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Mar 09 2009

On Mortgages and Morality

Rick-santelliThere’s this meme going around among right-wing Republicans; most vocally in the now-famous Rick Santelli rant, but I’ve been seeing it for a little while now. It has to do with the mortgage crisis and the bailouts. And it goes something like this:

“Why should you pay for your neighbor’s mortgage? Why should you pay for their mistake? They’re the ones who took out the mortgage they couldn’t pay. Why should you bail them out?”

Whenever this meme raises its head, there’s a point Ingrid keeps bringing up. And it’s what I want to devote this post to.

When we bought our apartment three and a half years ago, of course we applied for a mortgage (what with the whole “not having the cash up front to buy a San Francisco apartment” thing). We found a mortgage broker, filled out the applications, provided all the pertinent information.

And we trusted the bank to tell us if we qualified.

Loan_applicationWe trusted the bank to tell us if they thought we had enough income, and a stable enough income, and a solid enough history of paying off our loans and bills and such, to pay off the mortgage on this apartment. We thought we could, obviously; but we also didn’t know any more than the average person about the complexities and finer points of the financial world. Which is to say, we didn’t know much. We trusted that the bank — being a bank and all — knew more about the financial world than we did. We trusted that they were doing a careful evaluation of our financial prospects, based not only on the information we gave them, but on their own extensive experience of loaning people money. And we trusted that, if they thought we couldn’t pay off our mortgage, they’d tell us.

A trust that, as it turns out, was grossly misplaced.

The mortgage is not a problem for us. We’re doing fine. (And I don’t think our mortgage actually got sold in the speculative bubble.) But the fact that we’re doing fine — the fact that the bank was correct when they told us we were a good risk and would probably be able to pay off our mortgage — is apparently just pure dumb luck.

TulipmaniaBookCoverThe banks, as it turned out, were no longer making their “to lend or not to lend” bets based on a careful assessment of whether applicants would probably pay off their loans. The banks were now speculating on mortgages, buying and selling them like they were tulip bulbs in 17th century Holland. The banks were not betting that people would pay off their loans. They were betting that somebody else would buy the loans from them, at a higher rate. They were betting, as all speculators ultimately do, that somebody else would be a bigger idiot than them. They were betting that they could make money on mortgages — regardless of whether people could pay them off or not.

Which brings me back around to the topic at hand:

Does it really make sense to blame homeowners for the mortgage crisis?

Does it really make sense to blame homeowners for taking out loans that their banks told them they could pay off?

Maybe I’m showing myself to be a financial simpleton here. But it seems to me that it’s not the job of the loan applicant to know if they’re a good credit risk or not. That’s the job of the bank. The job of the loan applicant is to ask for money. It’s the job of the bank to decide whether the applicant will probably be able to pay it off. It’s the job of the bank to say Yes or No.

EmptyPocketsNow, I understand that during the housing bubble, some people lied on their mortgage applications. People said they had jobs when they actually didn’t; people said they made way more money than they actually did. And while it is, theoretically, one of the jobs of the bank to check that the information on loan applications is accurate — to oh, say, let me throw out a crazy idea here, call the applicant’s employer and make sure this person actually works there (something the banks were failing to do during the mortgage bubble) — it’s also the case that the people who lied on their mortgage applications clearly do not fall into my “We applied for this loan in good faith, we trusted that the bank wouldn’t loan us money that we couldn’t pay back” category.

So I wouldn’t have a problem with a homeowner bailout plan that said, “If you lied on your mortgage application, then you’re shit out of luck.”

But everybody else?

LiarLiarThey were lied to. They were told, “Yes, we think you’re a good credit risk,” by banks who they trusted to answer that question truthfully. They were told, “Yes, we think you’re a good credit risk”… by banks who, as it turned out, didn’t give a damn if they were a good credit risk or not, as long as the banks could turn their mortgages over to a bigger idiot at a profit. The mortgage crisis was not about ordinary Americans recklessly buying homes that they couldn’t afford. Or at least, that’s not mostly what it was about. It was about the banks and financial institutions recklessly speculating on mortgages — i.e., people’s homes, and people’s lives — as if they were tulip bulbs.

I understand the moral principle that people should accept the consequences of their actions, and that you shouldn’t reward people for bad behavior. Like a lot of people, I cringed at the bailout of the auto industry, and while I reluctantly had to swallow that it was probably necessary (on a different moral principle: namely, that you shouldn’t make lots of other people suffer just so you can punish someone for their bonehead mistakes, otherwise known as Not Cutting Off Your Nose To Spite Your Face), there was definitely a strong sense of injustice about it that stuck in my craw.

But bailing out homeowners who got caught in the mortgage crisis doesn’t mean that we’re paying for our neighbors’ mistakes. It means we’re paying to help our neighbors who, through little or no fault of their own, got scammed by institutions they had every reason to trust.

And that, I thought, was one of the good old-fashioned American values the right wing keeps going on about.

19 comments

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  1. 1
    Tommy

    Sure, folks are individually responsible for their individual mortgages. (Although, frankly, I found our mortgage paperwork to be quite overwhelming and I’m a math-whiz with a law degree. Plus, I had to deal with the anger from the real estate lawyer when I actually insisted on reading the damn stuff.)
    But the overall affect of defaulted mortgages on the well-being of the banks, and in turn, the ecomony, is the responsibility of the banks, not the individual lenders. End of story. And they failed at that.
    Plus, there are plenty of safeguards in the program to target the help at those who are more or less blameless. People who purposely abused the system aren’t eligible.
    Republicans are just mean fucks.

  2. 2
    karin cobabe

    AMEN SISTAH! I don’t qualify for a bailout on my loan, but I’m hoping that by helping out other homeowners, it will start to turn this market around so I can sell mine! Right now, we’re stuck with it and we really want to move to a different state.

  3. 3
    Tommy

    Or, another way to look at is that blaming the individual borrowers for the mortgage crisis is like a bookie blaming the gamblers when he doesn’t cover himself correctly.

  4. 4
    JG

    Tulip bulbs in 17th century Holland? Family Guy would be proud.
    I’m not sure I entirely agree with you though. Lots of people signed up for a mortgage that starts with an incredibly low rate, which then balloons in a few years to a completely unaffordable number. Now, the lender should have known this wasn’t going to work out well, but so should the buyer. I have a 7 year ARM mortgage, which I signed up for on purpose understanding that in 7 years I was going to move to the current interest rate unless I refinanced (which I’m doing right now). There are all kinds of mortgage calculators out there.
    While most of the problem stem from financial institutions, some of the responsibility does belong to the home-buyer, for not learning as much as they should have about the enormous financial commitment they were making.
    Do I have this completely wrong?

  5. 5
    Tommy

    JG: I don’t think you have it completely wrong at all. But I also think that banks tried really hard to keep people from fully understanding the commitment and the possibilities surrounding those commitments.
    And if the banks aren’t doing that, then they aren’t doing their jobs. Which is why individual borrowers are to blame for their individual mortgages, but the whole crisis is squarely the banks’ fault.
    And the bailout is to stop the crisis.

  6. 6
    Paul Crowley

    The banks are responsible another way too. If the banks are prepared to make crazy loans, people have more to spend on houses; that forces house prices up, and that pretty much forces you to accept a crazy loan.
    And of course if it takes a crazy loan to buy a house, that means that if you want to stay in the mortgage lending business, you’d better start offering crazy loans too…

  7. 7
    Chad

    Clearly and concisely put, Greta. Thank you.

  8. 8
    Christine

    THANK YOU. This is what has been bothering me about this particular talking point, I just couldn’t put it into words. Mostly because economics makes me want to stab myself in the eyeball with a pencil. Anyway, my horrific visual image aside, this is a fantastic post. :D

  9. 9
    arensb

    I’m with JG. Like so many others, I was boggled by the amount of the money my bank was willing to lend me. But if they’d told me I qualified for a loan to buy one of the $650,000 McMansions that had been popping up in northern Virginia and elsewhere, I would have smelled a rat.
    I’m mostly in agreement with you, though. It’s just that I don’t think the banks should take 100% of the blame and borrowers 0%. It’s probably closer to 95%-5%. A bailout that involved opprobrium for stupid borrowers and personal bankruptcy for stupid lenders would sound about right.

  10. 10
    Kelly

    I freely admit I’m probably way off here on a tangent, but one contributing factor to the increases in foreclosure might be due to the increases in health care costs. People are having to pay more out of pocket expenses and insurance companies love to deny claims.

  11. 11
    Cannonball Jones

    Got to disagree with you on this, the fact is people don’t ask the bank’s whether or not they can afford the mortgage, they just ask if the bank is willing to give them the money. There’s a big difference. Unless you are incapable of basic arithmetic you know whether or not you can afford it. Simple sums – I earn x pounds per month, my outgoings are y pounds per month so I can afford mortgage payments of x minus y pounds per month.
    The bank will be able to tell you if you’re deemed a credit risk but in reality that has nothing to do with your present ability to repay a mortgage. I was a credit risk for some time despite never having missed any kind of payment in my life – a previous flatmate had run up some bad credit history and I was tarred with the same brush.
    I’m not saying the banks are in the clear on this, far from it – they should be fucked and burned in my opinion. I just don’t think the people who borrowed more than they can afford are as feckless as you’re making out.

  12. 12
    Kit Whitfield

    Excellent point well made.
    Let’s remember, too, the effect of panic buying. The banks were driving up the cost of housing to ridiculous extremes and predicting that they’d never come down. In that situation, a lot of people try to stretch to mortgages they can’t really afford now because the prediction is that houses will cost even more later.
    And after all, houses aren’t a luxury like tulip bulbs. Everyone needs somewhere to live. Putting money into a mortgage, were told, was a better investment than putting it into rent. Especially as we’re all going to retire some day: the hope is that you’ll own a roof over your head then, so you won’t find yourself unable to pay your rent on your little pension and wind up out on the street in your seventies.
    So I’m not inclined to blame people for taking out mortgages they knew might be above their means. While it looks reckless from an uncharitable viewpoint, all the property buyers were actually doing their best to be foresightful. They were just given really bad information to make their predictions with.

  13. 13
    Ebonmuse

    One other problem is that some of the people who bought houses didn’t intend to live there, but were just real estate speculators. They bought houses at prices they knew they couldn’t afford, taking out loans with low introductory teaser rates, and then tried to resell at a higher price before the rate reset.
    Like the banks, these people contributed to the housing bubble, making it bigger and its collapse more painful than it oherwise would have been. Ideally, a bailout would help homeowners, not speculators, but I don’t know what the best way is to tell the two apart.

  14. 14
    Bruce Gorton

    Yet another issue was: Costs went up, but wages at the bottom of the scale were kept stagnant.
    So what you ended up with was a matter of family X being able to afford the loan, but then the oil price went up, raising petrol and diesel, which in turn raised the food price, while healthcare costs kept going up.
    And people ended up trading down in their jobs while the government trumpeted its low unemployment figures.
    Manufacturing moved to service industry – your production line foreman learned to flip burgers while the Chinese built up market dominance.
    The only sector that seemed to be really doing well, was the property sector.
    Property is what ended the recession that began when Bush took office, but it was a false economy – it couldn’t last forever.
    And the Emperors of Wallstreet told everyone it was structured to never sink, the sheer size of the banks, the sheer size of the loan industry, the investment packages so arcane that nobody could quite figure out what they had bought, these things prevented meltdown.
    And property prices couldn’t go down. If the loans failed, then they would just reposess the houses and sell them off at a profit.
    Then the cold wind of reality caught the emperor naked, property prices went down as defaults mounted and the markets were flooded with property that just sat there, nobody could afford a mortgage anymore.
    And the powers that be, those Wall Street emperors, their God-president, their advisors in the media who shouted praise at the fine property market robes until people saw them, needed someone to blame.
    Who better to blame for the shrivelling of their genitals than the commoners?

  15. 15
    Oelsen

    I don’t care about poor homeowners.
    I care about dollar-fixated energy prices, raw materials and stuff. And we have to pay them if the dollar goes up. In short term, we are really screwed here in europe if you bail everybody out. Because that would cause an inflation never seen before.
    Besides that, if the system is skewed, you have to correct it. Maybe now is the time to implement innersystematic securities. Like having enough assets to get a mortage or put up with renting. I know about the american dream, house, car holiday; but with a house you are limited by obligations. Renting makes you free.
    A society has to predict, learn or get burned. I suspect american (western) culture likes to get burned…

  16. 16
    sav

    Ebonmuse and Bruce have it right. There are a lot of things that contributed to the crisis.
    And to address Oelsen’s concern about renting: in some towns, renting may make better sense. But here in San Francisco my partner and I were paying rent that increased every year, and we decided if we were going to pay that much money, we may as well pay it to ourselves in the form of a mortgage for a house we would someday own outright. And that’s what we’re doing.
    Now, we were smart and didn’t buy above our means. But we also had the benefit of a financial planner who is part of our family, and who gave us advice for free. We had a number and we didn’t go above it. We decided if it wasn’t doable, then we’d just have to save more money and wait longer.
    But we were able to get into the housing market and buy. And it’s not a big place–an 800 sq. ft., 1-bedroom loft, and with two kids and two cats. We’re not living the stereotypical American Dream.
    Our creditors just froze our home equity line of credit, too. It’s not a huge deal because it’s basically extra money for upgrades to the house, but the banks are screwing themselves by freezing the HELOCs of people with outstanding credit scores, such as me and my partner. We had plans to do upgrades to the house this year, but now that’s been put on hold. If we don’t do upgrades, we don’t help stimulate the economy, which means contractor X down the street gets one less big job that could feed her family for a few months.

  17. 17
    hoverfrog

    In addition to al that you’ve written there is one other issue that the borrowers have no responsibiity for. When the banks make loans they bundle them up together as an asset. When you have an asset with a value you can get a loan from another bank against it which enables you to make more loans and increase your assets. Fairly simple.
    You can assume a certain percentage of loans will fail (about 2%) for a variety of reasons and factor this in to the value of the asset. When bad loans are made though this asset value is reduced and the loans on the loans have no value. When the housing market dips the security on the bundle is destroyed so banks stop lending to one another.
    The poor “man on the street” has no control over any of this. All they want to do is live in their home, pay their mortgage and get through life with not much hassle and some fun once in a while. Yet if your bank is strapped for cash they won’t or can’t lend you money without taking it from somewhere else so credit in other areas becomes more expensive. Say shipping loans go up so the price of bananas increases, loans to energy suppliers increase so the cost of fuel increases, etc.
    Blaming the chap who thought he could pay his mortgage for not having the foresight to see a 20% increase in his outgoings is more than a little unfair.
    There is also a trend at the moment to get banks lending again that works directly against the trend to get the to be more responsible with their loans. I have no idea how that will pan out.

  18. 18
    Vitriolic Virchow

    You’re being slightly disengenuous. It’s easy enough to figure out how much your mortgage should cost, and what you should budget. It’s also easy enough to recognize bad deals “I will loan you 150% of the value of your house”–DANGER. People were lying to get loans. People were speculating in real estate. AND the banks were evil fuckers, trying to maximize the amount of loans they were writing. If you make as many loans as you possibly can, you can’t be surprized if more go bad than if you were conservative.
    It reminds me of the credit card business in the ’90s, where banks were trying to get everyone a credit card they could. My CAT got credit card offers. There’s a problem with that.
    I agree, lots of bankers should be stood against the wall and shot for stupidity. So should people who treated their houses like ATMs and cash cows.

  19. 19
    Slamlander

    *I posted this answer on my own blog*
    This is where many people get it completely wrong. You are not supposed to trust the banks any more than you should trust the Federal government, which is to say Not at all. The legal reality is that you are responsible for putting your signature on the contract, no one else. California, at least, has disclosure requirements for all loans ((Why do you think that is? Could it be that banks have proven themselves untrustworthy in the past?)) and the law requires that you be aware and understand all of it ((This is so that you can’t reneg later. You are not allowed to later claim that you didn’t know.)) . However, that doesn’t relieve you of the requirement of doing some of your own homework. You know your budget better than anyone can. It is up to YOU to look at the terms and decide whether or not you can afford it.
    Now, did you fill out the forms truthfully or only State your income without providing the previous year’s form 1040? What about your recurring monthlies, did you declare ALL of them? What about the tons of food that your Saint Bernard eats?

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