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 2)
on Nov 26, 2007
I just didn't know that you and I shared such a fascist viewpoint.


I dont think you grasped what i meant. Here it is in a nut shell:

1- No bail outs, lenders should suffer the losses
2- Restructure the mortgages such that the stupid homeowners can pay them. Their stupidity to be penalized by adding a fine to the original debt.
3- The lenders must be penalized for their unethical actions and the system to be changed so that this doesn't happen again.

Clear enough?

No facism involved . everyone must pay for their stupidity but the society should be protected from the effect of their actions.
on Nov 26, 2007
Bailing these people out with tax money


I never said bailing them out is the way to go. I said "even if there was no bailout ..... we all suffer ..." i.e. bailout will make our suffering worse.

Home mortgages and home construction are just a small part of the overall economic picture.


Not true at all. Home construction is a big part of the economy. If it wasn't the market would not be as nervous as it is rigth now. The Oil have its effect too and so is Car sales. These three sectors are major parts of the economy.



on Nov 26, 2007
So you agreed to the terms. Now YOU (the imaginary person we all talk about) live by them.


Doesn't the law require the lenders to provide a clear payment schedule to the borrower over the life of the loan? At least an estimate of the future payments when the promotional period ends?

I think it does. Did they Actually provide that to those fool borrowers?

I really dont know if they did or not. If they didnt, then that was unethical(even if the law did not require it)and they should be punished for that even .


on Nov 27, 2007

At least an estimate of the future payments

Nope, not in most states anyways. Anything that floats on variable interest doesn't have to be estimated. They only have to spell out the things that homeowners are guaranteed to have to pay. The rest is left to the borrowers wishful thinking to fill in.

 

Clear enough?

 

Much better.

on Nov 27, 2007

Doesn't the law require the lenders to provide a clear payment schedule to the borrower over the life of the loan? At least an estimate of the future payments when the promotional period ends?

I think it does. Did they Actually provide that to those fool borrowers?

I really dont know if they did or not. If they didnt, then that was unethical(even if the law did not require it)and they should be punished for that even .

Yes to the first - on fixed rates, I dont know to the second, and on the third - I think that goes beyond ethics to criminal.  And like I said, if they broke the law, nail them!  I have no use for criminal lending practices, and I am sure there are some out there (and why we have laws to penalize them when they do break them).  But this is perhaps a small number of crimes, with a large portion of whines, and the whiners should not be given a Bail out of Debt free card.

on Nov 27, 2007

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.


This had more to do with being stupid and ignorant to just how much I would need my credit to be good when I was became a family man. I won't deny I was foolish to ignore my problems and not try hard enough to solve them, I put pleasure and entertainment before my responsibilities and now my family is paying the price for my lack of intelligence and common sense.

I have, since then, improved and now own a new car and am looking forward to buying a home. I am also preparing to go to school so that I can take advantage of the opportunities arising on my current job.
on Nov 28, 2007
"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."

MasonM, maybe some of the people who are making it out to be a catastrophe work in these sectors. For example, my husband goes out every day and builds houses so we can feed our kids and pay our bills. For us, home construction is a huge part of the economic picture and every day that he does not have a house to build is a devastating day because it means that later in the week we will have to make a choice between A. eating, or B. paying our bills. He has been doing this for 10 years and has no other skills. I would call anyone having to make that choice on a regular basis a catastrophe. It's only fair to note that we blame no one for our inability to feed our family or his choice to drop out of high school and my choice to skip college, refuse to take food pantry resources from other people who can't feed their children, and agree wholeheartedly that no one should be forced to bear the burden of other people's mistakes.

However, making statements about the "overall economy" depersonalizes the problem. "If it doesn't make an impact on my life, it's not a problem" is an awfully selfish attitude to have. Do you care at all that children are going hungry and families are being torn apart over this non-catastrophe that doesn't affect you? If not, that is exactly what is wrong with this society. People are supposed to care about each other and help each other, not sneer when someone else screws up.
on Nov 28, 2007

However, making statements about the "overall economy" depersonalizes the problem. "If it doesn't make an impact on my life, it's not a problem" is an awfully selfish attitude to have. Do you care at all that children are going hungry and families are being torn apart over this non-catastrophe that doesn't affect you? If not, that is exactly what is wrong with this society. People are supposed to care about each other and help each other, not sneer when someone else screws up.

That is a good motto for charities, but not for government.  FOr it is that thinking that would have protected the buggy whip manufacturers from extinction long after the age of horse and buggy are gone. Should we stop Pre Fab housing because that will put some people out of work?  By your thinking we have to because we have to think of "all the buggy whip makers who have to feed their children".

on Nov 29, 2007
Should we stop Pre Fab housing because that will put some people out of work? By your thinking we have to because we have to think of "all the buggy whip makers who have to feed their children".


You know, it's funny that you should mention pre-fab housing in particular, because my husband happens to build the high end custom homes that people spend millions of dollars on. Of course I think that pre-fab housing is a horrible idea. We're house snobs.

But in the interest of remaining objective, no I don't think we should stop pre-fab housing. It makes some housing cheap enough that it is possible for many people with lower incomes to get their families out of the inner city areas that are infested with drugs and prostitution. I think improving people's lives is a wonderful thing.

Obviously, the market does rule with things like buggy whips. My point was that I see a lot of callous comments about how other people's problems don't matter as long as they don't infringe on our own happiness. I'm not saying that the government should be a charity. Rather, I'm saying that the only reason these problems exist is because people have an attitude that they shouldn't care about others. If the buggy whip makers have others to help them feed their children while they learn a new skill set, their children won't have to go hungry. If everyone thought like most of the people who have posted here, they would live on the street and their children would have to turn to prostitution or stealing just to get dinner.
on Dec 01, 2007
I sit at my computer tonight....after many, many glasses of wine. I am licensed to sell real estate in the state in which I live. I am very familiar with the current situation. In fact, I bought my one-bedroom condo at the height of the boom. Despite paying extra on my mortgage, I am currently upside-down in my property, due to the turn in the market. Should somebody come "rescue" me? No. I knew what I was getting into. In fact, because I knew what I was getting into, I did pay extra on my payments, and am not as far behind as I "should" be. I'll gut it out for a little while longer, try to stash some extra cash away, and look to buy a bigger home while the market is down... probably sometime next year.

I have little sympathy for those who didn't do their homework. Did I have a lender or real estate agent who explained to me all the details of "interest only", "reverse mortgage", or "adjustable" mortgages when I bought my house? NO! I spent a whopping $17 for a book called "Mortgages for Dummies", and began my education of the financial ramifications of home-ownership. I was about to sing my name to over a quarter of a million dollars of debt, and I needed to understand what I was getting into. If anybody didn't take that precaution, then woe is them. Yeah...the whole market may take a hit.... I know I've lost tens of thousands of dollars of equity in my property, and will have to wait quite a while to refinance or sell. But, the market is doing what it does best.....adjusting. Those who were not supposed to be home-owners in the first place will find that the "get a home quick" schemes just didn't work for them. Does it suck for them? Yes it does! Do I sympathize for them? Yes, I do. But that doesn't mean the whole system should absorb their bad decisions......
on Dec 01, 2007
Well in any event, homes will now be cheaper, good for me:)
Unfortunately, the value of your home will decrease as well. The brighter side of this is your taxes will decrease *shrugs*
on Dec 03, 2007

The brighter side of this is your taxes will decrease *shrugs*

IN a pigs eye!  Not in my area at least.  I was in a meeting with the head IT guy of the county.  He lived in it as well.  And did not like the fact that the mortgage assessment program had only one direction. UP.  So I do not expect to see any tax relief from this band of blood suckers.

on Dec 07, 2007
There's no more George from a "It's a Wonderful Life."
on Dec 07, 2007

There's no more George from a "It's a Wonderful Life."

Interesting comment (and I agree), in that I was just thinking recently that there are no more S&Ls.  Has anyone seen one?  They are all mega banks now.  I prefer small banks, but every time I move to one, they are gobbled up by BOEB (Big Old Expensive Bank).

on Dec 07, 2007
High risk has high gain and harsh consequences as it's results. If we start helping the people who lost tons of money on this then where does it stop?

Stock market investments? money mismanagement?

As MM said this is an issue of Personal Responsibility. Clearly something missing in the teaching to children but that's another story.

great article!

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