate, This will go on and on. Too many people still benefit from a foreclosures.
QE2,3,4,5 etc may help the top 25%, but the middle class (and below) are destined for a long slow recovery or worse.