Journalists like simple stories with clear-cut villains who are easy for readers (and journalists themselves) to recognize. And so, as the financial crisis has brought Wall Street to its knees in recent weeks, it’s become so much easier for journalists to cope. Time Magazine, for instance, tells us in its current issue that Wall Street “sold out” America, while the New York Times decries “Wall Street’s ”¦.real estate bender.” John McCain has helped out the scribes by attributing the problems we now face to greed on Wall Street.
Listening to this sort of chatter, it’s easy to forget that this mess began with a heap of bad mortgages made by American consumers who never came within a hundred miles of the card sharps on Wall Street. The inability (and in a good deal of cases, the unwillingness) of these same ordinary Americans to pay back these loans, many of which are sitting in mortgage backed-securities held by institutions around the world, helped tilt us toward this systemic threat to our financial system. And even as we focus on bad bets and lousy leverage ratios on Wall Street, these toxic mortgages continue to unwind, and as they do, we are getting a better look at how they were made””and it’s not pretty. If it wasn’t clear before, it should be now, that speculation and fraud””much of it on the part of borrowers””were rampant.
As I have observed before, mortgage fraud soared in the run-up to this mess, and believe it or not, it’s continuing to rise. The FBI says that reports of suspicious mortgage activity increased by 10-fold from 2001 through 2007, and rose another 42 percent in the first quarter of 2008.
It’s likely that some borrowers didn’t understand what they were getting into, true, but that doesn’t mean they were deliberately deceived. The mortgage processes we’ve gone through were more like living the disclaimer in a radio ad: All “we are required by federal law to disclose that…” That, of course, depends on the mortgagee comprehending what is being related to him or her.
Of course, we weren’t the targets of the federal low-income loan initiative, so we were required to provide work histories, proof of income, credit references, inspection documentation, etc. I understand that those who weren’t likely to be able to afford these loans were not so encumbered, so perhaps they just winked and nudged past the bit about repayment, too, secure in the knowlegde that the taxpayer would be picking up the tab if the roof came in.
[url=http://www.nypost.com/seven/09242008/postopinion/opedcolumnists/house_of_cards_130479.htm?page=0]This article[/url] is as good a summary as I’ve seen anywhere. The crisis is unrelated to deregulation, but more a case of unintended consequences of legislation that sought to promote “equality.” Once again, legislation that ignores truths about human nature in the name of “progress” takes its toll.
Until we get the national savings rate back out of negative territory to 3% or so, we’re looking at stagnancy or smoke ‘n mirrors (which is what the last five years were, atop artifically inflated home prices). Dick Lugar actually tried to run for POTUS a few primary seasons back with that as a key platform point, which led to my first actual political donation, but he’s not exactly Mr. Personality and the call to “Save, not spend” didn’t bring out the crowds. As WFB, Jr. always said, it all goes back to the mistake of income tax withholding . . .
A personal anecdote: I bought a house in 2005, and was only saved from getting into an adjustable rate mortgage by attending a class offered by Pittsburgh’s Neighborhood Housing Services. They taught us how to recognize ARM’s and told us to avoid them. Sure enough, when I went to sign for a mortgage, the little letters “ARM” were printed down near the bottom line. The broker presenting me the mortgage said nothing about adjustable rates or what this meant. I had to push the “stop” button hard to keep the broker and real estate agent from pushing this on me. I thank God for that training course, and wish everybody had taken advantage of it.
Helen, that’s (literally) criminal in my home state.
Here in California, many banks offered low income mortgages to illegal aliens, banks like Wachovia and Bank of America. Now, if you’re low income and realize you can’t pay your mortgage AND you’re not a legal resident or citizen, what would you do? Unfortunately, human nature being what it is, you would most likely walk away, untraceable and unaccountable. It happened to a house in my neighborhood a year ago, a house which is STILL owned by the bank.
Not only were the lenders incentivized to make a mortgage, the loan writers were rewarded bonuses for pushing even people whose credit was good into the high risk category, ARMs, etc. according to a former Countrywide employee I heard interviewed last year.
Yeah, people ought to be more careful what they get into, but it is hard for the uninformed to deal with outright deception by the people supposedly helping them with the paperwork.
Unfortunately, Helen’s experience is not an isolated one. Countrywide and Washington Mutual were paying brokers to advertise low rate mortgages, and many of their brokers were, to put it charitably, dishonest. Christian radio stations – at least those in the SW PA area – featured ads by mortgage brokers (and they still do) who tell people with bad credit they can get a mortgage with low rates. The problem is not simply greedy people desperate to buy property – the fundamental problem is that dishonest and illegal practices were being tolerated even in states where such things were against the law. As for federal watchdogs, they abdicated their responsibilities for oversight many years ago. Meanwhile Congress allowed the credit companies and banks to engage in all sorts of devious practices – credit card issuers charging rates of upwards of 30%, tacking on all sorts of creative fees, directing their advertising to those least able to afford credit cards.
Yeah, there’s lots of blame to go around – but the ones who could have chosen to forgo the fast and dishonest buck – who got the golden parachutes and made the collapse of the markets inevitable – will be rescued and have their fortunes protected. Sad to say, some may actually have to give up aluxury homes or two and even a yacht. But they will emerge relatively unscathed. In the meantime . . . well, you know the rest of the story. It’s the one that never ends. And the howls coming the “financial services” (there’s an oxymoron) sector about the dreaded proposal that they may actually be held accountable may actually convince enough politicians to allow them to keep on wreaking havoc on those least able to sustain their thievery.
Helen in #4, thanks a lot for sharing your story.
Dan is correct that C/Wide and WaMu were the worst offenders. But here’s the incredible thing: nowhere in all that govt-mandated disclosure paperwork for 1% Option ARMs does it show the actual interest cost for the loan based on then-current rates. Nor are borrowers ever told that payments could double in as little as 2-3 years. Finally, Helen’s experience is all too common, especially with non-English-speaking borrowers. Shameful!
I had the opposite experience.
I bought a house six years ago . . .and had a pick of different kinds of loans, including ARM. It was, honestly, quite tempting. One doesn’t know what the interest rate will do when one buys a house. Do you gamble and hope for something lower? In fact — a friend of mine *did* get something lower a year later.
But I chose the long-term fixed rate mortgate.
And for the past five years, I’ve felt staid, boring, and dumb too. *And* as if I missed out on spending less money.
The mortgage lender answered all of my many questions. Laid out clearly what was what, and the benefits of each of the five or so options. And I picked the deadly dull one.
And yes — she was a Washington Mutual mortgage person.
My bet — plenty of people knew *exactly* what they were getting into. And they chose to take the risky, new, cool, everybody’s-doing-it option.
And when it didn’t work?
No biggie — default.
We can blame Wall Street for their buying debt they couldn’t honor. But I blame normal, standard, everyday American consumers too, for the same thing.
Sarah, You are 100% right. There is plenty of blame to be placed on the heads of both parties. Those who offered such low rate morgages who knew what might happen to all the high risk notes, and those who were gullible to not ask. If we insist on this $700 B bailout it should be a long time payback arrangement from both sides of the fence.