A pox on the people that bought subprime mortgages

So, there’s been a lot of media coverage recently about what this crisis means, and how to explain it to the common man.  Terry Gross recently did an interview with Gretchen Morgenson looking at AIG spending and how it’s tied to mortgage-backed securities, and all that fun financial terminology that eventually led to America ending up in the toilet, swirling slowly around the bowl.  And NBC’s Dateline is also looking at how Wall Street and Main Street are linked together.  If I have to hear that phrase one more time, by the way, I’ll scream.  I’m glad that all of this investigative media is going on after the fact. As they say, hindsight is always 20/20 (but only if you still have a vision coverage plan. )

The more I hear and learn about this, the more sleazy I feel. I am looking inside Upton Sinclair’s The Jungle, only about asset-backed securities and the nooks and hideous crannies of capitalism.  I don’t mind capitalism at all.  What I do mind, is the morons who decided to purchase sub-prime loans. A lot of shows treat them like they are the victims of all of this. Oh no, Countrywide gave them too much money and they couldn’t afford the payments on the house.  Well, guess what, dipwad. It’s YOUR responsibility to know how much house you are able to afford.  It should be the first thing you look at. It’s actually something I am looking at right now as my husband and I are beginning to look for a house that we will buy sometime in the fall or spring of 2010.  Do I want this house?

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You bet your sweet biddy, I do.  I want to park my fine whip in that two-car garage and relax with a mojito on the second…or third floor while my maid asks me if it’s time to take out the spring Wedgewood china yet. Maybe if I’m feeling bored, I can go out onto the mini-sea that’s behind that house.  Or play polo with the horse I buy to match the siding.  I could do all of that. But, I’m not retarded.  I know, as much as I yearn for open foyers and Pella tempered windows, I cannot afford that house.  Apparently, the owners couldn’t either, because it was one of the houses my husband, mother-in-law, and I saw this weekend as part of our foray into foreclosed homes as a possibility for our first house.  My mother-in-law (and later my mom, online), took one look at the house and said, “But how are you going to wash all those windows?”  That’s because they’re not retarded.  They understand that if we buy that house, no matter the price (because now the bank owns it), we will go into DEBT.  We are not ballin’ as hotshot DC corporate types.  In fact, we are ballin’ on a budget.  If I buy grapes for more than $1.49 a pound, I cry for a couple days softly into my pillow.

So if we can understand it (via our immigrant parents), why can’t Americans that were born in this country?  I don’t mean to completely harangue against all Americans.  But the Americans that bought houses and didn’t understand their obligations are ruining my country for me.  If you are buying a house for $600,000 and you are making $10/hour, it is totally not the company’s responsibility to babysit you and make sure that you are living within your limits.  Maybe in Finland.  But definitely not here.  And now, I am screwed, because of people that failed to do their own homework.  And the government is now bailing out those companies who didn’t do their homework as well and check out these shady borrowers, but instead resold it to Lehman Brothers, AIG, etc, and crashed the economy.  Thanks, fellow subprime Americans.  Now not only will I not be having my mojito, I’ll probably have to grow the mint for it in my new-age Victory Garden in the future, if the government keeps bailing out the companies right and left.  I, for one, am jubilant about the prospect of paying off billions of dollars way into the future.

Vicki

9 thoughts on “A pox on the people that bought subprime mortgages

  1. The problem was the incentives were skewed all the way up the line. In 2000, when we bought, the bank checked us out 6 ways from Sunday– just as they did when I bought for the first time 25 years ago– just like they did my parents for each of the 11 or 12 houses they bought over the course of their peripatetic academic careers. Even in the California housing bubbles I saw over the years, the banks were never the enablers… people had to get private money to participate in the ‘housing never goes down’ madness. The reason so many otherwise smart economists (including my mother) missed the beginning of this thing was that it was so completely beyond belief that the banking practices of — well- forever had suddenly been thrown out the window.

    When I saw the value of our little, 50’s era townhouse double in a less than 3 years I knew something was up– but what? I became convinced there was a bubble early on but it wasn’t until Tanta joined Calculated Risk that I began to understand the why and how it happened.

    By the time we sold in 2005 the value of our house had nearly quadrupled. And on the housing blogs I was laughed at, told I was an idiot and that I was now totally screwed and would never be able to afford a house again. The Post was still boosting housing incessantly, buoying their bottom line with the huge real estate supplements they were putting out. Hardly anyone was quoted in the media except the ‘economists’ in the direct pay of the housing industry. I was fortunate in that the people I knew personally didn’t laugh or sneer– in fact they listened & a few even took my advice to hold off on buying. But lots of other people on the bubble blogs had stories of pressure from family and friends to ‘buy now or be locked out forever.’

    Getting mad at the people who bought into the mania– and then lost their houses, strikes me as the same kind of thing as getting mad at addicts for buying drugs rather than the dealers that supply them– or at soldiers who die in wars instead of politicians who start them. Yeah, if enough people ‘just said no’ there would be no drug trade, no war– and no financial crisis. And we wouldn’t need laws or governments or regulations and we’d all live in free market paradise.

    So who am I mad at? The economists who pushed that free market fundamentalism, for one. The idea that it was perfectly safe to allow banks to play a ‘heads I win tails you lose’ game — handing off risk to the government while pursuing a highest short term gain at all cost strategy was definitively disproven by the savings and loan debacle. The billionaire hedge-fund owners who bought the legislation– and legislators– that dismantled the few remaining regulations from our last great free market meltdown. The ‘let us show you how to get rich’ real estate ‘schools’ and seminars that taught people like 24 year old Casey Serin (another ethnic Russian immigrant, by the way) how to buy 6 houses on no income by closing quickly enough on them that they didn’t show up on his credit report, lying about his income and claiming owner-occupancy for each of them. The government for selling itself to the highest bidder, firing the regulators, reassigning the FBI agents and generally blocking any of its parts that would otherwise have investigated and at least slowed the progress of the bubble– allowing more time for people to recover their collective wits. The media for becoming the complete sycophantic tool of its advertisers and being a bubble booster right up to the bitter end.

    Oh, yeah, and while I’m at it– the anonymous jerks who trashed me and others for trying to warn the herd away from the edge of the cliff. I’d like to think they were among the foreclosure victims, but more likely they took heed for themselves, pulled out of the speculative madness while encouraging others to continue and are now among the current batch of ‘flippers’ buying up foreclosures in bulk for far less than banks are willing to sell to individuals– and reselling them for six figure profits each. Or they’re the hedge fund executives who are in line to get even more egregiously wealthy by taking up the deal Geithner seems to be offering to let them speculate risk free yet again with the government taking all the down side.

    So does that mean I think people don’t have any responsibility to figure these things out themselves? No. I’m mad at them, too. But the people in the middle and lower middle class who’ve been losing ground for a generation, who bought into the idea that they could reclaim that ol’ American dream– and give their children at least as good a life as they had– by buying a house– and who have now lost that house and that dream — probably for good– are W-A-A-Y down on my list.

  2. I agree that the people who signed off on the sub-prime mortgages for houses they couldn’t afford should have made better choices. And I don’t think we should be rescuing anybody from their bad choices. But I think you’ve got blinders on about exactly what choices they were making. There are some of the $600,000 houses in the mess and those people were just idiots, along with the people who bought second-homes with a sub-prime mortgage. But most of the people trapped in the sub-prime market aren’t in $600,000 homes, they are in $300,000 homes. And they weren’t choosing between a $300,000 house and a $100,000 house they could afford. They were choosing a $300,000 house or no house, because they lived in markets where the tiny little starter homes are $300,000 and up. If you’re a parent watching your kids grow-up too fast, and you really want to give them what you had as a child (or maybe something better), it becomes increasingly difficult to keep waiting. There comes a point you realize that by the time you can afford a home with a decent mortgage the kids are going to be grown and gone and it won’t matter any more. So you do what you must to get that for the kids and hope for the best.

  3. Sarah and Elizabeth

    Thanks so much for your insightful comments and perspective as someone who was active in the zeitgeist of the pre-bust market.I do agree with both of you that banks and financial institutions, and particularly those who hyped the market definitely have a part to play in this and it must have been EXTREMELY frustrating to be like a Cassandra, trying to warn everyone away when the tide was clearly not in your favor.

    However, I really do place the blame on the homeowners. Saying that they are like drug addicts legitimizes them as rational individuals and again makes them the victim. Just because the dealers are out there doesn’t mean that it is their fault that I become addicted to drugs. If I have a good enough head on my shoulders, I shouldn’t come near that stuff in the first place.

    This quote particularly struck me:”If you’re a parent watching your kids grow-up too fast, and you really want to give them what you had as a child (or maybe something better), it becomes increasingly difficult to keep waiting.” I don’t agree with that at all. I find it would be a better idea to live in an apartment rather than become indebted and have your child go through the trauma of moving out of a home that has been foreclosed. When I was in 7th grade, my parents were looking for a new house (their old one was bought for $70,000 and was falling apart.) They knew they could afford more and wanted to send me to a good school district, but did not want to pay too much for a house. So, for a year, we lived in an apartment. It was embarrassing for me at the time, but I think the intrisic message of “your kids HAVE to grow up in a home to experience the American dream” is really part of the whole problem of this situation.

    This quote, “But the people in the middle and lower middle class who’ve been losing ground for a generation, who bought into the idea that they could reclaim that ol’ American dream” again points to the fact that people weren’t thinking. Including Casey Serin, who pretty much screwed his friends and relatives out of their life savings. Just because Jim Cramer is telling me to buy, buy, buy doesn’t mean I should listen. And I think we all saw that last week when he was eviscerated on the Daily Show.

  4. I do agree that people have to take personal responsibility which is why we bought townhouse we could afford versus a single family that would have been a stretch. But there is plenty of blame to go around. The mortgage companies made way to many loans that should never have been processed. They put pressure on Real-Estate Appraisers to “appraise” the house at the “right” value. People were convinced by the media, their agents and mortgage brokers that home values would just keep rising or that they would be able to refinance and the “professionals” encouraged it. While I do agree in personal responsibility, I don’t think we can ignore the predatory practices that feed on greed and ignorance.

  5. I certainly agree with everybody that the banks and lenders are to blame. They should never have been bailed out. If a company makes bad decisions it should be punished and the productive parts of it sold off while the unproductive should no longer exist. Having said that the subprime mess is also a crisis of arithmetic and common sense. If I have a family of 3 and our annual income is 50,000 USD after taxes and the bank tells me I can afford a house worth 360,000 USD I should figure out my monthly payments and decide if I can afford that ($2395.09 @ 7% for 30 years). That’s just the mortgage not counting any other monthly expenses. I don’t care what the banker and the loan officer tell me. A 30 year commitment paying a sum I cannot afford monthly is a bad idea. I think if more people did even the most fundamental research this crisis would never happen or simple be a lot smaller.

    I would also urge people to take a look at the New vehicle sales statistics, notice how during the subprime years people are buying these homes and going even deeper into debt by buying new cars at an ever increasing number. This seems wrong, but it makes sense if people are going even deeper into debt by borrowing against their already over priced house.

  6. Vicki,
    This is a great post.

    The bottom line is that creative accounting and creative loan applications got us into this mess. You simply cannot convince me that the banks are any more responsible than the loan applicants. Heather and I lived in DC during the bubble and we never bought a house or townhouse, simply because we couldn’t afford it. I don’t care what the bank told me, I know how much comes into the checking account every month and how much has to go out. There wasn’t enough for a 300K one bedroom deal in Bethesda, even if Joe the loan broker told me otherwise.

    Since creativity in loans and securities got us here, we need some creativity to get us out. My business partner is located in Southern California and he told me yesterday that most people buying houses right now are immigrant families. Immigrant families that have worked for years or decades to save up their 20% downpayment, that have scrimped and saved, been priced out of the market for years, etc. Now, their perseverance and patience has paid off.

    Which brings us to an interesting idea: How to set a floor for house prices, mop up the excess capacity, and do so without committing billions of dollars…? Interesting article at WSJ.com: Immigrants can Fix Housing Bubble

    I think it’s a much more logical way to address the problem: Instead of selling debt, you’re asking foreigners to become stock holders, not debt holders. Require the buyers to have a minimum net worth, a clean background, and a willingness to pay cash and occupy the home for X number of years…

  7. I almost bought a house 4 years ago when the market was crazy…my lender told me I could afford 2100 per month. I as only bringing home 2600 per month. I’m an idiot if I believe him. And he’s a liar for telling me I can afford it.

    I bought about 6 months ago, a nicer house and my payment is 1600. I make more now, and 1600 is doable.

  8. It’s funny how my parents, who were financially in a lower block than the average middle-class American have managed to avoid the mess that the real estate blow up caused. Their secret? They bought a smaller house than they could have, and their payments now are half the price of even most apartment rentals in the area, even though the value of the house has gone up since they bought it.

    I admit it is somewhat satisfying to see that their common sense paid off, because that’s what I plan to do when I’m ready to buy property.

    This brings me to another thing: Why isn’t it required for all high school grads to take a Finance 101 class?

    1. I wish we’d had to take one but, like you, I learned a lot from how my parents dealt with life. I would always complain that we couldn’t have the best or coolest things, but later on I was extremely thankful when they paid off my entire college education.

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