I’m really not into foreclosures (eviction is the process of actually getting someone out which shouldn’t happen much). Nobody wants foreclosed real estate. It’s much better to do everything you can to get people to pay. Here’s my stupid analogy. I had a buddy once who led those mule rides in Grand Canyon. He would go rescue hikers who were tired in the Canyon. People would ask him for a ride and the conversation would go: “$300” “Don’t have it with me. My money is in my car” “See you!” “Oh wait. Let me check my knapsack. I do have my wallet” Tons of people who default on mortgages can get the money if you press them. They can get it from their family, selling stuff they like, their retirement funds, working overtime, bartending twice a week, whatever.
bchadwick Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > > I’m okay with punishing people for being stupid > > and gullible and surely not into picking up the > > tab when they are swindled. Let’s hold that > guy > > at XYZ accountable, but we provide people with > > free education through 12th grade. If they > can’t > > read a loan document after 13 years of free > > education (K-12) that my taxes paid for, why > > should I pick up the tab for the new truck they > > bought on their HELOC? > > > > In “normal times,” I’d agree with you, but in this > case we are stuck with the choices of: > > 1) a financial system where no one can borrow, > businesses go under, unemployment skyrockets, and > there is apparently no productive task that > americans can compete globally on. Add to this > that civilization is only about 5 meals away from > anarchy at any one point in time. > > 2) bail out the swindlers. > > 3) bail out the swindled. > > > Faced with these choices (which I realize aren’t > the *only* choices available, but they do appear > to be the major ones), I choose option #3. How can we compete globally when we can’t even read mortgage docs written in our own language? Anyway, I am bailing them out. I’m refinancing their mortgage that they have defaulted on. I’m just not paying the bill and it is now up to them to take the five years to figure out how to extricate themselves from a mess that is not nearly as bad as the one that got themselves into (because I won’t be charging them usurious rates, just asking for convertible preferred stock in their children).
OK, I see what you mean, and I agree with you. We (taxpayers) pay up because we need to have a financial system that has at least some liquidity, and existing borrowers start to learn how to live on smaller budgets. I’ve been asking myself: what is it that Americans can do more productively than anyone else in the world that can pay for the cost of living here. I’ve been asking myself this for about 5 years now, and I still don’t have much of an answer. Partial answers include: a) our university system still appears to be admired enough that people want to send their students here to learn (though this is not as strong as it once was). b) business managers (outside of the financial arena) still tend to be relatively efficient and skilled at managing teams, relative to other parts of the world. c) relatively good rule of law in the US is a benefit to those with financial capital to manage, since if something shady is done with it, the legal system is relatively clean and accessible. This also is not as strong as it once was. I run out of ideas here… but desperately want more…
JoeyDVivre Wrote: ------------------------------------------------------- > Skylar Wrote: > -------------------------------------------------- > I’m okay with punishing people for being stupid > and gullible and surely not into picking up the > tab when they are swindled. Let’s hold that guy > at XYZ accountable, but we provide people with > free education through 12th grade. If they can’t > read a loan document after 13 years of free > education (K-12) that my taxes paid for, why > should I pick up the tab for the new truck they > bought on their HELOC? > > > The average person trusts these people and says > > “just tell me what my monthly payments will be”. > > > At a time when mortgage rates were low, average > > home prices were increasing, financing options > > were plentiful and gas prices were somewhat > > stable, many of these people truly thought they > > could afford their homes. > > Back to Mom’s trailer, Bubba. As much as I agree with you regarding accountability, some people really depend on the knowledge and integrity of the individuals selling them mortgage loans. For every “Bubba” out there, you have a handful of hardworking people that were just uninformed. As unfortunate as it is, my free education through the 12th grade did not provide me the skills to understand a loan document - I was just lucky to have an IQ higher than 100, which the average american does not. Trust me, as a person who grew up in the “working class”, there are COLLEGE educated people out there who do not understand the risks associated with a variable rate mortgage. P.S. I am not new to this forum. I’ve followed your posts and I am familiar with your background, respect what you have to say, etc. What I have come to find, however, is many highly educated people in finance, government, etc. are very far removed from how the average middle class american thinks, works and lives. I, on the other hand, have experienced life from both sides.
bchadwick Wrote: ------------------------------------------------------- > OK, I see what you mean, and I agree with you. We > (taxpayers) pay up because we need to have a > financial system that has at least some liquidity, > and existing borrowers start to learn how to live > on smaller budgets. > > I’ve been asking myself: what is it that > Americans can do more productively than anyone > else in the world that can pay for the cost of > living here. I’ve been asking myself this for > about 5 years now, and I still don’t have much of > an answer. Partial answers include: > > a) our university system still appears to be > admired enough that people want to send their > students here to learn (though this is not as > strong as it once was). > > b) business managers (outside of the financial > arena) still tend to be relatively efficient and > skilled at managing teams, relative to other parts > of the world. > > c) relatively good rule of law in the US is a > benefit to those with financial capital to manage, > since if something shady is done with it, the > legal system is relatively clean and accessible. > This also is not as strong as it once was. > > > I run out of ideas here… but desperately want > more… We work harder than anyone. The average American puts in 200 hrs/yr more than the average Japanese and we think of them as workaholics.
Skylar Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > Skylar Wrote: > > > -------------------------------------------------- > > > I’m okay with punishing people for being stupid > > and gullible and surely not into picking up the > > tab when they are swindled. Let’s hold that > guy > > at XYZ accountable, but we provide people with > > free education through 12th grade. If they > can’t > > read a loan document after 13 years of free > > education (K-12) that my taxes paid for, why > > should I pick up the tab for the new truck they > > bought on their HELOC? > > > > > The average person trusts these people and > says > > > “just tell me what my monthly payments will > be”. > > > > > At a time when mortgage rates were low, > average > > > home prices were increasing, financing > options > > > were plentiful and gas prices were somewhat > > > stable, many of these people truly thought > they > > > could afford their homes. > > > > Back to Mom’s trailer, Bubba. > > As much as I agree with you regarding > accountability, some people really depend on the > knowledge and integrity of the individuals selling > them mortgage loans. For every “Bubba” out there, > you have a handful of hardworking people that were > just uninformed. As unfortunate as it is, my free > education through the 12th grade did not provide > me the skills to understand a loan document - I > was just lucky to have an IQ higher than 100, > which the average american does not. > > Trust me, as a person who grew up in the “working > class”, there are COLLEGE educated people out > there who do not understand the risks associated > with a variable rate mortgage. > Trust me, there are students at “Most competitive” universities who can’t figure out how to tip a waiter much less understand the risks of a VRM. Doesn’t mean I want to pay the tip for them when they short-change the waiter. Now, if the waiter starts spreading gasoline around the restaurant in a fury about $5, I might ante up. Maybe. > > > P.S. I am not new to this forum. I’ve followed > your posts and I am familiar with your background, > respect what you have to say, etc. What I have > come to find, however, is many highly educated > people in finance, government, etc. are very far > removed from how the average middle class american > thinks, works and lives. I, on the other hand, > have experienced life from both sides. You don’t really think I am offended by your comments do you?
^^^^No - I was offended by your comments.
Yeah, well, back to the trailer then.
As suggested before, I think we are all thinking about the “ideal” solution, that helps us sleep at night… Here, there may be none and thats whats has us academics in a mix… JDV, I agree that the best option for everyone should try and keep existing home-owners in their homes. What if: The homes were partially subsidized for these defaulters so that their prices (of properties) reflect market rates now, rather than those at the peak of the bubble. The monthly payments on these new prices would be enforced through govt. programs (as suggested by JDV). This difference (subsidized amount) is somehow charged to the institutions (through Long term financing, etc). Would that work?
I don’t like that solution because it has Citigroup (e.g.) paying the whole tab for someone who defaults on their mortgage. That means everyone has an incentive to default on their mortgage if their property value has dropped. This sounds to me like one of those solutions that gets us into unintended consequences quickly (but all solutions probbaly do).
"Trust me, there are students at “Most competitive” universities who can’t figure out how to tip a waiter much less understand the risks of a VRM. Doesn’t mean I want to pay the tip for them when they short-change the waiter. Now, if the waiter starts sreading gasoline around the restaurant in a fury about $5, I might ante up. Maybe. " point 1: I find that hard to believe. Maybe they don’t know how to calculate it in their heads, but I haven’t met many undergrads that haven’t grasped the concept of multiplication. You’re the professor though, so I’ll give you the benefit of the doubt… although I don’t think that’s a very good reflection on your own teaching abilities 
point 2: I don’t know what kind of restaurants that you go to, but I’ve never had a waiter try to swindle me into buying a meal that I didn’t want. They might suggest that eat a steak instead of a burger, but once I order, they don’t pressure me to change my order. The analogy is so far off its practically misleading. Anyhow, I’m sure there were people out there that took on mortgages who were bound and determined to buy a house that they couldn’t afford. People need to learn the lesson “if its too good to be true…”. Those people should and probably will lose their house regardless of refinancing…. However…. I’m also sure that there were also these situations: Avg joe: I can afford a house that cost X per month so I need a loan for $200,000. Mortgage Broker: well actually, you can afford a house that cost 300,000 Avg joe: I don’t think so Mortgage Broker: well, we have these new loans called ARM IOs. They’re very low risk because interest rates are low and historically the value of housing has gone up by 10%. You will be able to take the equity out of your home and pay off the principle amount in 5 years. You’ll get more house for the same monthly payment… blah blah blah. Before you know it, the broker has convinced avg joe to upgrade. I’m sure that some mortgage brokers are as sleazy as some used car dealers. I agree with your original post, but this last post is a weak defense of your argument.
Nolabird - Point 1: It was hyperbole. I admit it. Point 2: It was a lousy analogy, but I enjoyed it. Your conversation between avg joe and MB is directly to point and an important example in figuring out how we assign responsibility. How much responsibility does MB have to protect avg joe? MB is supposed to be selling stuff and that conversation (followed up with docs, etc) complies with all legal requirements I know of. Incidentally, it’s not really clear that MB knew he was putting avg joe at risk. He is probably avg john who just went to some rah-rah sales meeting about the new ARM IOs. I’m into personal responsibility so I apportion blame as follows: Avg Joe: 50% MB: 20% Company that offered up the ARM IO: 30% Securitizers of the ARM IO: 10% Me: -10% Edit: Actually, I’m into other people accepting personal responsibility.
JoeyDVivre Wrote: ------------------------------------------------------- > Company that offered up the ARM IO: 30% Yeah, SOMEBODY understood the risk. But if they didn’t offer the hot new ARM IO, the company would lag the industry in profitability and presumably management would be shot down by the board of directors until new managers started hitting their quarterly numbers. Majority shareholders are not exactly average Joe’s but they likely had essentially no understanding of the product. It really comes full circle to poor decisions by people who don’t take the time to understand what they are getting into. Colossal failure of the free market.
I do remember when I was looking for a home in the DC Metro area. A friend pointed me to his real estate broker, who showed me around to lots of expensive places in Virginia. I had never bought a home and these numbers seemed very large and scary. But she walked me through the process and explained how with mortgages you can pay about the same as you would in rent, and the tax benefits are great, and I could actually afford these places. I went to bankrate.com and read up on this more, prepared a spreadsheet that estimated prices and costs, and the first thing I did when I looked at a place was open up the spreadsheet, type in the asking price and figure out what it would cost me. I came to the conclusion that she was taking me to places that I could just barely afford and only under the most optimistic scenarios. If I hadn’t taken the time to figure out my own spreadsheet, she probably would have “professionally reassured me” that I could live in these nice places. Ultimately, I wanted to live in the District, and for some reason, she never took me to any places there, despite my asking her repeatedly. So I went and found a broker in DC - guy who’d just started and I was his first client. He found me something I really liked and I could actually afford, and left the spreadsheet analysis to me. Lesson: these real estate agents and their mortgage broker buddies had a system of telling people they could afford things that they really couldn’t afford. Now, I figure I’m smarter than the average guy and was therefore able to think my way through on some of this, but I think a lot of financially illiterate folks were just putty in the hands of these professionals who just tell their clients to lever up to the max, take an ARM, buy a more expensive home, and then inflate both the mortgage broker’s and the real estate agent’s commission. Also remember that the agent and the mortgage broker do 100s of these deals a year, whereas the average buyer does maybe one deal every 5 years. This means that for every concern that the average buyer has, the brokers have figured out pat sounding answers that make the buyer feel dumb and uninformed. Now this is in the nature of selling, and so caveat emptor is certainly appropriate, but there is a huge power and information differential here, and the risk exposure of each party is the opposite. It borders on fraud and false advertising when these professionals present the fact that you can afford to live in a place based only on some hyperoptimistic scenario. I’m glad I bought a cheaper place in the part of town that I really liked. And I’m still bummed that I sold it (didn’t want to be a long distance landlord).
bchadwick Wrote: ------------------------------------------------------- > > Now this is in the nature of selling, and so > caveat emptor is certainly appropriate, but there > is a huge power and information differential here, > and the risk exposure of each party is the > opposite. It borders on fraud and false > advertising when these professionals present the > fact that you can afford to live in a place based > only on some hyperoptimistic scenario. > I hate stuff like that because it’s always used to blame me. In fact, why can’t you make your own assumptions about paying for the house, your risk tolerance, your ability to increase your income, etc? That MB is not your financial advisor.
JoeyDVivre Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- Partial answers include: > > > > a) our university system still appears to be > > admired enough that people want to send their > > students here to learn (though this is not as > > strong as it once was). > > > > b) business managers (outside of the financial > > arena) still tend to be relatively efficient > and > > skilled at managing teams, relative to other > parts > > of the world. > > > > c) relatively good rule of law in the US is a > > benefit to those with financial capital to > manage, > > since if something shady is done with it, the > > legal system is relatively clean and accessible. > > > This also is not as strong as it once was. > > > > > > I run out of ideas here… but desperately want > > more… > > We work harder than anyone. The average American > puts in 200 hrs/yr more than the average Japanese > and we think of them as workaholics. - One of the best infrastructures in the world - the freeway system, airports, etc. - A system that encourages entrepreneurship and risk taking unlike anywhere in the world - A system that attracts talent from across the world and makes them want to stay back in the US - A system that’s been around for 200+ years changing now and then, facing troubles now and then, but still surviving and thriving. How many other countries can bost of such a system?
buyers were placing huge bets that real estate would continue to appreciate…maxed out monthly payments, low/no equity. it doesn’t take a genius to understand what happens when the value of the house goes down by 10%. they knew the payments were a stretch, maybe they didn’t understand ARMs, but they SHOULD know what they are getting into ESPECIALLY if they don’t understand. they were more than willing to capture the upside, but the downside never entered their minds? people are expected to manage their own lives, including saving for retirement, signing complicated legal documents, taking out loans (student, home, credit cards, auto, etc, etc) - what do we really expect, someone to constantly hold their hands? additionally people (average people) are fully aware that businesses and people are out there to mislead for financial gain…one should enter any legal business arrangement with that expectation. Outside of family & friends, “I trusted you” is a very weak argument.
As a “pointing fingers” argument, you’re right - it doesn’t work well. I was thinking of the problem initially as a public policy problem. Here you have individuals risking (on average) a large portion of their total wealth, there are huge information asymmetries, incentives that push facilitators to recommend things that borrowers probably can’t afford. From a public policy standpoint, that means a lot of bad loans are going to be originated and there is trouble for the whole economy down the line. Initially, I thought: “how fortunate that I was able to think things through a bit clearer and figure out that I didn’t want to take as much risk as people were urging. I hope that not too many people get caught in things they can’t afford, because that would mean a lot of people are suffering.” What I didn’t realize is just how much everything is interconnected. That my livelihood may go down with the ship because a bunch of these other people were stupid with their decisions. So I guess this falls in the “where were the regulators” line of argument.
i think it is unfair to blame the people who bought things they couldnt afford.g’span-the maestro-repeatedly said that people should take advantage of ARM loans to buy houses when the interest rate was at 1% (and probably could nt go any lower). It was clearly interpreted as a signal to party.public policy failure -yes ,blame the guys who provided these perverse incentives first. btw, i was reading at dailyreckoning.com about how some of these negative amortization loans grow exponentially. it is scary: "Professor Chris Martenson is a professor of. But he has done the world a favor with his description of what happens when things grow exponentially, rather than arithmetically. Imagine you could make a football stadium watertight, he writes. Then, imagine that you put a magic drop of water in the center…a drop of water that doubles every minute…so that after six minutes or so, you’d have about enough water to fill a thimble. Now how long would it take before the stadium filled, he asks? We’re not going to leave you in suspense. For the first 45 minutes, you can walk around the stadium and barely get your feet wet. But in the next 4 minutes the stadium fills and you drown