Adventures in sub-prime borrowing. Granny gets evicted.
Published on November 25, 2007 By greywar In Current Events

Casual Interest Section


  • Where is the line drawn for personal responsibility?

  • What factors free you from it? Age? IQ? Education level? Race? Gender?

      While most people will probably agree that a 1 year old with an IQ of 30 and a kindergarten level of education isn't capable of understanding the terms of a home mortgage, the same folks would probably agree that once you are an adult you have to have some responsibility for the things you do. After all, that is why we are calling you an "adult" at that point. 

      Let's use an example from another area of personal responsibility:

      I buy a car but don't know about traffic laws, don't have insurance, and am ignorant of the most basic laws of physics. Consequently I crash into your house after turning onto a clearly marked one-way street. Thankfully I don't kill anyone but since I don't have insurance your only recourse is to sue for recompense. The judge tells you : "No, he shouldn't have to pay you because he was unsophisticated in the ways of cars and traffic." Case dismissed?

      Most folks would think it reasonable to hold me accountable for things like learning traffic laws, getting a license, buying liability insurance, and grasping basic motion physics as necessary knowledge for operating a vehicle in our society. It is odd how many of those same people don't apply even half of that standard to buying a home.

      That is the attitude of some (NYT's Bob Herbert) towards people who took out loans they couldn't afford in the "sub-prime" market. Interestingly the very term "sub-prime" comes from the fact that the recipients of these loans wouldn't qualify for higher quality (read: with better terms) loans. These debtors were, are, and will continue to be credit risks. People like me frankly. I have horrible credit.

      Herbert and the like think that the defaulting holders of sub-prime loans shouldn't pay and either the lenders should take the loss (without foreclosing) or that the taxpayers should foot the bill in a bailout. I think not.


 

Moderate Interest Section


      As a younger man I allowed myself to get way over my head in credit card debt. I lived beyond my means. I saved nothing. I have been late on payments and had default settlements of credit card balances.

      Anyone looking at giving my money on credit has to weigh that into their risk calculations and for most of them it doesn't make sense to give me any money at all. For the lenders who are willing to lend me money, they hedge their risks by charging me higher interest rates or by attaching other terms to the loan to maximize payoff for their risk. I would be a fool to take them up on these offers.

      I lived like an economic moron when I was younger with only one exception : nothing I did was backed by collateral. No mortgage, no car loans, no deal with Vinny (collateralized by threat of pain). Nothing of the sort. I could have taken out numerous loans secured by my car title. I could be living in a big house with a whopping adjustable rate mortgage and a 90 inch plasma screen no problem. Lenders are available to make it happen. Not doing this saved my ass.

     If I had done that and it all came crashing down on me because I had no ability to pay my debts then all of those things could be taken from me. My house and property seized, sold, and liquidated to pay the principal of my loan to my creditors. Very few people would even feel sympathy for me and fewer still would argue that I shouldn't have to bear the consequences of my actions. I certainly wouldn't expect them to.

     Of course I am not a little old lady like Dorothy Levey, a "79-year-old widow who sits alone inside the small house she has lived in for 41 years, afraid to answer the telephone or the door." 

     Now one thing in that quote should immediately leap out at you : "the small house she has lived in for 41 years". She should own this house by most accounts. In fact she used to own it. Then in 2002 she and her husband (combined life experience in excess of a century) "were persuaded to take out a new loan, ostensibly for debt consolidation" (emphasis mine -GW).

    Note the "persuaded" used as though someone broke into their home, held a gun to their heads, and forced them to take a loan for the value of their home (and of course also forced them to spend every dime of it). Also note that according to the poorly followed-up article the money was "ostensibly for debt consolidation".

    Ostensibly? It only seemed like it was for debt consolidation? What was it really for... ostrich wrangling? Mime genocide? The reporter doesn't explain and basically abandons her story once it veers into waters that don't fit his narrative thrust. The inclusion of the word is telling in a Freudian way however.

    The story continues to lament predatory and misleading lending practices even though nothing in the story says that widow Levey's loan was actually predatory or misleading. Not a single word of that, not one.

    According to the NYT's Bob Herbert she is part of a "largely bewildered, frightened  group" of people who shouldn't be held responsible for her obligations because she is part of a class of "unsophisticated home buyers and homeowners". I would point out here that their lack of sophistication and general bewilderment certainly didn't stand in the way when it came time to cash those re-fi checks and spend the money.

 


Serious Interest Section


     Even Herbert recognizes that most of the time these loans weren't fraudulent : "I heard the same story again and again — decent people enticed, sometimes fraudulently, into loans they never understood and couldn’t afford." (Empahasis added again -GW) 

     Ok, I have no problem relieving truly fraudulent loans... If a company forged your signature or altered documents then by all means that should have no obligation to pay.

     Of course if "fraudulent" means that at some point a sales rep said that your payment would be $400 a month "forever" and then you signed a mortgage that only guaranteed that rate for one year, well don't come bitching to me about your payment when you couldn't be bothered to check out the contract. If you won't read or have a lawyer/real estate agent look over the most expensive thing most people will ever sign then what exactly will you perform due diligence on?

     Even if the money was for debt consolidation it was a horrible financial maneuver and now widow Levey is paying the price. She is flat broke and likely to face eviction. The lesson here? Don't ever under any circumstances enter into collateralized debt if you can possibly avoid it. If you owe $5,000 to Mastercard and can't pay well... your creditors can't come and throw you into the snow. Roll that $5,000 up with a "debt consolidation" loan secured by your home and suddenly your creditors are the new owners of the place you spent 41 years in and you agreed to it in writing.

     The fact is that there is a massive market of willing home owners in their 60's and 70's (and at younger ages too) who are extremely willing to gamble with their homes. The airwaves are rife with lenders who want to help them do so.

     The gamble of the venture is that in these "reverse mortgage" or outright equity loans the elderly homeowner is banking on not living long enough for the loan to go full term (or the creditors give terms that guarantee the home owner the right to live there until death) and the creditor is actually banking on the same thing.

     Either way the creditors win. The loan gets paid off or the house ends up being theirs when the owner dies. This can lead to some amazingly shortsighted mortgages followed by even more shortsighted spending binges or debt consolidations late in life. The town we live in has a lot of home owning retirees and there is a thriving business dedicated to helping them undo all the work they did in buying their homes in the first place.

     Sell back your house to pay off some credit cards? Sure, it is nice to be debt free, but it is far nicer to have a guaranteed place of residence.

     As for the lenders deserving a bailout? Well, the reasoning will wait for another article but in a nutshell: No, they also knew what they were getting into. To hell with them too.


Summary Points

 


 

  • If you can't pay the monthly payment, don't get the loan.
  • If you can't read the loan have someone else do it for you or don't get the loan.
  • If "interest rate" is simply beyond your ability to grasp, don't get the loan (there is a pattern emerging here).
  • If you ignore all of the above and get the loan anyway, it isn't the taxpayer's responsibility to pay it off for you. Same goes for the guy who did the lending.

Addendum

 


 

     Additionally, much is made about these cases being "part of the sub-prime" crisis as though the reason they can't pay was somehow due to the sub-prime market collapse. Not so, these people are half the cause of the sub-prime problem (the other half will get it's own article later). Their defaults on these loans are what caused the collapse, not the other way around.

 

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Comments (Page 1)
on Nov 25, 2007
Come on now! Those poor, stupid people can't be held responsible for their lack of understanding of such a complex concept as after a certain period of time their rates will skyrocket. It isn't their fault they can't think beyond tonight's prime time tv schedule.

As LW would put it, note for the dense: that's called sarcasm.

I agree 100%. People make their own beds, they should lie in them. Their stupidity isn't my problem.
on Nov 25, 2007
I don't mind at all stupid people getting nailed for their stupidity, and I really don't need to be called upon to bail out these idiots, but.... I really wish that the real criminals here -- the big mortgage companies and mortgage brokers -- were going to pay a much stiffer penalty and price for their hands in this mess.  Countrywide and others that pushed these mortgage products and encouraged all of that easy money out there for people to get and buy their McMansions with (when they really couldn't afford them) may suffer a little, but it's no where near what they should be suffering.  They should be seeing their CEOs hauled before congress to be grilled longer and hotter than a big-bite at a 7-11, and even that would be nothing more than a start to the fun they should wind up experiencing.
on Nov 25, 2007

I really wish that the real criminals here -- the big mortgage companies and mortgage brokers -- were going to pay a much stiffer penalty and price for their hands in this mess.

 

I agree to a point. The problem here was a system, the packaging and selling of risk. That will be the topic for another article sometime soon.

on Nov 25, 2007
It's not like it's something new. The Latin language has been dead for a great long time and yet caveat emptor is a very old expression. We've had stupid people for as long as we've had people.
on Nov 25, 2007
We've had stupid people for as long as we've had people.


If we allow them to freely practice their stupidity we all pay the price. Even if there was no bailouts, the foreclosures will have a ripple effect on the economy and we all suffer from that. That is why the system that allowed the mortgage companies to lend "unqualified " people that kind of money should be changed to prevent this from happening again and again and again as is currently the case since the "savings&loans" disasters of the 1980's.

Their stupidity isn't my problem


I wish that was true. It is yours and mine and ours no matter how much we pretend that we are not affected by it.

Taking the article's example of the stupid car driver to its logical conclusion, isn't the house owner suffering from the driver's stupidity. even worse, If that driver has nothing to collect from, isn't that a financial disaster for the owner? and what if the driver caused a fatal injury to someone?

We all get affected by the stupidity and/or greed of others ...... that is the job of the monitoring and regulating agencies to protect the public from that.

I wonder if anyone would be held responsible for allowing this to happen?



on Nov 26, 2007

I wonder if anyone would be held responsible for allowing this to happen?

    You utterly missed the point of that example. Totally. The popint is that the driver pays the price. Not only does he get fucked in civil court, but he also pays criminal penalties for his actions. because he was willfully ignorant he goes to prison. If he kills someone he goes to Federal Ass Pouding prison.

    Bailout advocates would instead say that he shouldn't pay the price, but rather that the taxpayer should be forced through legislation to pay for his crimes of stupidity.

    If the house he crashed into is my neighbors then most likely he will receive assisstance from me. Voluntarily. Not through forced government collection.

     If you are arguing that we pay off these loans, take possesion of the houses, and resell them to help blunt the economic impact while imprisoning the morons who took out the loans though, then I am 100% behind you. As for the lenders, if they want moeny from taxes to help their side out then there should also be prison time.

If we allow them to freely practice their stupidity we all pay the price.

     So everyone simply becomes a ward of the state? Or are you really advocating for bailout followed by judicial punishment? If so, then great! I just didn't know that you and I shared such a fascist viewpoint.

    Giving these fuckchops a "get out of your jackassy mortgage free card" simply encourages further leaning on the welfare state to save people from their own goddamned stupidity/greed at the expense of those who are not stepping on their fiscal cocks.

    As for the economic effects? Well the market will take care of the vast majority fo that and in poin of fact has already done so. At this point a bailout would only end up rewarding the people who caused the ripple in the first place. Do you really want to give this sort of chumpstain another chance to cause more damage? I don't.

     I want them financially ruined, emotionally raped, and devoid of further means to royally screw up.

 

on Nov 26, 2007
While I can understand this whole "we have to save the economy to save ourselves" argument, maybe what we need to to allow this to happen in hopes that people will learn and avoid this from happening again. It's the "you live, you learn" concept. Sure I wouldn't want this country to become a disaster, but helping pay off our stupidity while allowing the mortgage companies to make the profits at the same time is basically telling people that it's OK to screw people out of their money and possessions cause the Gov't will protect you if something goes wrong that could affect the entire nation, a problem that was foreseen before the idea was implemented and was used as a back-up to a possible failure of the idea.
on Nov 26, 2007
As a younger man I allowed myself to get way over my head in credit card debt. I lived beyond my means. I saved nothing. I have been late on payments and had default settlements of credit card balances.


Wow, for a moment there, I thought you were talking about me. As some here know, I screwed up my credit at the age of 18; got myself a few store cards and a credit card or 2 and never bother to pay for the items I bought. To this date, 13 years later, I am still paying the consequences of my stupidity and ignorance. While I never got a house or a new car loan, never had any major credit cards with enormous limits, $1500 in debt was enough to screw the next 13 years of my life. I since then have learned a great deal, and while I am not perfect when it comes to keeping up with my debt, I have improved this past year to the point of finally buying myself my first new car and working to clear my credit out completely so that I may start work on purchasing a home (while keeping an eye on current events) and stabilizing my rollercoaster of a lifestyle. My family has suffered enough from my stupidity and ignorance and its time I became a responsible citizen of this great nation.

BTW, thru out all these years of being a screw-up, not once did I ever believe the Gov't owed me anything. I got what I deserved and never argued against it. During hard times I did receive some federal help such as food stamps and tax breaks, but I never lasted long since I never stopped looking for a better job that paid more. I like the idea of knowing what I have I worked hard and paid for with my own sweat and not that of my fellow Americans.
on Nov 26, 2007
If we allow them to freely practice their stupidity we all pay the price. Even if there was no bailouts, the foreclosures will have a ripple effect on the economy and we all suffer from that.


Nonsense. Home mortgages and home construction are just a small part of the overall economic picture. The economy may stumble a bit, but it would hardly be the catastrophe some are making it out to be. Oil prices are much more of a threat to our economy that are stupid lending practices by a certain banking sector.

Bailing these people out with tax money is the only way we would all "pay the price" for the stupidity of these people. It isn't the job of the government to do so and that's not what tax money is supposed to be spent upon. Rental property owners need to make a living too.
on Nov 26, 2007
Exactly. Bailing out the idiots means we are subverting natural selection....we will evolve into a nation of idiots who are only smart enough to have our hand held and our ass wiped while the government tells us how they will "take care of us".

Financially supporting idiots means that there is no motivation to delay gratification and live within your means.

I have scrimped and saved, penny pinched and tried to be as fiscally smart as possible (basically staying out of debt-no implication as to investment here...) If I was a little more susceptible to the so-called great offers....I'd be in debt up to my eyeballs, with no house or cars.
on Nov 26, 2007
Here is a thought.

If they enact certain guidelines to prohibit sub-prime mortgages...what happens in 20 or 30 years? Right now, we have a tax "patch" that is supposed to be voted on by Congress every year to compensate for the ass-backward alternative minimum tax. It wasn't geared for inflation and now, we hope that the government does it's job. Can you imagine the cluster that this will become in 30 years if the government takes charge?

Yikes!
on Nov 26, 2007

$1500 in debt was enough to screw the next 13 years of my life


What? Wow.

Are you not forgetting a zero? 1,500 doesn't sound that much to me. Can be easily paid off in a month or two if you have no other obligations, I'd guess.
on Nov 26, 2007

They should be seeing their CEOs hauled before congress to be grilled longer and hotter than a big-bite at a 7-11, and even that would be nothing more than a start to the fun they should wind up experiencing.

Yea, make a bad situation worse.  No thanks.  GW said it. "If fraud...".  If not, then tough!  Those companies were providing a service and charging for it.  When you loan is "packaged", the law states the original terms of the loan applies (I had to get nasty with Suntrust on that one). So you agreed to the terms.  Now YOU (the imaginary person we all talk about) live by them.

on Nov 26, 2007
The term "personal Responsibility" seems to have gone by the wayside.
on Nov 26, 2007
The borrower seems to think that the lender has the responsibility of approving the loan, and therefore, the lender has the responsibility of deciding whether or not the borrower can afford it. Well, that's not the way life works. It's the responsibility of the borrower to know if the borrower can afford a mortgage, and it's the responsibility of the lender to limit their risk. Should a lot of mortgages have been denied? Absolutely - both sides are at fault for that, though. If you take a mortgage that doesn't have a fixed payment, how are you going to know if you can afford that later? You don't even know what your payment is going to be. We had the lowest interest rates, record lows, and you took an ARM! As if interest rates were going to drop...
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